Source: Sherman Publications

Village’s ‘strong’ credit rating tempered by ‘weak’ finances

by CJ Carnacchio

April 10, 2013

Once again, Standard & Poor’s gave the Village of Oxford an ‘A’ rating – the third highest credit (or bond) rating available.

But once again, it was accompanied by a “negative outlook,” which is a warning that if the municipality’s financial picture doesn’t improve, that rating could be lowered.

“In our view, the village’s overall financial position remains weak,” stated a March 27 report issued by Standard and Poor’s Rating Services.

Councilman Elgin Nichols agreed with Standard & Poor’s assessment and called the financial services company’s report “well done.”

“I think they’re right on target,” he said. “I think that we are going to have to make some challenging decisions and soon. If this were the ‘Wizard of Oz,’ I would see the tornado coming.”

Village President Tony Albensi called the report “fair,” but found the outlook troubling.

“I am concerned over the report,” he said. “The ‘A’ rating is nice, but the negative outlook is not something that we should be proud of. We should be concerned about that.”

Councilwoman Sue Bossardet was a little more optimistic in light of the report.

“It’s obviously a concern to me, but I’m not wringing my hands about it,” she said.

That’s because Bossardet believes village officials are “working hard” to come up with a sound budget for the 2013-14 fiscal year.

“I think council is on the right track and administration is working hard to do what council says,” she said.

A strong rating

Standard & Poor’s affirmed its ‘A’ long-term credit rating for the village.

An ‘A’ means the village has a “strong capacity to meet financial commitments, but (it’s) somewhat susceptible to adverse economic conditions and changes in circumstances.”

This is the second year in a row the village has received an ‘A’ rating.

In January 2012, Standard & Poor’s downgraded the village to an ‘A.’

Prior to that, the municipality had held an ‘AA-’ rating since 2008.

Standard & Poor’s credit ratings express the firm’s opinion about the ability and willingness of a corporation, state or municipal government to meet its financial obligations in full and on time. These ratings can also speak to the credit quality of an individual debt issue, such as a municipal bond, and the relative likelihood that the issue may default.

The firm’s rating system ranges from the highest ‘AAA,’ which denotes an extremely strong capacity to meet financial commitments, to the lowest ‘D,’ which represents default on financial commitments.

A negative outlook

Although the village’s ‘A’ rating is considered a good thing, it was accompanied by a “negative” outlook, which is the second one it has received since January 2012.

The outlook assesses the potential direction of a long-term credit rating over the intermediate term, which is typically six months to two years. A “negative” outlook indicates that a rating may be lowered.

According to Caroline West, a director at Standard and Poor’s, a “negative” outlook means there’s “a greater than 1 in 3 chance the rating could go down in two years.”

“The negative outlook reflects our view of the ongoing financial challenges facing the village, including continuing decreases in property tax revenue,” according to Standard & Poor’s March 27 report.

The village’s property tax base declined by an average of 6.1 percent annually between 2007 and 2012 to $108.8 million. This was attributed to slowdowns in the manufacturing sector and housing market.

During that same period, the estimated market value declined 9.3 percent annually to $227.4 million.

Standard & Poor’s noted that it could revise the village’s outlook to “stable” – which means that a rating is not likely to change – if it can avoid heavy dips into its fund balance for the remainder of the 2012-13 fiscal year and the upcoming 2013-14 budget.

“However, if the council is unable to successfully close the budget gaps . . . and reserves fall further, we could lower the rating,” the report stated.

Dwindling reserves

Of particular concern to Standard and Poor’s were the village’s “notable budget gaps” and its dwindling reserves.

Originally, the village’s 2011-12 budget called for using $211,000 in reserves to keep it balanced. That amount equalled two-thirds of the village’s fund balance at the end of the 2010-11 fiscal year.

In the end, the village actually ended up using only $17,000 in reserves because the 2011-12 expenditures came in under budget as a result of staff turnover and reduced costs in the areas of legal fees and utilities.

This $17,000 dip into the reserves, which Standard and Poor’s called “minor,” left the village with a total fund balance of $303,000, of which $264,000 was available for use.

Although Standard and Poor’s considers that size of a fund balance to be “strong,” they also indicated it’s “small” when compared to previous years.

“This reserve level is far below the unreserved fund balance of $882,000 in 2009, due to large draws in (fiscal years) 2010 and 2011, as a result of high legal costs, a reduction in the property tax levy by the village council, and a payout (for the acquisition of) a disputed property,” the report stated.

With regard to the current 2012-13 budget, Standard & Poor’s stated that although the village management previously projected a “minor surplus of $8,000,” the actual budget that was adopted called for using $102,000 in reserves, which equals a third of the existing fund balance.

Granted, the village was able to save $100,000 in healthcare costs through contract negotiations with the police union.

But Standard & Poor’s noted how the village also paid $18,000 for a forensic audit to investigate an alleged embezzlement by a former employee.

As for the 2013-14 budget, which is still being formulated, Standard & Poor’s wrote that it “calls for using approximately $200,000 of reserves, but officials believe they will close the gap somewhat before a final budget is adopted.”

The village’s new fiscal year begins July 1, but a budget must be adopted in May.

