Standard & Poor’s, one of three major credit rating agencies, on Thursday issued a report on city finances declaring “The stable outlook reflects Standard & Poor’s opinion that it will likely not change the rating within its two-year outlook period because we expect Bridgeport to maintain balanced operating results and, at least, adequate budgetary performance.”
Some highlight from the report that was provided to the city by Credit Analyst Timothy Barrett:
Standard & Poor’s Ratings Services assigned its ‘A’ rating, and stable outlook, to the City of Bridgeport, Conn.’s series 2016A, 2016B, and 2016C general obligation (GO) bonds. The outlook is stable.
At the same time, Standard & Poor’s affirmed its ‘A’ long-term rating and underlying rating (SPUR), with a stable outlook, on the city’s existing GO debt. The series 2016A, 2016B, and 2016C GO bonds are secured by the city’s full faith and credit pledge. We understand that officials intend to use the series 2016A GO bonds to finance the city’s various capital projects as outlined in Bridgeport’s five-year capital improvement plan. The series 2016B and 2016C series will be used to refund previously issued GO debt.
We understand that this refunding is projected to generate a net present value savings of roughly $6.4 million, with cash flow savings taken upfront in the first seven years (fiscal years 2016 through 2022) ranging from $2.0 million-$5.0 million annually, with negative cash-flow savings in the last five years (fiscal years 2023 through 2026) of $3.0 million-$6.0 million annually, primarily to help relieve budget pressure in the near term.
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Weak budgetary flexibility
Bridgeport’s budgetary flexibility is weak, in our view, with an available fund balance in fiscal 2015 of 2.4% of operating expenditures, or $13.4 million. Over the past three years, the total available fund balance has remained at a consistent, albeit thin, level overall, totaling 2.4% of expenditures in 2014 and 2.3% in 2013.
Bridgeport hopes to build reserves to stronger levels over the next few years, but we believe a material improvement in operating flexibility will be challenging due to the current budgetary environment. Specifically, the city began fiscal 2016 with a budget gap of nearly $20 million. Although management reports it has been successful in eliminating much of the gap primarily through expense reductions, we understand that further cost-cutting measures will be needed in order to achieve breakeven results for the year. However, we believe the city’s elevated fixed costs, including above-average pension and benefit expenses, could constrain Bridgeport’s ability to substantially increase reserves.
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Adequate liquidity
In our opinion, Bridgeport’s liquidity is adequate, with total government available cash at 7.3% of total governmental fund expenditures and 68.2% of governmental debt service in 2015. In our view, the city has strong access to external liquidity if necessary given its history of issuing GO debt and short term notes.
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Provisions in the city charter drive many of Bridgeport’s fiscal policies. Under the city charter, the city is required to submit a monthly financial report to city council that includes year-to-date analysis, a month-over-month comparison, a two-month projection, and a year-end projection. To help make conservative expenditure assumptions, management includes a $1.5 million contingency in its budgets. On the capital side, the charter requires a formal five-year, annually updated capital plan with identified funding sources. However, Bridgeport does not maintain a formalized debt management policy.
Outlook
The stable outlook reflects Standard & Poor’s opinion that it will likely not change the rating within its two-year outlook period because we expect Bridgeport to maintain balanced operating results and, at least, adequate budgetary performance. In particular, we expect management to continue to make the necessary budget adjustments to maintain financially balanced operations in addition to at least adequate liquidity.
Downside scenario
In our opinion, credit factors that could lead to us to lower the rating include a weakening in general fund reserves to a level we regard as very weak, or if liquidity were to decrease to a level we consider weak.
Upside scenario
We currently believe that upside potential over the next two years is limited due to what we view as weak income levels in addition to budgetary pressures, in part the result of increased pension contributions, as well as above-average pension and OPEB liabilities. Nevertheless, we could raise the rating if the city were to significantly improve its budgetary flexibility and liquidity due to operational surpluses.
NOTES FROM ABOVE:
** with negative cash flow savings in the last five years (fiscal years 2023 through 2026) of $3.0 million-$6.0 million annually, primarily to help relieve budget pressure in the near term.
** the total available fund balance has remained at a consistent, albeit thin, level overall, totaling 2.4% of expenditures in 2014 and 2.3% in 2013.
** we believe a material improvement in operating flexibility will be challenging due to the current budgetary environment. Specifically, the city began fiscal 2016 with a budget gap of nearly $20 million.
** we believe the city’s elevated fixed costs, including above-average pension and benefit expenses, could constrain Bridgeport’s ability to substantially increase reserves.
** However, Bridgeport does not maintain a formalized debt management policy.
** We currently believe that upside potential over the next two years is limited due to what we view as weak income levels in addition to budgetary pressures, in part the result of increased pension contributions, as well as above-average pension and OPEB liabilities.
Is this really hopeful? Where is the top hat from which to pull a rabbit? Will the magician need to slay the rabbit for stew before going on stage in the out years? Time will tell.
Many Moody executives live nearby. In my opinion, Bridgeport just received a “reputational” downgrade.
Standard & Poor’s retains their “A” rating despite the wishes of many here to put Bridgeport into bankruptcy.
Moody’s Investor Services 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.
Refunding Bonds are bad because none of the money goes to growth or actual projects and all the money goes to retiring the old bonds. Nothing’s gained. It’s like eating your tail to feed your mouth.
And General Obligation Bonds are backed by Bridgeport’s unlimited power to tax property.
(gulp)
LE,
Hate to disagree with you on this matter.
If we agree a General Obligation (GO) bond at its outset is buying long-term goods or infrastructure or property then a 20-year bond is paying in installments for things that are expected to be around and of value when the final 20th year payment of principal and interest is made.
However, if interest rates drop significantly, and older GO bonds can be called in before maturity and replaced with current debt of similar duration, then the public saves because of the lesser interest rate applied to the debt over time. (Perhaps not in every year, but with a “present value” calculation the gain for the City, net of legal and new marketing expenses, can be positive.
The loser at the moment of the refunding is the holder of the GO bond who assumed they would have the original interest rate for 20 years for instance.
The approval this year was for refunding AND for new GO bonding. Your thoughts? Time will tell.
As with all loans, what Bridgeport did or does with the money is the only thing that matters. $650 million in long-term debt indicates a hyperactive bond counsel history. I understand debt. What about the assets? Are there any?
I am unconvinced Bridgeport produced lower worldwide interest rates. I am convinced lower rates existed five years ago. Conclusion: I don’t want to hear about the money “saved.” tell me about the money lost by not refunding earlier.
You may be convinced there were lower rates years ago but show us, LE. And as rates tend to vary and bond agreements may have terms limiting action to re-fund or other limiting reasons, a gradual transition, while rates are at historically low levels seems to make sense to me.
Your alternative is to lament the LOSS potentially by not acting five years ago? Don’t we have much more to lament as a City than that particular lost opportunity? Time will tell.