City Credit Rating Outlook Revised To ‘Negative From Stable’–Not A Downgrade

As the city tries to close a $20 million budget deficit for the year ending June 30, one of the three major credit rating agencies, Moody’s Investors Service has revised Bridgeport’s financial outlook to negative from stable, a move that in the future could impact interest rates on borrowing for public improvements and purchases. Moody’s declares, “While the city’s new administration is proactively addressing this shortfall by instituting a comprehensive plan, the city’s financial flexibility is greatly reduced and reserves will likely remain narrow for longer than previously anticipated.” A spokesman for Moody’s says the outlook is not a downgrade.

“No, this is not a downgrade as the A2 rating did not change,” says David Jacobson, a Moody’s media spokesman. “The negative outlook does, however, connote some downward pressure on the rating for the reasons described in the report and the heightened chance of a downgrade in the next 12-24 months.”

City Finance Director Ken Flatto says the other two major credit rating agencies have not changed the financial outlook of the city. Flatto termed Moody’s action as “Only an outlook change which is nothing like a downgrade.”

Flatto added that Moody’s has changed Bridgeport’s financial outlook back and forth three times in the past four years and had a similar negative outlook issued in 2013.

Statement from Flatto:

The City is pleased to have received ratings from Moody’s and Standard & Poor’s which remain consistent with the past few years.

We share the rating agency concerns about the city’s budget problems inherited this year which, along with a relatively low fund balance which was depleted the past several years, has contributed to Moody’s revising its rating outlook to a negative outlook. The Administration is committed to working hard to reverse this outlook over the next two years and hopefully toward setting the stage for a possible upgrade if the city can address the concerns in these reports.

From Moody’s:

Summary Rating Rationale

Moody’s Investors Service has assigned an A2 rating to the City of Bridgeport’s (CT) $81.3 million General Obligation (GO) Bonds, 2016 Series A, GO Refunding Bonds Series B, and GO Refunding Bonds Series C. The rating outlook has been revised to negative from stable. Concurrently, Moody’s has affirmed the A2 rating on approximately $650 million in outstanding long-term general obligation debt.

The A2 rating reflects the city’s narrow financial position characterized by low General Fund balance and weak liquidity. In addition, the city continues to face ongoing pressure from long-term liabilities and a sizable deficit in the city’s Internal Service Fund. The A2 rating also incorporates the city’s large and diverse tax base with below average socioeconomic indices and high fixed costs for debt service, required pension contributions and retiree healthcare payments.

Rating Outlook

The revision of the outlook to negative from stable reflects our expectation that the city’s financial position will be pressured in the near to medium term. The city announced in December that it is facing a potential $20 million budget gap (or 7.3% of the city side of the budget) in the current fiscal year. While the city’s new administration is proactively addressing this shortfall by instituting a comprehensive plan, the city’s financial flexibility is greatly reduced and reserves will likely remain narrow for longer than previously anticipated.

Factors that Could Lead to an Upgrade

Significant improvement in General Fund reserves

Material improvement in liquidity and continued reduction in reliance on cash flow borrowing

Large reduction or the elimination of the Internal Service Fund deficit

Significant improvement in the underlying tax base

Factors that Could Lead to a Downgrade

Failure to address budget gap resulting in a decrease in reserves and diminished financial flexibility

Failure to address the accumulated Internal Service Fund deficit

Significant tax base declines

Heavy reliance on cash flow borrowing

Underfunding of pension plans

Legal Security

The bonds are secured by a general obligation unlimited property tax pledge.

Use of Proceeds

The proceeds of Series A bonds will be used to fund various capital projects of the city. The proceeds of Series B and Series C will be used to refund all or a portion of the city’s 2016 Note, Series 2006A bonds, Series 2006B bonds, and Series 2012A bonds. The estimated par amounts for the 2016, Series A, B, and C are $22.75 million, $35.725 million and $22.86 million, respectively.

Obligor Profile

Bridgeport is Connecticut’s largest city by population and is located 60 miles northeast of New York City and 60 miles Southwest of Hartford.

Methodology

The principal methodology used in this rating was US Local Government General Obligation Debt published in January 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Regulatory Disclosures

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Robert Azrin
Lead Analyst
Regional PFG Northeast
Moody’s Investors Service, Inc.
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