Moody's drops Suffolk bond rating

A Wall Street agency Monday dropped the rating on long-term Suffolk County debt by two notches as county lawmakers prepared to vote Tuesday to borrow against unpaid state and federal aid -- a move it has avoided for two decades.

Moody's Investors Service dropped the county's bond rating to A1 from Aa2 and issued a negative outlook because of the county's tight cash flow, dwindling reserves and widening budget gap.

David Jacobson, a Moody's spokesman, called the two-notch drop "rare," and said the negative outlook means the county could face a further downgrade in the next year or two. Downgrades usually result in higher borrowing costs.

"The downgrade and negative outlook reflects sharply narrowed liquidity after recurring operating deficits have significantly reduced reserve levels," Moody's said. "The county continues to face a structural operating gap in the current fiscal year, necessitating significant midyear budget adjustments."

Moody's action came after a blue-ribbon panel appointed by County Executive Steve Bellone disclosed last week that Suffolk ended 2011 $33 million in the red, faces a $148 million budget hole this year and a $349 million shortfall heading into the 2013 budget. Bellone warned that 462 county jobs funded only through June are unlikely to survive.

County lawmakers Tuesday are expected to approve an emergency resolution authorizing up to $90 million in short-term notes to avoid running out of cash in early May.

The revenue-anticipation notes are viewed as riskier than borrowing based on tax revenue since the state can reduce state aid levels, while the county can seize parcels if property taxes are not paid. The county has not used the tactic since 1992.

County Comptroller Joseph Sawicki said the borrowing is backed by more than $430 million in state aid owed the county and that he expects to have to borrow only $70 million.

Bellone said the downgrade "does not come as a surprise" amid the panel report. "Moody's emphasizes that for years, Suffolk County has been running an operating deficit which has been papered over through one-shot revenues," he said. "Those days must come to an end."

Bellone has declared a fiscal emergency, clamped down on non-mandated spending, issued orders to curtail overtime and wants state legislation to increase revenue. But he has yet to make any specific proposal to unions for concessions and has not issued major plans to deal with the county's growing budget gap. Aides say he will use his state of the county message planned for next Tuesday to begin rolling out major proposals.

Fitch Ratings director Karen Wagner said that "while the prospect of Suffolk County issuing revenue anticipation notes is certainly not a good sign, we're awaiting details on the mitigation plan before taking further rating action."

Moody's officials said the county could improve its rating by implementing "significant recurring budget adjustments" to improve the county's fiscal stability, cash flow and reserves. The firm also warned against increased cash flow borrowing and use of remaining reserves to balance county operations."