There is only a sliver of truth to Tiverton officials’ comments about the town’s recent credit rating from Standard & Poor’s: The rating agency does consider the amount of money sitting in the town’s account when it comes up with a rating, and (surprise, surprise) investors lending the town money like to see lots of cash lying around to ensure that they will be paid.
That’s just a sliver of truth, though. Most of the comments are misleading or downright incorrect. Tiverton was not “downgraded” because voters used some of the town’s unassigned funds at last year’s financial town referendum for a 0% tax increase; money in the town’s reserve fund was not the most significant factor in Tiverton’s bond rating; and failing to achieve a higher bond rating will not cost the town a significant money, if it cost the town anything at all.
Dave Perry’s Punch and Judy Show
At the December 8 Town Council meeting, brand new member David Perry made a point of highlighting something from the monthly report of Town Treasurer Denise Saurette (see page 12 of this PDF document):
Perry: I’d just like to read a couple of sentences from the treasurer’s report pertaining to something that happened back in May with our financial town meeting. “As part of the library bond permanent financing process, the Town was required to obtain a current Bond rating, and then go out to bid for purchase of the Bonds. The Town was issued a rating of ‘Stable AA,'” which I believe was a drop from stable AAA. “S&P’s most notable concern was the use of Unreserved General Fund to balance the FY2015 budget.”
I just wanted to bring that to everyone’s attention, and hopefully, it won’t happen again.
Perry got what he wanted as a political gift when Fall River Herald News reporter Kevin O’Connor highlighted the moment in an article on December 12. With only Perry and the treasurer’s report as his source, O’Connor wrote:
The town’s bond rating was downgraded one notch, from Stable AAA to Stable AA. Standard & Poor’s, the rating agency, explained that the downgrade came as a result of the decision by town voters in the May Financial Town Referendum to use $600,000 from the town surplus to pay for the current budget.
Both Perry’s statement and O’Connor’s reportage are simply false, and the report from Treasurer Denise Saurette is misleading — probably for political reasons, unfortunately.
The Town Was Not “Downgraded”
A municipality’s bond rating is not a running score, like an individual’s credit score. The town can’t check in on its rating from time to time to see how it’s doing. Bond ratings are one-time snapshots to give investors a sense of the starting point at the time that the bonds are issued.
In other words, it is not correct to say that the town’s rating was “dropped” or was “downgraded.”
The last time Tiverton sought a rating was in 2007, and a different agency, Moody’s, rated Tiverton at an A level, which is a full step down from AA. In other words, the more-recent rating was a significant improvement from the prior rating.
As a matter of fact, only two Rhode Island towns have ever received AAA ratings — Little Compton and Portsmouth. For both towns, that was considered a major achievement, and it’s irresponsible and dishonest of Tiverton authorities to pretend that the town was on the cusp of joining them.
The AA Score Was Not a “Result” or a “Consequence” of the 0% Referendum
The bottom line is that Tiverton could not have reached AAA based on higher reserves alone.
The 0% budget proposal that won last year’s financial town referendum (FTR) used around $600,000 from the municipal government’s unassigned funds. The charter requires those funds to equal 3% of expenditures, and the 0% proposal kept them at 3.4%, or $1.6 million.
The only effect that the adjustment had on the town’s bond rating was the score for “budgetary flexibility.” (See here for S&P’s Tiverton report.) It is true that the cutoff for the next-highest “budgetary flexibility” score is 4%, and the unassigned funds would have equaled 4.7% of projected expenditures if voters had chosen the Budget Committee’s proposed budget, instead of the 0% proposal. However, it is not true that this would have resulted in a AAA rating.
As confirmed through extensive communications with the S&P analysts who rated Tiverton, even with a “very strong” score on budget flexibility — the absolute best —the town would still be at AA. (See here for S&P’s scoring methodology.) In other words, even if the town had unassigned funds equaling more than 15% of the total expenditures — over $7.2 million — budgetary flexibility alone would not have gotten the town to a AAA rating.
The fact that elected officials don’t want to admit is that the town government is to blame for the less-than-perfect rating, not taxpayers who are tired of annual tax increases for poor performance.
Town Management Was Only “Adequate”
S&P “considers Tiverton’s financial management practices ‘standard,’” which earns the town a score of “adequate.” In common language, that sounds OK, but in S&P’s scoring, “adequate” is only one step above “weak,” which was the score for budgetary flexibility. And management counts for twice as much. Financial management accounts for 20% of the town’s rating, while budgetary flexibility accounts for only 10%.
