Cut of Federal Govt Spending Causing Downgrading of Fairfield County Bonds?
Late last week it was reported that the towns of Fairfield and Westport received a “negative outlook” from Moody’s credit rating agency, in the wake of the S & P downgrade of the US federal credit status from AAA to AA+. Currently, Westport and Fairfield hold AAA credit ratings. A negative outlook is not a downgrade, but it is a warning that a downgrade could occur.
In an exclusive interview with municipal bond expert Carolyn Frzopf of Janney, Montgomery Securities, I learned that Moody’s is considering downgrading the credit ratings of several Fairfield County towns because Moody’s is afraid that the cutting of federal government spending will reduce the income available to those towns. Ms. Frzopf is the manager of many local government funds and was on the telephone conference call organized by Weston First Selectman Gayle Weinstein last Monday. Also on the call were various First Selectmen, Mayors and independent financial advisors of Easton, Norwalk, Westport, Greenwich and many other municipalities. They made their pitch to Moody’s that such fears had no foundation in fact, and that these towns had plenty of money to pay their obligations. Ms. Frzopf agrees with that, and stresses that each town has independent yearly auditing and rigorous financial oversight. She views this scare as a non-event. However, Moody’s said it will make a final decision within 90 days.
When Moody’s was asked if they are considering downgrades to Hartford and other parts of the state, they said no. Moody’s did not answer why Fairfield County was deemed more susceptible to loss than other parts of the state.
Why does it matter? Because credit ratings determine how much money a town has to pay in interest on the bonds it issues. The lower the credit rating, the higher the rate of interest, because the higher the risk of the investment. If a town has to pay a higher rate of interest on its obligations, it has to raise the money from somewhere else. That somewhere else is usually taxpayer dollars. Therefore, it is in our interest, as taxpayers to these towns, to ensure that our towns continue to manage their money- i.e. , our money- with as much prudence and rigor as possible.
In the meantime, here are a few interesting tidbits I discovered:
1. Hearst Publications has a financial interest in Fitch, one of the three largest credit ratings. The other two are Moody’s and Standard & Poor’s ( S & P). I haven’t connected the dots yet on this, but for some reason this fact interests me.
2. CT is actually suing Fitch, Moody’s and S & P for violations of the CT Unfair Trade Practices Act, on the grounds that those rating organizations steered investors improperly. The allegation is that the ratings agencies have a financial interest in other companies as well, and that the ratings they gave may have made those companies more attractive, while other ratings may have made competitors less attractive. Maybe Point One connects to Point Two? Help- I’m not terribly shrewd at this.
3. Our new Attorney General, George Jepsen, recused himself from the lawsuit mentioned in Point Two because he represented S & P as a private attorney. What a very small world!