New Jersey leads the nation with the highest number of local governments holding speculative-grade, or junk, credit ratings, according to Moody’s Investors Service.
Three municipalities — Collingswood, Harrison and Salem — are on the list because of high levels of risk related to projects in which the local governments has been involved, and two others — Camden and Irvington — have increased economic risk laid to falling real estate prices, foreclosures and other economic conditions, according to Moody’s, which does not rate all U.S. municipalities.
Most New Jersey municipalities borrow money by selling short-term notes or longer-term bonds to finance capital expenditures, such as infrastructure projects. Some towns also guarantee the financing — co-sign the loan, in essence — of projects like commercial redevelopment thought to be beneficial to the town and the tax base.
Credit ratings, in general, influence municipalities’ borrowing costs and the interest rates they pay on debt. Credit downgrades and low credit ratings typically make it more difficult, if not impossible, for local governments to sell their bonds to institutional investors — who want to be paid more interest for taking on the increased risk, if they will even buy the debt, said Jacki Shanes, a partner at law firm McCarter & English LLP, in Newark.
“If they can’t access the capital markets to do capital projects through note or bond issues, it’s a problem for the infrastructure,” Shanes said. “It really affects how they are going to maintain and improve their infrastructure.”
Since ratings agencies scrutinize ratables, surplus balances, and five-year plans and forecasts, municipalities need to focus improvements in those areas to earn upgrades to investment-grade ratings, finance experts say. The widespread decline in property values and the tax base, because of the economic downturn, is still putting pressure on the revenue side for municipalities, while local governments are limited in how far they can cut budgets, said Anthony Inverso, managing director at Phoenix Advisors LLC, which advises municipalities and other government entities on finance issues.
“In general, a strong bottom line is what’s going to help any municipality get to a higher credit rating, and that’s a combination of revenues at an appropriate level, and expenses that are in balance, and very basic revenues exceeding expenses,” Inverso said. “It’s obviously not straightforward from a municipality’s perspective, because you have to balance your tax base and you need to provide essential services.”
Winning an upgrade and maintaining investment-grade credit ratings are complex matters that rely on the timely flow of information and a dialogue between municipalities and ratings agencies, according to Noreen White, co-president, of Acacia Financial Group Inc., a financial adviser to local and state governments.
“Whether it’s good news or bad news, you don’t want to be waiting until you’re going to be issuing debt to let them know something bad has happened, or something has not happened that you expected,” White said.
Municipalities try to be proactive about fixing their ratings, taking actions that might satisfy analysts to upgrade them to the more attractive and financially lucrative investment grade ratings.
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