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East Hampton Downgraded By Moody's From Aa3 To A1
The irony and the Freudian displacement reaction are simply too much. Since Moody's knows it would be kneecapped and Friend-o'ed the second it downgrades the UK, Germany or France, it has decided to lash out at the very people who will be the cause of the next, and terminal for the rating agency, round of congressional grillings in a year or so, when Europe is bankrupt and Moody's is questioned why it kept England at AAA until two days after the sovereign default.
From Moodys:
NEW YORK, Jun 23, 2010 -- Moody's Investors Service has assigned an A1 rating with stable outlook to the Town of East Hampton's (NY) $9.5 million Serial Bonds, 2010 Series A; and a MIG 1 rating to $5 million Bond Anticipation Notes, 2010 Series B. At this time, Moody's has also downgraded the town's rating to A1 from Aa3 and revised the outlook to stable from negative affecting $85 million of outstanding parity debt. The rating downgrade reflects depletion of the town's financial reserves following four consecutive operating deficits (2004 through 2007), with further financial deterioration anticipated given a projected operating deficit in fiscal 2008 (unaudited) and fund balance decline driven primarily by management's ongoing efforts to clean up the town's balance sheet in 2009 (year ended December 31, 2009). The rating also factors anticipated financing of the town's accumulated operating fund deficit from proceeds of the current bond issue and an additional authorization of $15 million for deficit reduction bonds that will be utilized to settle previous interfund borrowing from non-operating town funds for operating purposes, and management's plans to restore balanced operations through the implementation of recurring revenue enhancements and expenditure controls, as reflected in the town's fiscal 2009 and 2010 budgets. The rating additionally incorporates the town's sizeable tax base and modest level of debt that is amortized over an average period of time. Moody's stable outlook is based upon our expectation that the town's current financial position will stabilize over the medium-term despite challenges related to ongoing operating pressures facing all New York municipalities, related to contractual salary increases and growing pension costs, in the face of an uncertain economic recovery. These pressures are expected to be addressed through implementation of recurring measures that will provide for the restoration of structurally balanced operations. Further diminishment of the town's financial flexibility beyond that currently projected could lead to downward pressure on the town's rating. Proceeds of the Series 2010A Bonds and 2010B BANs will retire a like amount of Series 2009D BANs maturing June 30, 2010. Series 2009D were originally issued for deficit reduction financing.
DEMONSTRATED MARKET ACCESS
The MIG 1 rating incorporates the town's long-term credit characteristics and history of market access. The town typically receives three to six bids on its competitive offerings, and received four bids on the Series 2009E notes, 10 bids (six bidders) on the Series 2009D notes, and 12 bids (eight bidders) on the Series 2009A notes. Additionally, the town received three bids on its October 2008 bond anticipation note sale, despite market disruption at that time. Given this history, Moody's expects the town will be able to refinance the current notes at their March 25, 2011 maturity.
TREND OF OPERATING DEFICITS DEPLETES OPERATING RESERVES, LIQUIDITY
The town's financial flexibility has narrowed substantially following four consecutive operating losses (2004 through 2007) which decreased General Fund balance from a recent high (fiscal 2003) of $6.8 million (29.9% of revenues) to a deficit fund balance position of -$2.3 million (-7.3% of revenues) in fiscal 2007. Moody's analysis of the town's finances factors four major operating funds (General, Town Outside Villages, Highway, and Refuse and Garbage Funds). On a combined basis, operating reserves decreased from $12.3 million (27.3% of revenues) to a deficit of -$5.7 million (-9.5% of revenues) during this period, reflecting the impact of a substantial deficit in the Town Outside Villages Fund (-$7 million, or 43.5% of revenues in that fund), offset by positive reserves in the Highway and Refuse and Garbage funds. During this period, operations benefited from conservative budgeting of mortgage tax revenues, budgeted annually at approximately 65% of prior year actual receipts. However, mortgage tax surplus was not sufficient to replenish appropriated fund balance and offset significant and growing expenditures for employee benefits, which consistently exceeded budget during this period, driven by over-expenditure related to health benefits, for which the town was self-insured. During this time, modest property tax levy increases and implementation of various fee increases were not sufficient to offset expenditure growth. Despite the deficit fund equity, the town's cash position was satisfactory as of fiscal 2007, with combined operating fund net cash equal to 11.4% of combined revenue. Liquidity was supported by substantial interfund loans from the Community Preservation Fund (CPF, part of the Capital Projects Fund). This fund receives revenue from a 2% real estate transfer tax ($31.6 million in fiscal 2007; projected to have declined to $15.3 million in 2008 in line with regional real estate trends), the proceeds of which are dedicated for open space preservation. Reliance on this alternative liquidity source is evidenced by growing interfund liabilities, particularly in the Town Outside Villages Fund, in which the liability increased from $1.8 million in fiscal 2006 to $5.4 million in fiscal 2007. As of the town's fiscal 2008 financial statements, these liabilities are expected to be funded from the proceeds of deficit financing (discussed below).
