Will Secaucus – or any other city or town in New Jersey – see its credit score drop if the state forces them to cap annual tax increases?
That’s the question being debated in city halls throughout the Garden State after yet another municipality had its bond rating downgraded, partly due to a law signed in July to reign in property tax increases. It’s at least the second such downgrade to be announced in recent months.
On Aug. 31, Moody’s downgraded its bond rating for Westfield from Aa1 to Aa2. In one sense, the downgrade is minor, since both ratings are given to municipalities that are considered safe for investors.
But the reason given for the downgrade is a troubling sign to some.
According to a Sept. 3 letter circulated to members of the New Jersey League of Municipalities, the state’s new Cap 2.0 law was at least partially to blame for the downgrade.
“When you look at the rule of unintended consequences, I’m certain this is one of them.” – David Drumeler
“The recent credit rating downgrade of Westfield by Moody’s Investor Service has been reported by Bloomberg to be based largely on the impact of the state’s imposed two percent budget cap,” wrote League Executive Director William Dressel. “It is unclear how much of a factor the cap was in its decision and how much of a factor the cap will be by Moody’s and the other rating agencies in future rating reviews. More rating reviews will follow in the next two months. These will give a better read on this subject.”
In fact, the Westfield downgrade wasn’t the first one issued by the credit rating company. In July, the same month the tax cap law was signed into law, Moody’s downgraded North Haledon’s bond rating, citing the new 2.0 Cap as “credit negative.”
“We take a degree of exception with the downgrades generally, because the Cap 2.0 legislation provides a debt service exception,” said Kevin Roberts, a Christie spokesperson, last week.
Christie himself has called Moody’s decisions “not unexpected,” and has used the downgrades to push the legislature to pass his “toolkit,” a 33-bill package the governor says will limit public spending.
What’s in a rating?
But municipal government officials are closely watching the downgrade trend.
“We are concerned this could affect bond rates for municipalities, because that two percent cap makes it harder for municipalities to raise funds in general, and that’s what the bond agencies look at when they’re establishing their bond ratings,” said Secaucus Town Administrator David Drumeler, who said he has not yet read Moody’s final report on Westfield, which details why the town’s rating was downgraded. “Your ability to raise revenue can greatly impact your ability to pay. And whenever you limit a municipality’s ability to pay, you have the potential to affect their bond rating.”
Secaucus’ last bond rating – an AA/Stable – was issued in March by Standard & Poors.
Ratings issued by Moody’s Investors Service and Standard & Poors are similar to credit scores given to individual consumers and rate the credit-worthiness of municipalities.
The ratings issued to municipalities affect many factors, including the interest rates they pay on loans; those with better ratings pay lower interest rates, while those with poorer ratings can expect to pay higher interest rates. So, the possibility of getting a lower rating from S&P or Moody’s can mean hundreds of thousands of dollars lost in interest payments.
“This is the new world that we’re going to be living in, post two percent cap,” Drumeler said. “When you look at the rule of unintended consequences, I’m certain this is one of them.”
‘The cap didn’t help’
But the League of Municipalities, of which Secaucus is a member, cautioned last week against placing too much emphasis on the recent downgrades and the tax cap’s impact on them. The organization, for example, noted that other factors likely played a role in Moody’s decision to downgrade Westfield.
The town had an operating deficit for five straight years, and has been drawing down its surplus to balance its annual budgets.
“The cap didn’t help, but we feel the cap was not the major factor in the downgrade,” said Matthew Weng, staff attorney for the league.
The takeaway message, he added, is that municipalities that are already on sound footing financially won’t be strongly affected by these downgrades.
“Credit rating agencies are downgrading towns across New Jersey due to spending of their budget surpluses,” said Hoboken City Administrator Arch Liston. “In Hoboken, we are working to improve our bond rating, and that includes planning for a responsible surplus level of around 10 percent.”
The conservative-leaning League of Municipalities, which has supported many of Christie’s initiatives and proposals, including the property tax cap, is advocating passage of the governor’s toolkit, which Weng said should limit the number of cap-related downgrades.
“Once many of these toolkit reforms get passed, and towns have more options to control costs, I think what you’ll find is that the two percent cap will have very little impact on bond ratings,” said Weng.
The governor’s office is promoting the same message.
“There is a clear need and urgency for the legislature to act on the governor’s tool kit proposals, so municipalities have the reforms they need to control costs, more effectively manage their budgets, and live within the cap while meeting their obligations,” Roberts said.
E-mail E. Assata Wright at email@example.com.