Standard & Poor's reduced the Town of Hempstead's bond rating by three levels Wednesday, citing the town's use of reserve funds and an additional $22 million in tuition settlement charges.
The bond rating agency lowered the town's rating from AA+ to A+ because of "continued fund balance deterioration."
"The downgrade reflects our view of the town's very weak financial flexibility following the continued deterioration in its available general fund balance," the agency's report states. "We believe Hempstead's fiscal 2014 year-end general fund results will show reserves decreasing to negative levels."
Hempstead passed a $431.8 million budget for 2015 and borrowed $24.9 million from reserves to balance that budget. The town has $80 million remaining in reserves.
Hempstead officials passed an amendment in November to issue bonds covering a $30 million gap in the 2014 budget, including $22 million in lawsuit payments to Nassau County.
"A variety of factors beyond the town's control have caused the most recent ratings adjustment," Hempstead Town spokesman Michael Deery said in a statement.
One primary cause of the ratings decrease is tuition payments to the Manhattan-based Fashion Institute of Technology after the New York Court of Appeals ruled Hempstead, North Hempstead and Oyster Bay towns must pay the county back for Nassau students' tuition payments.
Nassau County has withheld sales tax for tuition payments since 2010, but Hempstead included the tax in its budget revenue. Hempstead owed about $17 million in 2014 and an expected $4.6 in the 2015 budget. Those costs were covered by the $30 million in bonds issued by the town.
"An arcane practice that has been the subject of conflicting court decisions leaves Hempstead Town residents on the hook for tuition costs associated with local students at the Fashion Institute in Manhattan," Deery said.
Moody's Investment Service downgraded the town last year one level to Aa1 from AAA for using reserves to balance the budget, but the town's rating was still considered stable. The town reduced its reserves spending 20 percent in the current budget from the previous year.
Standard & Poor's determined the town's fund balance could improve in the next two years if it continues its 2015 budgeted surplus. If the town continues to use reserves, the rating could be lowered again.