Banking & Finance and Government

Anatomy of a bond-rating designation

June 28, 2013
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After Kent County Commission Chairman Dan Koorndyk led a small contingent of county officials to New York City a few months ago, Standard and Poors and Moody’s Investors Service renewed the county’s triple-A short-term and long-term bond ratings.

The April trip was worthwhile and significant, marking the 15thconsecutive year the county achieved the gold standard.

County Fiscal Services Director Stephen Duarte, who Koorndyk said did much of the heavy lifting at the presentations to the ratings agencies, recently shared some insights with county commissioners into why they came back with the top rating. 

Duarte started with his department’s publication, the 2013 Financial Overview. Fiscal Services compiles one every year and it’s chockfull of the county’s revenues and expenditures over the past few years and projections of those figures for the next few years. The publication also contains local economic factors, such as the current employment picture and media stories about recent economic events.

Duarte hasn’t called the publication the county’s fiscal Bible, but he could. “This is the centerpiece of our presentation when we go to the ratings agencies in New York,” he said.

Duarte said the agencies are particularly interested in certain fiscal areas, such as the county’s debt position. Both S&P and Moody’s wanted to know where the county’s debt stood in relation to its daily financial operations.

The county’s outstanding debt is $436 million, well below the legal limit as defined by state law. In fact, that figure is just 2.1 percent of the legal limit. The limit is set at 10 percent of the county’s State Equalized Value, which is nearly $21 billion, which means the county’s debt could legally be $2.1 billion. 

“On April 9, we paid $29 million of those debts,” said Duarte. 

He added that roughly 64 percent of the total debt is self-supporting, meaning revenue the county receives is paying the debt service. For instance, the state Department of Human Services is paying much of the debt on the Human Services Complex the county built through its lease payments.

“They still feel the debt is moderate for Kent County,” said Duarte of the ratings agencies.

Duarte also said the agencies are interested in the county’s financial future and both scrutinize fiscal projections. 

Total revenue to general operations has been projected to rise from $161 million this year to $171 million in 2017, while total expenditures have been pegged to go from $160 million to $171 million. 

“I think that might be a bit optimistic and we might crank that back,” he said.

Duarte also said the revenue sharing the county receives from the state is likely to remain flat over those years at $9.2 million. “I haven’t heard anything different,” he said. 

In the recent past, the county had received $12 million annually. 

Duarte felt revenue from the real estate transfer tax and fees would rise, which is a good sign for the local economy. The figure is expected to be $1.9 million this year and then rise to $2.1 million in 2017. 

Duarte also thinks property-tax revenue is going to go up, which makes up roughly half of the county’s operating revenue. About $83.7 million is expected this year, and $91.6 million has been projected for 2017, a 9.4 percent increase over the next five years. 

However, he noted the forecast doesn’t take the issue of the personal property tax into much detail due to the cloudy future of the recent legislative changes made to the levy. Those changes won’t be finalized until voters decide in August of next year whether to let the corporate use tax serve as a partial PPT replacement revenue source for local governments. If voters decline to do that, the PPT carved out by the state Legislature will go back to the drawing board.

Duarte did feel PPT revenue to the county will drop by about $500,000 next year because of new limits placed on the tax that went into effect this year.

The ratings agencies were also interested in the direction the county’s employee costs were heading. Duarte explained that wages will rise by about 1.5 percent annually from this year through 2017, going from $59.4 million to $63.5 million over that five-year period. “But we’re sitting pretty good,” he said, noting all labor contracts are in place and locked in for the next few years.

But if the county is sitting “pretty good” for wages, it’s in the catbird’s seat right now as far as the employees’ health insurance plan is concerned. The cost for group coverage is projected to remain relatively flat for the future: expected to only go from $10.6 million this year to $10.7 million in 2017.

County Administrator and Controller Daryl Delabbio, who also made the trek to New York last month, said the county was able to rein in that cost through a number of changes over the past few years. The biggest were self-funding the plan, getting employees to pick up a larger share of their premiums and having them pay higher co-pays. Workers now pay 17.5 percent of their premiums, up from 15 percent a few years ago.

The county also hired Blue Cross and Blue Shield to be its third-party administrator.

Delabbio noted all but 260 of its 1,570 employees are on the group plan. The others are with the Grand Valley HMO.

The county’s pension cost is expected to rise. It has been forecast to go from $6.4 million this year to almost $7.9 million in 2017. The employee contribution to the plan rises to 8 percent next year.

It may or may not be a coincidence, but following their return from the ratings agencies — a trip that also included County Treasurer Ken Parrish — the Government Finance Officers Association gave the county its highest award for financial reporting.

This year is the 12thconsecutive year the GFOA, a group of 17,500 government finance professionals in the U.S. and Canada, has honored the county’s fiscal team with the reporting standard. Over the last 22 years, the county has captured the GFOA award 21 times. 

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