Comments on Cohasset’s Bond Rating

E-mail from Reader #1.

Michael Milanoski, Acting Town Manager, recently bragged that the town had the second highest bond rating available.  We compared Cohasset’s rating with that of nearby towns, ranked by the strength of their rating. Here we go, Cohasset – just above Hull and Marshfield.

* Duxbury          AAA/stable

* Hingham          AAA/stable

* Norwell            AAA/stable

* Scituate            AA+/stable

* Cohasset          AA+/negative

* Marshfield       AA/stable

             * Hull                  AA – /stable

The “negative” qualifier relates to a “lack of consistent financial management which has affected the general fund and the utility funds” according to their April 6, 2012 revision. If these issues are cleared up, the Town could be returned to “stable.” It appears for new issues of general obligation bonds, the rating would be AA+ and for refunding bonds the rating would be AA+/negative.

E-mail from Reader #2.

S&P’s rating rationale for the general obligation credit of Cohasset from the time of the initiation of their downgrade of the Town’s outlook in April of this year appears below. What has the rating agency upset with Cohasset is a combination of deteriorating financial ratios and past lack of financial management (i.e. the water department’s books disappeared and other matters discussed in the forensic accountant’s report). The more recent S&P rating rationale for the Town’s recent general obligation bond anticipation notes, which was published on November 14, 2012 cited “recent general fund declines and improper accounting in the utility operations,” indicating that the agency is still concerned about the efficacy of Town government, i.e. they will wait and see. Our experience with the national bond rating agencies indicates that Cohasset will have to prove its case over the course of at least one fiscal year and more likely several years. They are fast to downgrade and slow to upgrade. Having a new finance staff that has the support of elected and appointed officials and demonstrates that management has a handle on the numbers, as well as operations that affect financial outcomes will be important in the process of getting back to a “stable” outlook. What happens with a temporary Town Manager will be of secondary, if any importance. On ratings calls with S&P (or Moody’s or Fitch for that matter) the analysts typically ask questions such as:

“What happened that resulted in the variance of results from the budget for (a particular line item, say water department expenses)?”

“Have there been any recent changes to the Town’s Capital Investment Plan (CIP)?”

“Has the Town been able to meet its budget targets for items on its CIP?”

“Does the Town have a formal policy with respect to maintaining the unrestricted balance of the General Fund at a particular level (% of expenditures)?” 

“Last year you had a draw on the General Fund balance. What resulted in the draw?”

“Will there be another draw this year?”

“What steps has the Town taken or planned to restore the General Fund balance?”

Where Cohasset is concerned, staying the course with good financial controls, records and reporting, rebuilding the General Fund balance, meeting budgets and avoiding nasty surprises where CIP is concerned, will be the necessary cure. With measures in place to meet these goals, I think S&P will tend to cut the Town a bit of slack before taking any action to downgrade the Town’s actual ratings. Local politics may annoy them to some degree, but they are full-time public finance professionals and take what public officials say about each other and how much better they will do than the bum they hope to replace or have just succeeded in office with a grain of salt. The likelihood of forbearance so long as the terms of probation are met is, to a large extent, due to their expectation that high property values and an excellent incomes profile for local residents will act as something of a buffer in times of financial stress. In other words, they think local property owners and water and sewer customers can and will pony up. 

© Copyright 2012 Tanna K, All rights Reserved. Written For: Tinytown Unleashed