News Column

New London maintains A+ bond rating

May 1, 2014

By Colin A. Young, The Day, New London, Conn.

May 01--NEW LONDON -- The city has maintained its bond ratings and "stable" financial outlook -- despite concerns over the city's liquidity -- with two rating agencies that city officials met with last week.

Fitch Ratings and Standard & Poor's both re-affirmed the city's A+ rating, which is four tiers below the gold standard of AAA, after meeting last week with Mayor Daryl Justin Finizio and Finance Director Jeff Smith.

Smith said he and Finizio discussed the city's current cash flow problems with the rating agencies and detailed their fund balance replacement plan to get the city's financial house in order before selling municipal bonds later this month.

"This plan basically preserved our rating," Smith said. "What we were able to show them is that we have a plan and we've taken steps to address the issues with our fund balance."

A municipality's rating has a direct effect on the interest rates paid on long-term borrowing. The rating is an assessment of the likelihood that a city or town's debt will be paid off.

By avoiding a downgrade of the city's rating, Smith said, the city will save tens of thousands of dollars in interest costs in the coming years.

The city's fund balance, the account that can act almost as overdraft protection for the general fund, currently has about $1.4 million. It will be increased to $2.5 million as a result of the City Council's approval Wednesday night to bond $1.1 million specifically for fund balance replenishment.

But the account should be equal to two months of operating expenses, or roughly $13 million, according to Mark Chapman, an independent financial consultant who works with the city.

"Given their current low level, Fitch views favorably the city's formal policy for rebuilding its reserves," Fitch analysts wrote. "Reserve levels are currently slim and while the city has a plan in place to rebuild reserves to more robust levels, management will be challenged to do so as fixed costs rise and the economic recovery lags."

Over the last month, the City Council has passed a four-step fund balance replacement plan that involved sanctioning the bonding of a total of $5.5 million and adopting resolutions that require it to budget at least $250,000 in each upcoming fiscal year for fund balance replacement and mandate that proceeds from the sale of city-owned real estate must go into the fund balance.

"The city is focused on rebuilding its reserve and liquidity balances and Fitch expects the city to comply with its ordinance requiring annual contributions," Fitch analysts wrote.

Fitch, however, also warned that, "any reversal in this plan could result in negative rating pressure."

The agency also wrote that because state aid accounts for 41 percent of the city's general revenues, the city is "exposed to state aid volatility." This, Fitch said, makes rebuilding the fund balance more important and "key to maintaining credit quality."

In November, when Fitch last released rating summaries for New London, it warned that a fund balance replacement would be a key to preserving the A+ rating.

The city's overall debt level is "moderate and should remain affordable," and the city's pensions are well-funded, the agency said.

Standard & Poor's has not yet published its rating report for New London.


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Source: Day, The (New London, CT)

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