County may find it harder to renew bond rating
When Kent County officials made their annual trek to New York last April to meet with representatives of Moody’s Investment Services and Standard and Poor’s, the journey turned out to be more than worthwhile.
About a week later, both agencies renewed the county’s triple-A bond rating for another year, which helped the county sell the bonds that will pay for construction of the new 63rd District courthouse and for improvements to the Fuller Avenue campus.
The county plans to go to the bond market again later this year to finance upgrades to the jail and juvenile detention center, and officials hope they come back from this year’s trip with another triple-A rating.
But this time getting the agencies’ highest grades might be a bit tougher.
Kent County got the top marks last year in part because revenue from property taxes in 2007 exceeded projections by 12 percent, the general operating fund balance was over $70 million and the county’s debt load was low — only 2.1 percent of the State Equalized Value of real and personal property in the county.
Those three factors, along with other elements like the 2007 countywide unemployment rate, all played a role in the agencies’ 2008 decisions. The situation, though, has changed this year.
Property-tax revenue for 2008 is expected to be $87 million and not the $89 million the county received in 2007. That drop wasn’t unexpected as County Fiscal Services Director Robert White said the income would fall to that level last April.
As he explained then, revenue was up that year because it was the final year of the switch in property-tax payment dates from winter to summer. So in 2007, White said the county collected the equivalent of 15 months worth of tax revenue because of the billing change.
At the same time, the $500,000 surplus that was projected for the general operating fund at the start of the 2008 fiscal year may now turn into a deficit as high as $2.5 million.
On another front, the total general operating fund balance is expected to close 2008 at roughly $67.7 million, or $2.5 million less than at the end of 2007. The county sets aside 10 percent of the fund balance for an emergency ($21.6 million in 2008)) and then designates another amount ($35.7 million) equal to 40 percent of the tax levy to cashflow requirements.
In addition, $9.8 million of the total balance is unreserved and undesignated, meaning those dollars can be used to fill any shortfall in the general operating budget. At the end of 2007, that account was almost $13 million and it has been projected to drop to slightly less than $6.5 million at the end of 2009 — a potential 50 percent fall in just two years.
The countywide jobless rate for 2008, though, is expected to be higher than the 2007 figure. The county’s debt load remains low, well within the state’s parameter.
White recently reminded the county’s Finance Committee that the fund balance played a big role in the agencies’ decisions to renew the county’s bond rating.
“You are headed in the direction where you are using up that unreserved, undesignated reserve,” White told the committee.
County Commissioner and Finance Committee Chairman Dean Agee asked White if the county should look at selling tax-anticipation notes like a few other counties have done. The notes are sold in advance of a county’s tax receipts to cover expenses that are due before the revenues are received. Doing that would keep the county from dipping into its diminishing cash reserves to pay its bills.
But White said the ratings agencies would see borrowing for short-term operations as a negative. Besides, he added, with the shape the market is in, there isn’t a guarantee the notes would sell. “If there is a market disruption and you can’t sell the tax notes, you’ll be facing difficulties,” he said.
Agee said the county will have to decide if a $6.5 million unreserved and undesignated fund balance at the end of this year is acceptable. If it isn’t, he said the county will have to choose what programs to cut to maintain the reserve.
Another option is for the county to lower the emergency and cashflow portions of the total fund balance and move those dollars into the unreserved and undesignated account, which would pump up that segment of the reserve fund. Yet another option is to change the county’s bill-paying policy, a move that would make vendors wait longer for their payments.
None of the three alternatives —selling notes, lowering requirements, or delaying vendor payments — drew immediate support from committee members.
But County Administrator and Controller Daryl Delabbio was certain of one thing: The county can’t continue recording deficits for the general operating fund like it has for most of the past seven years. Back then, the total fund balance was over $120 million.
“We can’t sustain the small deficits, yet alone the larger ones,” he said.
Kent County has had a triple-A bond rating since 1998, is one of only three counties in the state to have that top mark, and one of 48 counties in the nation with the rating.
Falling a grade to double-A would likely add a half-point to the interest rate the county would pay on its next bond sale. On top of that additional expense, many municipalities have had to pay bondholders an interest rate about 1.5 percent higher than last year, due to the collapse of the financial market last fall.