Consequently, there is no way budgetary flexibility could have gotten Tiverton to AAA, but if management had been “very strong,” then the rating would have been AAA even with “weak” flexibility. Voters might want to ask the town treasurer — who is in charge of managing the town’s finances — why this was not the “most notable concern” that she identified in the S&P report.
Other Factors Contribute to Flexibility
Even within the 10% for budgetary flexibility, voters’ use of the unassigned funds is only one factor of several.
If the town had saved money and started with a higher surplus last year, the $600,000 wouldn’t have mattered. If the town had saved money this year and were projecting a higher surplus in the upcoming audit, the $600,000 wouldn’t have mattered. If the town had a “demonstrated capacity and willingness to cut operational spending” by more than 2%, then its “weak” score would have been bumped up to “adequate.”
With all of these other possibilities and more, there is no reason to blame taxpayers for the rating.
Also Blame the School Committee
Even just simple accounting might have brought “budgetary flexibility” from “weak” to “adequate,” if the school committee worked with the municipal government as another branch of town government.
The town’s unassigned fund is calculated as a percentage of total expenditures. When calculating the expenditures, the town uses all spending — municipal and school. But when calculating the available funds that must be put aside, the town only uses the reserves on the municipal side.
At the time of the last budget vote, as well as the S&P rating, the school department had extra funds of $784,435. In fact, the S&P analysts noted that this money “provides some additional flexibility,” but they didn’t count it toward the “budgetary flexibility” score.
That isn’t exactly unreasonable, in Tiverton. After all, not that long ago the school committee sued the town to make sure that it even kept money above and beyond what the voters had approved at the financial town meeting, just because money that voters had expected to come from the state wound up coming from the federal government, instead.
Not a Big Deal
Obviously, elected officials at the local and state levels think it’s more important to let the school committee keep all surpluses on its own books than to boost the town’s credit rating. And they might be right that the ratings aren’t that big of a deal.
Perhaps more important than the question of what prevented Tiverton from achieving a AAA bond score is the question of how much it actually matters. In an era of ultra-low interest rates, the general answer is: probably not much. One might even go so far as to answer: not at all.
Ratings are not a simple formula in which that a higher rating gets lower interest based on a menu. The most important factor is the bond market. That’s true specifically — for particular bond ratings — and it’s true generally — with the cost of debt.
Specifically, bonds rated at AAA or at AA are a product (something to be sold), and sometimes the investment market wants AA even more than it wants AAA. That might happen if a whole bunch of AAA bonds go on sale at the same time or if fewer new AA bonds happen to be available, meaning that the municipalities selling them can demand better rates.
At the time of this writing, the composite bond rate chart for 20 year municipal bonds (which is what Tiverton sold) shows that AAA bonds were higher last month than AA bonds (at 2.95 versus 2.86). In other words AAA bonds were more expensive to whoever was selling them that month.
That’s not a perfect match for our purposes, because bond yields include trades of older bonds on the market, but it makes the point: It isn’t even a sure bet that selling AA bonds cost Tiverton any money at all compared with selling AAA bonds. That’s especially true considering that savvy investors would likely have seen the analysts’ note about the school surplus in S&P’s report.
More generally, the investment market makes a much bigger difference than notches in the bond rating. Consider our neighbor to the south. When Little Compton sold its AAA bonds in November 2013, it did so at a rate of 3.8% interest. With its AA rating, Tiverton was able to sell its bonds at 2.73% a year later — more than a full percentage point below Little Compton’s rate. We could speculate that Tiverton would have been even lower if it had achieved a AAA rating, but not only is that speculation, but with rates so low, the difference is minimal.
Journalists investigating the effect of bond ratings will quickly discover that experts do not want to put a dollar number on the difference. For one thing, investors have incentive to keep towns thinking they have to organize themselves around the demands of investors. For another thing, the transactions are just too complex to estimate as generalizations.
At best, having more money in the town’s unassigned funds would have brought the S&P rating up to AA+, which is between AAA and AA. Most indexes and literature about bond ratings don’t even bother to mention the pluses and minuses. Even if there would have been savings with an AA+ rating, they would have been so minimal as to be inconsequential. That’s definitely true when compared with the savings that taxpayers will realize over their lifetimes because taxes didn’t ratchet up last year.
When all is said and done, blaming voters at last year’s FTR for the AA rating is nothing more than an attempt to do two things:
- Shift blame to taxpayers in order to take more money from them in the next budget.
- Distract from the fact that it is town management that keeps Tiverton from joining its neighbors as a shining star of bond ratings.
Meanwhile, everybody should remember that every year’s increase in taxes becomes the baseline for the next year. Even a 1% tax increase is not simply one year of higher rates; it means higher rates for the rest of eternity… or at least as long as the Town of Tiverton exists.