Kearny took two shots across its bow this month from Moody’s Investor Service but the captain of the ship of state is hoping to stay afloat, even awash in debt.
Moody’s announced on May 11 that it was taking down the town’s credit rating by two “notches,” from A2 to Baa1 and has forecast a “negative outlook.”
In the firm’s analysis, the town’s financial obligations under a Baa rating “are subject to moderate credit risk.” Far worse ratings can be applied to municipalities.
It’s likely that municipal employee unions will be greeted with the news at the bargaining table. Civil Service Council 11, actively engaged in contract talks, may have already heard it and uniformed employees will soon enough.
But local officials are trying to keep a stiff upper lip and, undeterred, will be going out to test the bond market later this year, according to CFO Shuaib Firozvi, despite the likelihood of facing higher interest rates.
In its report, Moody’s attributed the lower rating to the Kearny’s “deteriorating finances, negative cash balance net of tax anticipate note proceeds and high reliance on state aid.” It blamed the “negative outlook” on the town’s “negative financial trend and increasingly negative cash position.”
“We’re obviously disappointed in the reduced rating,” said Mayor Alberto Santos, “but it doesn’t come as a surprise.”
Santos said that Kearny expected to be targeted for downgrading as one of the municipalities that receives transitional aid from the state and participates in the state’s qualified bond program.
But part of that action, Santos said, is also a reflection of the state’s own revenue shortfall this year.
Still, Santos conceded that Kearny has suffered from a “cash liquidity issue” which has prompted the town to issue tax anticipation notes to get it through times when cash is low.
And he acknowledged that the town has been saddled with “significant” obligations for the payment of water bills and employee health insurance and pension costs.
Another sore point for Moody’s was that, “Kearny’s fund balance [surplus] has declined steadily in recent years as management has chosen to draw down reserves in lieu of raising taxes or materially reducing expenditures.”
Because of cash flow shortages, “Kearny issued $10 million in tax anticipation notes in each of the past two years,” Moody’s reported. A 1% interest rate on the notes cost the town an added $100,000 each year, Firozvi said, “but with a $75 million budget, it’s just the cost of doing business.”
“The bottom line,” Firozvi said, “is you don’t have much reserves and a diminished surplus and that’s when we have to do anticipation notes.”
Those shortfalls, Moody’s said, the town has blamed on “a timing problem related to certain state aid payments and to delayed tax payments due to late adoption of budgets. The town is considering modifying its estimated tax bill system in a way which would considerably reduce or even eliminate reliance on [borrowing].”
Up to now, Moody’s said, “market access [selling shortterm notes] has not been an issue for the town, but a disruption in the town’s ability to secure [tax anticipation] notes would pose a significant risk to financial operations.”
Firozvi remains hopeful that it can successfully package a bond sale later this year to convert $23 million in temporary notes issued during the past three to four years for water and sewer improvements, purchase of equipment and police vehicles – together with recent obligations for acquisition of land for the Dukes St. pump station and W. Bennett Ave. water infrastructure upgrades – to permanent financing.
To do that, the town will need to get permission from the state Local Finance Board, Firozvi said.
For past bond sales, the town has been paying an interest rate of about 1%, but the reduced credit rating could push that up a bit unless other factors – like the Federal Reserve raising interest rates – weigh in, he said.
As of the end of 2014, the town was carrying on its books about $15 million in water utility debt plus an additional $46 million in general obligation debt for a total of about $61 million. Santos said the town should be better able to absorb – and gradually retire that debt – as its ratables start to climb with new projects like Vermela Crossing, a residential development at Schuyler and Bergen Aves., begin to come on line.