Municipal Rating Agency Downgrades Suffolk County’s Bond Rating
Suffolk County received worsening financial news this week when Fitch, a major bond rating company downgraded Suffolk County’s credit rating from “A+” to “A”. This will affect approximately $1.4 billion in general obligation bonds the county is looking to sell in the coming weeks. Additionally the rating agency considers Suffolk County’s bond rating outlook as “negative”. For comparison purposes Nassau County now has a higher Bond rating at (A+) then Suffolk County (“A”).
Municipal credit ratings are the largest factor affecting the interest costs on municipal bonds. Fitch’s bond rating system ranges from AAA as best quality to BBB- as worst quality. An “A” rating is considered “upper medium grade”. Suffolk County’s rating was “AA-“, in 2011 which was two levels higher than its current level of “A”.
Multiple reasons are cited in the Fitch Agency report for the downgrade. They include a reliance on short term borrowing, narrow cash flow coverage, challenges in Suffolk County’s structural fund balance, review of the 2012 budget results and over reliance on non-recurring budget items.
Some of the more troubling aspects relating to the downgrade include the 2012 budget having a much higher deficit than anticipated. It appears that Suffolk County ended up with a deficit of $90.8 million in year 2012. This is $26.7 million greater than what was projected. This deficit relates to the County’s general fund and police fund combined. Land sale delays and lower than projected tax revenues are the main culprit for the higher than anticipated deficit.
Additionally, Fitch is concerned about the County’s 2013 budget. This budget, according the rating agency, contains many non-recurring or “one shot” revenue sources that are not continuous annual sources of income for the County. Two examples of these “one shot” sources are the supposed sale of the Foley nursing home for $23 million and a sale/leaseback of various county owned buildings slated to generate $70 million.
Both of these revenue sources have been stalled due to a combination of pending lawsuits against the sale of the nursing facility and some state hurdles pertaining to the building sales. The current projected budget deficit for 2013 is about $250 million. If the two aforementioned deals were not to materialize then the budget deficit will be much higher then the projected $250 million.
Another major concern pertaining to the negative rating includes an increase in the County’s reliance in cash flow borrowing. In 2012 the County borrowed $600 million as compared to $310 million in 2006. 2013 borrowing projections are expected to exceed $605 million, according to Fitch.
The County budget has also been negatively impacted by Hurricane Sandy, which affected sales tax revenue and property tax collections. This could add an additional $51 million to Suffolk’s deficit in 2013.