Wall Street rating agencies gave a collective thumbs-down to Westchester County this week, downgrading its bond rating, based on its past two years of deficit spending and the use of the county’s reserves to balance its budget.
Whether the downgrade will drive up borrowing costs — and higher county spending — will be determined by market conditions when the county sells $200 million in bonds next week.
But one agency warned it could drop the rating several notches more if the county continues its practice of including phantom revenues in the budget and raiding its rainy day fund at year’s end to erase the red ink.
The downgrades by S&P Global Ratings and Fitch Ratings come as the county Board of Legislators reviews County Executive George Latimer’s 2019 budget, which would be balanced by having a county-affiliated agency borrow $22 million in a one-shot deal to pay for day-to-day expenses.
It’s not exactly the sustainable revenue stream that S&P was looking for to assure municipal bond investors.
For Latimer, and for homeowners, it is a case of pick your poison.
Go with his complex parking-lot deal to glean the $22 million one-shot, or increase county property taxes by 6 percent this year to pay the bills, and cover $98 million in new spending.
There’s also a possible move in Albany to seek an increase in the county sales tax.
Westchester County Executive George Latimer, left, speaks with Leslie Gordon of Feeding Westchester, John Ravitz, Executive Vice President of the Westchester Business Council, and Susan Fox of the Westchester Institute for Human Development during the annual breakfast of the Westchester Business Council at Tappan Hill in Tarrytown Nov. 28, 2018. Latimer was the guest speaker at the breakfast. (Photo: Seth Harrison/The Journal News)
The downgrades are the results of seven years of tax austerity under Latimer’s predecessor, Rob Astorino, who held the line on the county property tax-levy from 2011 through 2017. Latimer’s response to the Astorino era, however, has caught the bond rating agencies’ eye as well.
During his first year in office, Latimer settled the Civil Service Employees Association contract, to which no funds were appropriated in the 2018 budget. So the county expects to dip deeply into its reserves to pay for the labor settlement.
“The honeymoon is over,” declared Joe Markey, market president of KeyBank, at Wednesday morning’s Business Council of Westchester breakfast at Tappan Hill in Tarrytown.
How low can Westchester’s rating go? Certainly much lower than the AA+ rating issued on Tuesday, and the negative outlook issued by S&P. Moody’s Investor Services that downgraded Westchester in 2017.
Lower bond ratings can raise the interest rates because the investment is seen as riskier. Higher rates drive up borrowing costs on obligations that remain on the backs of taxpayers for 20 years.Exactly how much a lower bond rating increases rates depends on market conditions at the time of issuance.
“We remain concerned over the county’s ability to sustainably align revenue and expenditures and rebuild reserves to a level consistent with that of similarly rated or higher-rated peers,” the report said.
In other words, Westchester’s rating could go lower if it continues to rely on speculative revenues, and then is forced to backfill the shortfall with reserves.
Here we go again
That could happen again in Latimer’s first budget.
It remains to be seen whether the Democrat-controlled county board will back Latimer’s one-shot sale of several acres of land, located in the Bronx River Parkway Reservation, Westchester County’s first park. Latimer wants to sell the parking lots that serve patrons of the park’s Westchester County Center and provide spaces for White Plains commuters.
The Westchester County Local Development Corporation would pay $22 million for the park’s parking lots, which generate $2.5 million a year in county revenue. The LDC would sell tax-exempt revenue bonds to raise the $22 million.
It seems certain that the deal won’t be concluded by year’s end. The county has yet to make an application to the LDC for the sale. The LDC needs to change its charter to allow the deal, which requires approval by the state Attorney General. And the parkland sale must be first recommended by the Westchester County Parks, Recreation and Conservation Board, which meets Thursday to discuss the issue.
The Latimer administration wants to remove the parking lots at the Westchester County Center from a county park, and sell them to a public nonprofit. (Photo: David McKay Wilson/The Journal News)
S&P warned that including the park sale in the budget could create problems if the Board of Legislators fails to approve the final deal.
“Should this transfer not occur as planned, management may be required to fill the gap with expenditure reductions, an additional property tax increase above the planned 2 percent, or fund balance,” the report stated.
The report also warned about the Latimer administration’s rosy forecast for a 5 percent increase in sales tax revenues for 2019.
Latimer has so far said he’s not willing to raise property taxes more than 2 percent for 2019.
Sales tax could be next to go up
The S&P report notes that the county plans to seek an increase in the county sales tax during the 2019 session, though no revenue from the increase was included in Latimer’s budget plan.
The county’s sales-tax rate, which is now 1.5 percentage points – is part of the combined sales tax that’s charged in Westchester. The overall sales-tax rate includes New York state sales tax of 4 percent, 0.375 percent for the Metropolitan Transportation Authority; 2.5 percent for the cities of Mount Vernon, White Plains, and New Rochelle; and 3 percent for Yonkers.
Winning an increase in Albany could provide a revenue stream big enough to right Westchester’s fiscal ship and return S&P’s outlook to stable. But if that doesn’t happen, and Westchester does another year of deficit spending, the outlook could grow even dimmer.
“Should the aforementioned risks to the fiscal 2019 budget materialize and reserves continue a downward tend, providing limited cushion to insulate the financial position from disruptions related to tax reform or economic downturn, we could lower the rating, potentially by multiple notches,” the report said.