OPERATING DEFICIT ANTICIPATED IN FISCAL 2008; LIQUIDITY EXPECTED TO NARROW
Officials anticipate another substantial operating loss for fiscal 2008, based upon draft audited results (final audit expected to be released during the third quarter of 2010). The 2008 budget anticipated $2.2 million in health insurance savings through restructuring of benefits; this restructuring was blocked due to union opposition, and accordingly, health insurance expenditures are expected to have exceeded budget by $2.5 million. Additionally, the budget assumed $2.2 million of General Fund revenue for administration of the CPF fund; however, it is now expected the majority of these revenues may not be appropriately charged as budgeted, resulting in a shortfall of approximately $2 million. Further, the 2008 budget included a more aggressive estimate for mortgage tax receipts, at 86% of projected fiscal 2007 receipts. Reflecting the national residential real estate downturn, mortgage tax receipts are projected to have come in approximately $1.8 million below budget at year-end, reflecting a projected year over year decrease of approximately $4.9 million. In the face of revenue weakness and to offset the appropriation of $775,000 of fund balance in the 2008 budget, management took steps to reduce costs by leaving vacant positions unfilled and increasing budgeted contingencies. Nevertheless, a combined operating deficit (General Fund and Town Outside Villages Fund) of approximately $8 million is projected. The General Fund is expected to end the year with a total General Fund balance of negative $10.2 million or -42.3% of General Fund revenues. On a combined basis, fund balance for the major operating funds (General, Town Outside Villages, Highway, and Refuse and Garbage Funds) is expected to have declined to negative $15.3 million or -27.6% of General Fund revenues. In addition, combined operating fund net cash (General Fund and Town Outside Villages Fund) is expected to be a more narrow 7.3% of combined revenue at fiscal 2008 year-end down from a more satisfactory11.4% of combined revenue at fiscal 2007 year-end, despite the issuance of deficit reduction bond anticipation notes during the year, as proceeds of these notes were used to repay interfund loans to the CPF Fund.
CUMULATIVE DEFICIT EXPECTED TO HAVE GROWN IN 2009 DESPITE STRUCTURAL ENHANCEMENTS IN BUDGET
The fiscal 2009 budget incorporated several steps to restore structurally balanced operations, given no appropriation of fund balance and adoption of a 24% property tax levy increase. Significantly, management successfully restructured health benefits as of January 1, 2009, with projected annual savings of up to $3 million moving forward (2009 health insurance expenditures budgeted at $1.9 million below projected fiscal 2008 costs). The budget also incorporated reasonable assumptions regarding settlement of the PBA contract, which expired as of year-end 2006 and was recently settled within budgeted estimates. Management continues to take steps to streamline operations, freeze discretionary spending, strengthen internal controls and improve monitoring of revenue and expenditure performance. These budgetary enhancements and improved fiscal management are expected to result in a relatively moderate General Fund operating surplus for fiscal 2009. Mortgage tax revenues, budgeted at the level received in fiscal 2008, are expected to fall short of budget by $1.3 million although partially offset by positive variance from budget in beach permit fees ($308,000) and cable franchise fees ($171,000). Overall, General Fund revenues are expected to have come in $658,000 below budget. However, savings on employee benefits expenditures are expected to drive a moderate General Fund operating surplus of $1 to 3 million. However, ongoing clean-up of the town's balance sheet, including corrections to the recording of interfund liabilities and liabilities related to retroactive payments owed to the PBA at the end of 2009, are expected to result in decrease in operating fund balance on a combined basis. This decline may be mitigated pending the results of an ongoing capital fund audit which may uncover opportunities to reimburse the operating funds for prior year's capital expenditures from the proceeds of bonds that had been authorized but were not issued. Nevertheless, management currently projects an increased combined operating fund deficit of approximately $20 million to $30 million at year end 2009.
Favorably, the town received state authorization for the issuance of an additional $15 million of deficit reduction bonds (total authorization of $30 million) to fund the projected fiscal 2008 cumulative deficit; the town board unanimously approved this resolution. These additional bonds are expected to be issued upon certification by the New York State Office of the State Comptroller of the 2009 deficit, once the town's 2009 audit is completed (expected by September 2010), thereby eliminating the town's cumulative deficit.
2010 BUDGET CONSERVATIVELY STRUCTURED
Moody's believes the 2010 budget continues to reflect improvements implemented in 2009. The budget funds a 52% increase in the town's pension contribution, and includes conservative estimates for health insurance expenditures and reasonable assumptions in line with the recently settled PBA contract. Positions vacated in 2009 are fully funded in the budget, in anticipation of backfill of certain positions. Growth is funded primarily from an increase to the town-wide and part-town property tax levies; a beach parking fee, implemented in 2009 ($300,000 budgeted) has been eliminated. The town remains exposed to mortgage tax revenues, which comprised approximately 13.7% of combined revenues in fiscal 2007. Budgeted at the level received in 2009, these receipts are vulnerable should the housing market decline further.
