The recent approval of plans to sell Pension Obligation Bonds did not adversely impact the town’s bond rating as Moody’s and Standard & Poors have both reaffirmed the Town of West Hartford’s top rating.
By Ronni Newton
The Town of West Hartford plans to sell $17 million of General Obligation Bonds on March 2, and in advance of that has received reports from both Moody’s Investor Services and Standard & Poors with both agencies once again assigning their highest ratings along with a “stable” outlook.
Standard & Poors uses “AAA” while Moody’s uses “Aaa,” but both denote a top rating, indicating a very low risk to lenders. Less than 1% of municipalities nationwide earn the top rating from both agencies, and West Hartford, which has maintained the triple-A rating since 1974, is one of very few that has maintained the top rating for decades.
The top rating provides municipalities with the opportunity to secure the best possible interest rate when selling bonds because they are considered the lowest risk to lenders.
General Obligation Bonds are used to finance capital projects such as road construction, storm water management, park improvements, capital improvements to town and school buildings, and investment in financial management, rolling stock, and technology.
When the Town Council approved the sale of Pension Obligation Bonds in combination with a reserve fund in January as a strategic financing plan to take care of unfunded pension liabilities, there was discussion about the possibility of the action resulting in a temporary downgrade by one or both of the rating agencies, but Peter Privitera, the town’s chief financial officer, said at the time that even if that happened, the overall cost savings would far outweigh the potential impact.
Privitera said in January that he was confident that the town’s “conservative process” and approach of combining the sale of POBs during a time of historically low interest rates, investing proceeds using dollar cost averaging over the next six to eight quarters, and establishing the $27 million pension bond reserve fund to guard against future economic downtown, would be well-received by the rating agencies – and that proved true.
“This is great news for West Hartford,” Privitera said. “The affirmation of our AAA credit ratings with a stable outlook by both Moody’s and Standard & Poors is a recognition of sound financial management, along with positive fiscal and economic attributes the town possess. These ratings will allow the town to sell bonds at very low interest rates resulting in future savings.”
“The Aaa/AAA credit ratings from both Moody’s and Standard & Poor’s reflects West Hartford’s solid economic health, growing tax base, booming economic development, sound and conservative financial strategies, its experienced management team, and long range plans for infrastructure improvements, all desirable factors to the credit rating agencies,” Town Manager Matt Hart said.
Mayor Shari Cantor also said she was pleased, as well as proud, that West Hartford has retained the prestigious top rating and that the town’s “strong and solid fiscal strategies and management” have been reaffirmed.
“West Hartford’s economy is strong. We see investments throughout our town,” Cantor said. “In 2020, despite the obstacles created by the COVID-19 pandemic, there were 51 new businesses that opened and another 10 that are in the pipeline. In addition, four major residential projects are underway. Twenty-six units at Residences at Berkshire Road, 294 units at One Park, 52 units at 540 New Park, and 25 units at Ringgold Estates. Home values remain strong and West Hartford is the town many people are relocating to from nearby major cities.”
S&P’s narrative states in part: “The rating and outlook incorporate the town’s upcoming pension obligation bond (POB) issuance that will fully fund the unfunded actuarial accrued liability. Currently, West Hartford’s debt burden is low but will increase by approximately $365 million following the issuance of the POB. The town estimates that fully funding the actuarial accrued liability reduces cumulative pension contributions by over $140 million on present value basis over the next 30 years. Initially, while the debt burden increases, the town’s pension costs will substantially decrease, resulting in little to no budgetary effect in the beginning. In addition, management is reducing the discount rate of the pension plan to a more conservative 6.25% from the current 6.99% level and establishing a pension bond reserve fund. In terms of credit, we understand these actions likely limit the budgetary effects of future cost volatility to operations in the event of adverse investment returns.”
S&P also says its rating “factors the town’s steady operations and proactive management team that has been able to navigate the challenges related to the pandemic.”
The Moody’s report notes that plans to issue POBs will increase the town’s risk to market volatility, but has issued the rating with a stable outlook, which the agency noted “reflects the expectation that the town will continue to benefit from tax base expansion, leading to growing property taxes to support fiscal stability.”
The report stated that “West Hartford’s tax base will continue to expand given several commercial and residential development projects currently underway. Building permits have remained strong in recent years and median home prices continue to increase, despite economic challenges related to the pandemic.”
Specifically regarding the town’s plans to issue up to $365 million in pension obligation bonds in the spring to fully fund its pension obligations, Moody’s noted that if assets fail to meet return expectations and fixed costs increase, the town could face negative credit pressure. “While the issuance will increase pension assets substantially, the town will face increase vulnerability to market volatility, and potentially increased required contributions, in the event that assets do not meet investment return assumptions. In conjunction with the issuance, the town has created a Pension Bond Reserve Fund and will deposit an amount equal to the fiscal 2022 required contribution ($26.9 million) into the fund to offset potential increases annual contributions or POB debt service,” the Moody’s report stated.
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