Moody’s Downgrades City’s General Obligation Debt
Moody’s Investors Service has downgraded the rating of the City’s general obligation debt to Baa2 from Baa1. At the same time, it revised the outlook from stable to negative.
The Baa2 reflects the city’s reliance on nonrecurring revenues to stabilize its financial position in recent years. The Baa2 rating further reflects the city’s significant sized tax base and challenged demographic profile. The rating also incorporates the city’s elevated debt profile with rapidly escalating debt service and its modest pension liability.
“We were downgraded by Moody’s along with many other cities and towns across Connecticut as a result of the state budget crisis. S&P, the largest municipal bond rating agency in the nation, upgraded us 4 times, most recently to an A+. I’m not concerned by this,” said Mayor Erin Stewart. “It’s only been four years since we saved the City from the brink of bankruptcy. It takes a long time to get finances in order and it doesn’t happen overnight. I’m proud of our accomplishments and getting us back on the right track.”
Moody’s placed ratings of 26 Connecticut cities/towns and 3 Connecticut regional school districts under review for downgrade, affecting approximately $3.5 billion in outstanding debt. Moody’s has also assigned negative outlooks to ratings of an additional 25 Connecticut cities/towns and 3 regional school districts and maintains the existing negative outlook on the rating of 1 town, affecting approximately $3.45 billion in additional outstanding debt .
According to Joseph Manoleas, Lead Analyst of Moody’s, “Connecticut has been operating without an approved budget since the beginning of the current fiscal year on July 1. In the absence of a budget, expenditures are controlled by executive order from the governor. Under the executive order currently in effect, state funding of local governments is lower than it was in the last fiscal year by a total of $928 million. Historically, the State of Connecticut has provided significant funding to its local governments, largely in the form of education cost sharing grants, but also in the form of payments in lieu of taxes (PILOTS) and other smaller governmental grants. The current budget impasse highlights the ongoing vulnerability of funding that the State of Connecticut provides to its local governments.”
The negative outlook reflects the near term challenge the city will face to match recurring revenues with recurring expenditures while managing its escalating debt service, which grows rapidly through fiscal 2021.
In October of 2016 Fitch Ratings upgraded the City’s general obligation bond rating from “BBB+” to “A-” and improved the outlook from “negative” to “stable.” This was the second time in 10 months that a rating agency had positively upgraded the city’s bond rating.
In January 2016, Standard and Poor’s Rating Services (S&P) upgraded the City’s bond rating from “A” to “A+.”
Factors that Could Lead to an Upgrade for Moody’s:
- Sustained trend of structurally balanced operations without use of one-time revenues or non recurring expenditure relief
- Material reduction in debt burden
- Growth in tax base
- Improved resident wealth and income profile
Factors that Could Lead to a Downgrade for Moody’s:
- Continued trend of reliance on nonrecurring revenues
- Erosion of financial position
- Increase in debt burden
- Deterioration of city’s tax base and resident wealth and income profile
New Britain is a primarily residential community located approximately 9 miles southwest of Hartford (Caa3 negative). The city has an estimated population of 73,055.
The principal methodology used in this rating was US Local Government General Obligation Debt published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.