OP-ED: Harrison receives rating upgrade from S&P

By FRANK GORDON
On Dec. 18, 2013, Standard & Poor’s Ratings Service announced it raised Harrison’s credit rating to AA- from A. This rating upgrade indicates that, in S&P’s opinion, the town/village is better able to meet its financial obligations than was the case when the rating agency last performed a similar assessment. S&P also gave the AA- rating a stable outlook, meaning the agency does not anticipate any major changes in the village’s financial condition within the next two years.

S&P explained that, in performing its analysis of local governments’ financial condition, it focuses on seven factors: Economy, management, budgetary flexibility, budgetary performance, liquidity, debt and contingent liabilities and institutional framework. As justification for its upgrade of Harrison, S&P cited the village’s very strong economy, strong budgetary flexibility, strong budgetary performance and very strong liquidity. It also indicated the town/village is adequate or better with respect to the remaining factors.

Harrison’s economy has shown marked improvement since the depths of the recent recession. The village’s unemployment rate has fallen from 7.4 percent in 2012 to 6.4 percent in August 2013, according to its most recent bond offering document. The village’s median housing value rose from $0.8 million in 2010 to an estimated $1.1 million this year, according to the town assessor’s office. In addition, town/village revenues are expected to exceed budgeted amounts for 2013 by $2.5 million, or 4.4 percent, driven mainly by higher than anticipated revenue from building permits, sales taxes and state aid.

This data indicates employment of Harrison residents is on the rise, new building activity is increasing and spending by businesses and consumers is on the rebound. Whether these trends will continue into the future remains to be seen. Harrison’s 2014 tentative budget shows total town/village revenues declining by $1.4 million, or 2.4 percent, from 2013’s anticipated amounts.

S&P’s assessment of Harri-son’s budgetary flexibility and performance as strong is indicative of the village’s transition away from one-time revenue items to fund recurring expenditures. During the period from 2005 to 2009, the village was hit hard by the recession and revenues consistently came in below budget. The town/village was forced to rely on one-time property sales to prop up its declining fund balance.

With the improved economy, the village has been able to push through property tax increases averaging 4.2 percent annually since 2010. Over the last four years, the village has operated at a surplus, enabling it to replenish its fund balance. S&P’s assessment of Harrison’s liquidity as very strong is primarily a consequence of a fund balance that is expected to exceed $7 million by the end of 2013.

Reflecting on the upgrade at the Dec. 19 Town Council meeting, Mayor Ron Belmont suggested S&P’s action is further confirmation that Harrison is on the right track. Board member Steven Malfitano emphasized that S&P’s action was unsolicited, that is, the rating agency took this action on its own initiative and not at the behest of town officials.

A rating upgrade such as this benefits Harrison and its residents. The higher rating indicates S&P believes the village’s ability to pay its debts as they become due has improved. This should make it easier for the town/village to borrow money and also to borrow it more cheaply. The next time the town issues bonds to fund capital expenditures or to refinance existing bonds, purchasers of the bonds will likely require a lower interest rate than before since the town is perceived as better able to repay them. Lower interest rates means a reduced interest burden for the town, which could ultimately translate into lower taxes for residents.

S&P expresses its credit ratings using an alphabetic scale: AAA is its highest credit rating, followed by AA, A, BBB, BB, B, CCC, CC, C and D, in order of decreasing creditworthiness. A rating of D indicates that the entity is in default, that is, it has failed to make a payment when due. Each alphabetic rating other than AAA is further refined through the addition of a + or – indicator, which can be thought of as intermediate steps between each rating category. So, for example an AA+ rating is better than AA, which is better than AA-, which is better than A+, and so forth.

Each intermediate step between ratings is known as a notch in rating agency parlance. For example, from AA+ to AA is one notch and from AA to AA- is another notch. Rating agencies tend to be conservative so, generally, they change their ratings by only one notch at a time. That S&P raised Harrison’s rating two notches, from A to AA- is unusual, although not unheard of. It indicates the town/village’s creditworthiness has shown substantial improvement, according to S&P’s criteria.

S&P’s announcement of the upgrade comes barely a month and a half after a similar action by Moody’s Investors Service, a competing rating agency. In the case of Moody’s, Harrison’s credit rating was raised from Aa3 to Aa2, or one notch. Moody’s and S&P use somewhat different nomenclature in assigning ratings. Suffice to say upgrades from both agencies augur well for the village’s finances.