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Moody's issues 'credit negative' report for Northport-East Northport schools

Northport Middle School's closure over chemical contamination could push down property values in the Northport-East Northport school district, while a LIPA tax challenge could drive up homeowners' property taxes by as much as 36%, Moody’s Investor Service says.

In a report Friday, the credit rating company cited the Jan. 18 decision to close the middle school after the district found elevated levels of benzene and mercury in sludge of two cesspools and inorganic mercury in a leaching pool outside the building as a "credit negative" for the district, which has relocated 660 students to other schools while it works with state and local agencies to remediate the contamination.

Moody's noted that while the district believes it can absorb the short-term cleanup costs in its budget, it faces the longer-term “social risk that parents might decide to move to other school districts, lowering enrollment and weighing negatively on home prices.”

In a statement, school district spokesman Brad Gerstman noted that the Moody's report was not a downgrade "as there is no justification for such."

"The district has taken a proactive approach and has been working diligently on the issues cited in the report," Gerstman said, noting that "no harmful vapors of either benzene or mercury have been found inside the school building."

Gerstman said students were removed from the middle school "out of an abundance of caution"  during "extensive and ongoing environmental consultant review in consultation with local government agencies which will conclude in late March/Early April." 

Separately, the potential negative impact of LIPA and National Grid’s tax challenge over the $84 million the utility pays each year in property taxes also influenced the credit negative outlook, Moody’s said. The case has been argued in State Supreme Court and a verdict is expected soon, even as both sides have engaged in mediation. LIPA, arguing the plant is significantly over-assessed and is used considerably less than it was 20 years ago, wants to lower the $84 million in taxes it pays by half over the next seven years.

“If LIPA and National Grid win their challenge, the typical taxpayer would, in a worst-case scenario, face a 36 percent property tax increase,” Moody’s said.

Combined, the environmental and tax-challenge add “to the risk of a decline in home values,” Moody’s said.

Moody’s said the district will be able to “manage” the cost to relocate students, characterized as resulting in a “negative $100,000 budget variance” for 2020, but it believes the contamination “introduces longer-term financial risks.” Moody’s noted there was the “possibility of lawsuits from the families of affected students.” And while the district said it’s “fully insured” against claims, “it is possible that the district’s insurance rates will rise in the future,” Moody’s said.

Moody’s also said, “Media attention surrounding a school closure due to the discovery of a dangerous chemical will potentially deter prospective homebuyers in the area, lowering home values,” Moody’s said.

 Taxes for district residents, Moody’s said, are “currently relatively low” and any “significant increase" resulting from the LIPA tax challenge "may change the district’s relative attractiveness to new buyers and be an incentive to relocate, potentially weighing on home values,” the firm wrote. Huntington Town has argued the taxes are fair given the importance of the Northport Power station in LIPA's power portfolio.  

LIPA has projected some 70,000 residential customers in Huntington Town would be liable for more than $650 million in refunds to LIPA if it wins the case, in addition to any lower ongoing tax payments it could win.  It has already reached a settlement with Brookhaven Town over taxes for the Port Jefferson power station, and has reached tentative settlements with Nassau County over contested taxes for the E.F. Barrett plant in Island Park and for plant property in Glenwood Landing.

Moody’s viewed as a “positive” the June 2019 launch of a Community Advisory group effort to “right size” the school district in light of the LIPA case and declining enrollment. It could result in fewer buildings and lower costs for the 2020-21 school year, while maintaining a “high-quality educational program that is attractive to homebuyers.” Around 40% of the LIPA tax payment goes to the school district.

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