SIZABLE AFFLUENT TAXBASE EXPECTED TO BE IMPACTED BY ECONOMIC DOWNTURN
Moody's expect the town's sizable $32.9 billion tax base to continue to be impacted by the current economic downturn. The town's very high full value per capita of $1.5 million is indicative of a concentration of highly-valued second homes; this market is considered to be vulnerable should the economic recovery falter, resulting in further Wall Street job losses. While full valuation has grown at a strong average annual rate of 14.8% over the past five years, driven by healthy market value appreciation, growth is expected to slow or even reverse in the near term. Modest assessed valuation growth during this period, averaging 2% annually, reflects new development and redevelopment of existing properties. In contrast with the town's high full value per capita, more modest income indicators (median family income equal to 117.5% of the state level) reflects the lower wealth levels of year-round residents.
DEBT LEVELS EXPECTED TO REMAIN MODEST
The town's direct and overall debt burdens, at 0.4% and 0.8% of full valuation, respectively, are modest. Nevertheless, debt service comprised a substantial 21.2% of combined operating expenditures in fiscal 2007. Burden on property taxpayers is mitigated by transfers from the CPF, which fund debt service on bonds issued for open space preservation ($51.3 million issued to date, including town bonds and EFC loans). Net of a $4.3 million transfer from the CPF in fiscal 2007, debt service comprised a still high, but more manageable, 15.8% of combined operating expenditures. Given the town's sizable tax base, average principal amortization (72.8% retired within ten years) and limited projected issuance in the near future, the debt burden is expected to remain manageable. The town's borrowing has been significant in recent years and several projects have recently been completed. The town has no variable rate debt or derivatives agreements outstanding. The town's next issuance to refinance the current notes and fund the 2009 accumulated deficit is anticipated in 2011.
Outlook
Moody's stable outlook is based upon our expectation that the town's current financial position will stabilize over the medium-term despite challenges related to ongoing operating pressures facing all New York municipalities, related to contractual salary increases and growing pension costs, in the face of an uncertain economic recovery. These pressures are expected to be addressed through implementation of recurring measures that will provide for the restoration of structurally balanced operations. Further diminishment of the town's financial flexibility beyond that currently projected could lead to downward pressure on the town's rating.
What Could Change the Rating (Up)
- Demonstrated progress toward replenishment of reserves
- Demonstrated progress towards structural balance
What Could Change the Rating (Down)
- Significantly larger than anticipated operating deficit in fiscal 2009
- Growing structural imbalance
- Failure to complete audits in accordance with projected timeline (fiscal 2009 audit anticipated by September 30, 2010)
- Dramatic increase in Operating Fund deficits
KEY STATISTICS:
2000 population: 19,719
2008 population: 22,106
2010 full valuation: $32.9 billion
2010 full value per capita: $1,486,568
Direct debt burden: 0.4%
Overall debt burden: 0.8%
Payout of principal (10 years): 72.8%
FY07 General Fund balance: -$2.3 million (-7.3% of General Fund Revenues)
FY07 Operating Funds Combined Balance: -$5.7 million (-9.5% of Operating Funds revenues)
FY08 General Fund balance (draft audit): -$10.2 million (-42.3% of General Fund Revenues)
FY07 Operating Funds Combined Balance (draft audit): -$15.3 million (-27.6% of Operating Funds revenues)
2000 Per Capita Income as a % of State: 133.8%
2000 Median Family Income as a % of State: 117.5%
Long term G.O. Debt Outstanding (including bonds and notes): $94.5 million
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Why are they just getting around to the 2008 and 2009 results?
delete
All the news isn't bad.
Local municipalities are looking to offset such a downgrade from the significant tax revenues expected from the pending launch in 2012 of the locally flavoured theme park Gatsbyland, currently in beta development
http://www.independent.co.uk/multimedia/archive/00182/4793399_182231b.jpg
Who still cares about what rating these @#*&^% idiots give anything. Please don't give them credit by talking about them.
dude we need to give a damn, the entire structure depends on ratings
If you ignore them, they will leave.
Lobster roll anyone?
Pardon my ignorance. But WTF is a "Deficit Reduction Bond", anyway?
Spinology or just outright Fraudulent Deception?
translation.... the kleptocrats are going to have a shitty year. therefore,the outlook for the balance sheet of banksterland looks pretty piss poor...
this could be the first well thought out statement from any rating agency in well over a decade...
the day of reckoning is nigh....mwah-ha-ha-ha...
Did anyone catch Warren Buffet having to be subpoenaed to testify in Congress about the ratings companies ?
Up until his self incriminating testimony, he had been refusing to go. And after hearing him, I understood why. He's dirty
How could there be an '10 full valuation of $32.9 billion and a FY08 General Fund balance of -$10.2 million for a little shit town like East Hampton?
Just raise the millage rate and be done with it. I bet 60% of the homes are vacation/rentals anyway.
Another reason why consumer spending is going to continue it's decline. Not only are many underwater, but the cost of ownership will continue to rise. Get out now!
Deficit Reduction Bond - classic.
You mean $25,000/week cottage rentals aren't a sustainable taxable revenue stream?