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Stamford tries to keep credit rating amid downturn
Stamford ADVOCATE
By Stephen P. Clark
Article Launched: 04/25/2008 01:00:00 AM EDT

STAMFORD - Before the city holds its first bond sale in more than two years next month, it must get past the credit rating agencies.

That's who determines whether Stamford keeps its AAA rating.

City officials will meet with Standard & Poor's today and Moody's Investors Service next week.

The agencies will examine financial performance, debt management, economic conditions and other factors.

City officials will take analysts from each agency on a tour of Stamford to show them the economic development that is under way, Director of Administration Sandra Dennies said.

Stamford has had an AAA bond rating since 1996, when Mayor Dannel Malloy first took office. If the city's bond rating is downgraded, it may have to insure the bonds it issued.

States and municipalities issue general obligation bonds to fund public projects. The interest rate paid on these bonds depends mostly on ratings assigned to them by the three major credit rating agencies - S&P, Moody's and Fitch Ratings.

For example, AAA bond ratings yield lower interest rates than A bond ratings. A municipality issuing an A bond rating usually pays considerably more interest over the life of the bond, leading to higher taxes for residents.

"Cities that do not have a AAA bond rating, that have to have their bonds insured, are paying dearly for that," Dennies said.

On May 13, the city plans to sell $88 million in general obligation bonds. Of that amount, $47 million will pay off a short-term bond from last year, and the rest will help finance the $72.5 million capital budget for the next fiscal year. The city also may refinance $18 million in bonds at lower rates later this year.

The credit rating agencies will review, among other things, the city's $383 million in bonded debt, its $200.8 million post-employment benefits liability and the unemployment rate.

Last month, the unemployment rate in Stamford hit 4.5 percent, up from 3.6 percent during the same month last year, according to the city's financial adviser, Chris Martin of Webster Bank. Although the rate has risen, it is favorable compared with the state's 5.5 percent rate and Fairfield County's 4.9 percent, Martin said.

The city had no bond sale last year, Dennies said, partly because of the 2006 property revaluation, the first one in seven years, which drew heavy criticism.

The most recent bond sale was in February 2006, when it issued $59 million in general obligation bonds to help finance the Stamford High School construction project, a public safety radio system, the Urban Transitway project and the redesign of several railroad underpasses.

Moody's assigned Stamford a AAA rating in part because the city changed its Charter to allow the accumulation of reserves in a rainy day fund.

"Moody's believes the city will continue to enhance its improved financial position due to a revision to Stamford's previously restrictive Charter," the report read. "Due to state aid reductions, poor investment earnings and overtime expenses, the city's fund balance was reduced to a narrow $5.2 million (just 1.6 percent of revenues) in fiscal 2002. Revenue enhancements and spending and hiring freezes enabled the city to improve its general fund position to $17.3 million (4.8 percent of revenues) in fiscal 2004."

Rating agencies recommend that municipalities maintain a rainy day fund that is at least 5 percent of the total budget.

The review comes as state Attorney General Richard Blumenthal investigates the rating agencies' use of a dual system for bonds. Blumenthal testified last month before the U.S. House Committee on Financial Services that the practice should be banned.

"Wall Street profits, Main Street pays," Blumenthal said. "The current dual system of rating bonds issued by state and local governments is dangerously misleading and misguided. It imposes a secret Wall Street tax on states, cities and school districts across this nation. Rating agencies admit that municipal bonds frequently receive substantially lower credit ratings than corporate bonds with the same or worse rates of default. This dual rating system costs municipalities in Connecticut and around the country millions of dollars in unnecessary interest and fees every year."

Martin said the investigation shouldn't affect Stamford's review.

"It's really kind of business as usual to the extent that the city has capital needs, has a well-articulated plan for addressing them and is going to the market to get the lowest rate possible," he said. "We have every expectation that it will be a favorable outcome."