Politics & Government

Bernards Keeps Triple AAA Bond Rating Even As Local Debt Dwindles

Like Somerset County, unlike U.S., Bernards Twp. holds triple AAA credit rating from Standard & Poor's.

Bernards Township has held an AAA credit-worthiness rating since the municipality reissued bonds to obtain a lower rate last August, and there is no reason to think that rate will be reduced at this time, said Township Administrator and Chief Financial Officer, Bruce McArthur.

In fact, the township is looking to keep on its path of heading toward being completely debt-free by near the end of this year, McArthur said. That debt-free status will not include money borrowed for open space and farmland under a separate open space fund account, he said earlier this year.

McArthur observed that Somerset County, which earlier this week announced its AAA-bond rating had been reaffirmed by S&P, had its rating looked at again while seeking a recent Improvement Authority bond issuance of $24.38 million.

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"It costs considerable money to have a rating agency rate an issue like this — a basic necessity in these times," McArthur said in an email on Wednesday. "S&P rated our 2010 refunding issue AAA in August 2010 — [that] cost of $12.5K was included in the issue itself, which saved us $285,000 in total by getting lower rates," McArthur said in explaining that the township only sold municipal debt last year to retire earlier bonds sold at a higher interest rate.

Standard & Poor's has not specifically reaffirmed Bernards Township's credit rating since, and has had no reason to do so, according to McArthur.

S&P often updates such credit ratings about every four years, "but not necessarily," McArthur said.

"They have given no indication that they would change our rating," McArthur said. However, he said Moody’s, another financial agency that issues credit rating, recently emailed Bernards Township that Moody's rating on the municipality's 2002 debt of AAa is not being downgraded, McArthur said.

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"I would be surprised if our ratings were affected by the current federal downgrade," McArthur concluded.

To put the matter in perspective, McArthur explained that any of the credit ratings only are really important when an entity is out in the market trying to sell bonds. "It lowers your cost of borrowing substantially," said the township's CFO.

However, he said, Bernards has no plans whatsoever to borrow funds now for any purpose at the current time or in the foreseeable future.

"In fact, our non-open space funded debt balance will be $0 on Nov. 1, 2011," McArthur said, a schedule he has announced several times at public meetings. "No one wants to see their ratings downgraded, but it only really matters when you are out in the market," he said.

McArthur said S&P's downgrade of U.S. debt could more likely hurt the ratings of governments linked tightly to the federal government with mortgage guarantees, federal leases, or U.S. Treasury investments for debt repayment.

In reality, such ratings are issued on a specific bond issue, McArthur further explained. Ratings by individual agencies — such as Moody's versus Standard & Poor's  — can differ between the agencies due to differering views of financial analysts and other factors, McArthur said. S&P ratings can be lower, higher, or the same as Moody’s, he said.

But McArthur repeated that those past ratings don't really matter for Bernards Township since the bonds are long sold and gone.

"In fact, the AAa Moody rated bonds are the ones we just refunded so they are dead/gone and retired anyway," McArthur said. "The ratings are relied on by investors in the after-market as these bonds can be traded up to maturity," he noted.

The one aspect of the situation really affects municipalities like Bernards, which McArthur said holds "prudent" surplus reserves, is the township's return on investment earnings, which has deeply declined as a source of revenue in municipal budgets from past years.

"By law, our investment options are limited to conservative principal protection instruments like treasuries, collateralized bank rates," or similar, all tied to the federal funds rate, he said.

McArthur quoted S&P as saying that ratings on state, regional or local governments can remain higher than the level of government above if, in Standard & Poor's opinion, the individual credit characteristics of those governments remain stronger in times of economic or political stress.

Nevertheless, Bernards Township and even Somerset County, even though those governments may be considered to have a "greater commitment to fiscal discipline" than the U.S., ultimately still are tied to the U.S. financial environment overall, McArthur concluded.

Looking ahead, "Further erosion of the US creditworthiness would likely affect our rating," McArthur predicted.


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