Nichols believes there’s no doubt the village must continue to reduce its budget.

“I think we need to address those issues and cut expenses any way that we can,” he said. “We’re okay at this point because some of the decisions the village made over the past year were good ones, but we’re still not in a very solid position yet.”

Albensi agreed.

“Knowing that our reserves are continuing to decline is not something that I want to continue to see,” the village president said.

No new taxes

The financial firm noted how the village has not made use of its “revenue-raising flexibility,” i.e. increasing property taxes.

“The village has additional taxing capacity that could generate (an extra) $439,000 annually . . . if the village council chooses to utilize it,” the report stated.

Currently, the village levies a property tax rate of 10.62 mills. Technically, council could vote to raise that rate to 14.257 mills, which is the maximum amount it can levy without a vote of the people.

One mill is equal to $1 for every $1,000 of a property’s taxable value.

“We understand that the council is currently not willing to raise the property tax rate given the political climate,” Standard & Poor’s report stated.

“That is absolutely true – I am unwilling to raise property taxes because I think that we can make some budget cuts elsewhere,” Albensi said. “I think council needs to continue to consider what we can do to cut where we can cut without raising taxes.”

“I would prefer to hold the line (on taxes), only because I think everybody’s still struggling,” Bossardet said. “I see some signs of improvement . . . but I just don’t think that people are back to where we were a few years ago. So, I’m not really interested in raising taxes.”

Nichols is no fan of raising taxes either.

“I’m very much against any direction that increases taxes to the residents,” he said. “I don’t think most people are interested in raising taxes. I don’t believe that’s anything they would be open to and I certainly, as a resident, wouldn’t be open to it either.”

Nichols believes there are other ways for the village to find the money it needs to keep going, but they “may be a little tough to do.”

“There are things that we can look at (that involve) substantial amounts,” he said. “Of course, we’ll have to give up a certain comfort zone maybe in some areas. But I don’t think the village will suffer if we were to look at those particular items.”

Both Nichols and Albensi cited the village’s police/9-1-1 dispatch center as an example of an area where significant savings could be achieved.

“That’s one we need to look at seriously,” Nichols said. “I know that’s before a subcommittee right now, so I’ll wait to hear what the subcommittee has to say.”

Oxford is currently exploring the idea of sharing dispatch services with Lake Orion in an effort to save money. The village currently spends between $250,000 and $300,000 annually to operate its own dispatch center.

“I would like to see other options on the table as well,” Albensi said. “I would like to see the option of going with the Oakland County Sheriff’s Department for dispatch. That could save us well over $200,000.”

In August 2012, sheriff’s representatives told the Oxford council they could handle all of the village’s police calls for $27,580 in 2013 and $28,130 in 2014.

The cost for handling Oxford’s fire/EMS calls would be approximately $31,000 annually, depending on the volume of calls. But that amount would be paid by the fire department, which is run by the township board, but funded by both township and village taxpayers through dedicated millages.

Albensi believes reducing dispatch costs could “at least” get the village’s outlook changed from negative to stable.

The village president also sees “some potentially significant savings” could be achieved by combining Oxford and Lake Orion’s purchasing power for things such as office and public works supplies, and services such as planning and engineering.

“If we bid together, maybe we can get some savings there,” Albensi said.

Requiring village employees to contribute more toward their health insurance is another avenue Albensi wishes to explore.

“I think our employees could probably pay a little bit more than what they’re paying now,” he said. “As I’ve said before, I think the public sector is well behind the private sector in that regard. It needs to catch up.”

Like Albensi, Bossardet believes collaboration with Lake Orion could help save money. She’s interested in more cooperation with the township, too.

But she would also like to see the village sell some properties it doesn’t need such as the 0.43 acre it owns at 27 Pleasant St. and the 3.42 acres it owns at 98 S. Glaspie St.

“That would help with our bottom-line,” Bossardet said.

Although village voters gave permission to sell the W. Burdick St. municipal complex and the 2 acres it sits on, Bossardet said she’s “not interested” in doing that.

However, she is interested in leasing the portion of the complex that used to be occupied by the township offices. “I think that would help us, too,” Bossardet said.

Lots of debt

With regard to the village’s “overall net debt burden,” Standard & Poor’s considers it to be “high,” given it equals $8,978 per village resident.

However, the company noted that about 83 percent of that “comes from overlapping entities” such as Oakland County and the Oxford school district.

“Although residents in the village have a high debt burden per capita, it’s not all coming from the village,” West explained. “We look at . . . everything the residents have to pay for.”

In terms of debt incurred by just the village, the municipality has $2.964 million in general obligation debt and $4.098 million in debt related to the water and sewer systems, according to village Manager Joe Young.

“We understand that the village does not have any additional debt plans at this time,” the report stated.

“My intent is to not incur any other debt,” Bossardet said. “I know that we’d like to (fix) roads and all that, but we just can’t do it right now.”

Standard & Poor’s calculations only included the general obligation debt, according to West. General obligation debt is backed by the credit and taxing power of the municipality issuing the bond as opposed to the revenue from a given project.

In contrast, water and sewer debts are typically paid by system users through their normal usage fees or special debt service charges.