Original Reports

The 0.0% and 0.9% Elector Petitions Did Not Lower Moody’s Bond Rating

Question: Did the 0.0% and 0.9% elector petitions reduce Tiverton’s bond rating from Moody’s Investor Services?

Here we go again with the bond-rating blame game.

In order to refinance nearly $8 million of its debt, the Town of Tiverton asked Moody’s Investors Services to rate its bonds.  Moody’s rating of A1 was only the fifth-best rating possible, and was lower than other cities and towns in Rhode Island, so town officials took to the Newport Daily News to redirect blame (“‘Challenges’ cause bond rating to slip,” 12/10/15):

“Tiverton really didn’t stack up to the others,” [Town Treasurer Denise] Saurette said, [referring to a separate pool of Portsmouth, North Kingstown, and Burrillville,] “It was upsetting.  They see us as a potential liability.  It’s a black eye.  We didn’t do as well as we wanted to.”

The first excuse on the list?

Moody’s noted Tiverton’s use of the general fund surplus to offset the tax rate, and the ability of a taxpayers’ group to override recommendations made by the town’s Budget Committee, Saurette said.

A local politician took the finger-pointing one step farther:

“This is the beginning of what we warned would happen,” said Town Council President Denise deMedeiros, speaking of past elector budget petitions that were approved by voters at the annual financial town referendums in May that took money from the general fund surplus to offset the tax rate.

It is true that Moody’s mentioned Tiverton’s budgeting process and the results of the past two financial town referendum (FTR) votes — in which voters overwhelmingly supported smaller increases in taxes than elected officials wanted to impose.  But it’s simply not true that Moody’s reduced its bond rating for the town because of the 0.0% petition that voters selected for fiscal year 2015 and the 0.9% petition that won for fiscal year 2016.

The most glaring proof that the accusation is false is that the numbers Moody’s used for its rating were from fiscal year 2014.  That means the rating agency was looking at numbers from before any elector petitions had succeeded at the FTR.  There is no way the elector petitions affected the fund balance at that point.

Even if that were not the case, it would be incorrect to blame the fund balance for the town’s A1 rating.  Moody’s assesses 13 different factors in putting together its rating, and the fund balance only counts for 15% of the total (10% for the latest number and 5% for the change over the past five years).  Of the 13 factors, Tiverton scored AA (second best out of six) on only four, and three of those have more to do with the people who live in town than with the way the town is run.  The other nine factors were rated A (third best), with the fund balance among them.

Based on calculations by Tiverton Fact Check following Moody’s methodology, in order to reach the next overall bond rating of AA3, the town would have needed a fund balance of $7.7 million, which would have been $3.3 million more than it had at the end of fiscal year 2014.  Referendum or not, neither the Town Council, the Budget Committee, nor anybody else was talking about adding another six percent of the town’s revenue to its reserves.

As Tiverton Fact Check pointed out when elected officials were saying similar things about the (better) rating that Standard & Poor’s gave Tiverton a year ago, the bigger “challenge” for the town’s bond rating is its management, which is only average.  Moody’s also seems to put more emphasis than does S&P on total debt and pensions, which held back Tiverton’s rating.

While increasing the town’s reserves could conceivably get Tiverton to AA3, no amount of reserves alone could reach the next step above that on the ratings ladder.  In the other direction, if everything else remained the same, the town would have to have a sizable deficit — that is, a negative fund balance — in order to drop below A1.  That includes both the town’s reserves plus any balance that the school department has on its books.  Tiverton’s Home Rule Charter requires the municipal side alone to keep 3% of the town’s total budget as reserves, so any petition that follows the charter will be well within the safe zone.

The numbers involved also have to be kept in perspective.  According to Saurette, in the Newport Daily News, a higher rating could have saved Tiverton $100,000 over the remaining ten years of the bond, or $10,000 per year.  By contrast, the cumulative effect of the 0.0% and 0.9% elector petitions has been to save taxpayers $1.3 million every year.

In summary: Moody’s rating calculation doesn’t apply to the budgets affected by the elector petitions, and even if it did, the use of the reserves to reduce taxes would have had no effect, and even if the petitions were to blame, the $10,000-per-year cost barely registers against the petitions’ $1.3 million annual savings for taxpayers.


Justin Katz

Justin Katz is a writer and researcher focusing on Rhode Island policy and politics. For more about Justin, see our About page. justin@justinkatz.com (401) 835-7156.

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