Poor fiscal management, unrealistic budgeting, and ballooning debt led Oyster Bay to become the only municipality in the state with a junk credit rating from Standard & Poor’s, analysts said, in stark contrast to towns around it.
In 2011, Oyster Bay and neighboring Huntington and Hempstead towns had AAA credit ratings — the highest possible level awarded by the agency. All three towns had seen revenue such as the mortgage recording taxes drop sharply with the financial crisis of 2008 at the same time that municipal costs, including pension contributions, went up.
Huntington’s rating has remained unchanged. Hempstead’s has dropped four notches since then, last year falling to an A+ credit rating as its reserve funds declined. But Oyster Bay received downgrade after downgrade, sliding 10 notches to its current junk rating of BB+ with the possibility that it could drop further.
The difference, analysts said, is largely a question of how the towns’ governments responded to the fiscal crisis.
For Oyster Bay, “these are self-inflicted wounds,” said Dick Larkin, director of credit analysis at Manhattan-based Stoever Glass & Co. Inc. Larkin said the town was “an outlier.”
“The other towns, the other cities . . . are all balancing their budgets, doing the hard things to stay afloat,” Larkin said.
Why ratings matter
Credit ratings are important to taxpayers. Better ratings reduce the cost of borrowing for projects such as road improvements, while lower ratings increase costs.
For example, had Oyster Bay been able to get the benchmark rate for top-rated municipalities when it borrowed $99 million in January, it would have been able to save about $1.3 million in interest on that debt over one year.
Standard & Poor’s rates 196 municipalities in New York, including eight towns on Long Island. Oyster Bay is the only town on Long Island that received negative marks on all the factors over which it has direct control, namely managing its finances.
Another agency, Moody’s Investors Service, rates all of the towns and cities on Long Island except Oyster Bay. Following several downgrades, Moody’s withdrew its Oyster Bay rating in January after town officials failed to provide an audited 2014 financial statement. Town officials said computer problems caused the delay.
Oyster Bay Town Supervisor John Venditto has blamed the economy for the town’s woes.
“We haven’t been able to keep up with the rate of deterioration,” Venditto said in an interview.
In 2010 Standard & Poor’s warned the town its declining reserves threatened its AAA rating. Two years and three downgrades later, Venditto told Newsday, “We’re moving in the right direction.”
Two years after that, with three more downgrades, Venditto said his 2015 budget “will take us to a complete and real economic recovery in Oyster Bay.”
After the drop to junk bond status, he said he had taken steps to address the town’s fiscal problems, but “it wasn’t enough.”
Venditto has defended the town’s capital spending on infrastructure as being sound investments, but said last Tuesday the town will reduce its borrowing and that the fiscal problems can be fixed.
“We’re going to be moving sooner rather than later to correct the problem,” Venditto said.
Standard & Poor’s bases its credit ratings on several criteria, including:
- Financial management. Oyster Bay is the only Long Island town rated by Standard & Poor’s that is cited as having weak management.
- Debt management. Oyster Bay has no long-term debt policy. It accumulated more new debt from 2005 to 2014 than all other Long Island cities and towns combined, according to data from the state comptroller’s office.
- Cash flow. When the financial crisis hit, Oyster Bay depleted its reserves and has relied on short-term borrowing since 2011 to pay its bills. Other Long Island towns have financial cushions.
Standard & Poor’s considers the economy a bright spot for Long Island towns based on their residents’ above-average income levels, housing prices, relatively low unemployment and access to the broad and diverse New York metropolitan economy. Local economic conditions account for almost a third of municipalities’ ratings. The agency gives Oyster Bay, Hempstead, Huntington, Riverhead, Brookhaven and Southampton its highest economic mark. Islip and Babylon get the second-highest mark in this area.
“The late end of the ‘aughts’ — ’07, ’08, ’09 — were particularly difficult for municipal governments to manage,” said Kent Gardner, chief economist at Rochester-based CGR, a nonprofit consultant that analyzes municipal government practices and policies. “But we’re kind of on the other side of that.”
Noah Nadelson, chief executive at Port Jefferson-based Munistat, a municipal financial adviser, said that management in towns such as Huntington and Brookhaven — both of which maintained their credit ratings over the past five years — handled the loss of revenue during the recession by quickly cutting costs and making realistic financial projections.
“It’s a culture starting from the top and all management buys in and then the employees buy in,” Nadelson said. He said the key was to look at the budget and “see where there’s stuff that just doesn’t belong, and how can we do this better, and that’s what they’re constantly thinking about.”
Huntington, for example, will delay capital projects if borrowing will cause debt service costs to increase, Nadelson said. Huntington received Standard & Poor’s highest marks for management. The town’s budgets use conservative estimates, the administration regularly analyzes how current spending and revenue fit within historical trends, it has policies to limit debt and ensure that it always has money available, it uses long-term planning and provides elected officials with monthly financial updates, a Standard & Poor’s report said.
Standard & Poor’s criticized Oyster Bay’s lack of long-term financial planning, absence of a formal policy to limit borrowing and pay down debt, unrealistic projections and failure to make budget adjustments when actual revenue and expenses don’t add up. The agency cited 10 consecutive years of operating deficits by the town in its downgrade report.
“The town has to stick to our budget,” Oyster Bay Councilman Joseph Pinto said in an interview.
This year the board has begun asking questions about spending that it hadn’t in the past. Pinto said the administration last week began telling the board how resolutions up for a vote would impact the budget.
Long-term debt and liabilities
Long-term debt and liabilities such as pension payments, health care benefits for retirees and potential payments in legal disputes are also a factor in credit ratings. As municipalities across the country cut back on infrastructure investments over the past decade in response to the recession, Oyster Bay went the opposite direction.
With the fourth-largest population on Long Island, Oyster Bay has more debt than any other municipality on the Island — 2 1⁄2 times its annual revenue. The town’s long-term debt has grown by about $500 million over the past decade to around $800 million, outstripping all towns and cities. In 2014, more than a quarter of all long-term town and city debt in Nassau and Suffolk counties was owed by Oyster Bay, according to data from the state comptroller’s office.
Most of the borrowing went to road and infrastructure projects, data show.
In 2007 about 15 cents of every dollar the town spent went to paying principal and interest on its debt. Today it’s about 20 cents.
Huntington, by contrast, with a population around two-thirds of Oyster Bay, spends about 7 cents of every dollar on debt.
Babylon controls the growth of its debt with a policy that only allows the town to borrow no more than it paid off in a year.
“We will not issue more debt than we will retire,” Babylon Town Supervisor Richard Schaffer said. “By adhering to that policy over the years we’ve been able to be very disciplined.”
Credit ratings also take into account how much money towns have in reserves and in their operating funds, their ability to borrow as needed, and the ability to raise taxes or cut spending. Standard & Poor’s gives most Long Island towns the highest or second-highest marks in these areas. Islip ended 2014 with reserves and a surplus almost equal to its annual budget, whereas Oyster Bay has increasingly relied on short-term borrowing.
“They need to borrow money just to pay today’s bills,” Larkin said of Oyster Bay.
To address falling revenue, both Oyster Bay and Huntington cut staff by offering retirement incentives. Oyster Bay borrowed millions of dollars to pay for its program; Huntington didn’t.
“All too often governments borrow for personnel and personnel costs,” Huntington Town Supervisor Frank P. Petrone said. “That’s a big no-no; that’s an operating expense.”