Dan's Papers - June 6, 2008

Anybody who's ever had a credit problem can tell you it has an influence on making big purchases - even if you have the money to pay. Then again, if you don't have the money, bad credit doesn't only impede buying, but makes it hard to keep what you already have.

It's fairly common knowledge that there's been a credit crisis in the USA, as people unable to pay loans they probably could never have afforded in the first place end up losing their cars and homes. So what happens when an entire town's credit rating goes sour? Unfortunately, that question's being asked in East Hampton right now.

The rating drop was bestowed on East Hampton by Moody's Investors Service, which performs financial research and analysis on over 96,000 structured finance obligations around the globe. The reason for the bad mark? Long story short: a lack of trust by financial organizations for what the Town government is doing.

Six years ago, East Hampton Town had an Aa1 credit rating, the highest and strongest bond rating on the Island. But recent unusual financial activity raised the red flag, which started with the town's sale of $4.25 million in housing system revenue bonds and the planned sale of $5.7 million in bond anticipation notes, or BANs.

(For those who wince at the first sight of economic jargon, a Revenue Bond is derived from revenue generated by municipal projects, in this case the money brought in from a new housing project. BANs are smaller, short-term bonds issued by governments and corporations. In this case, with the belief that the proceeds generated by the aforementioned housing project would cover the anticipation notes, the Town issued the notes to raise short-term financing.)

One item - one of several that raised questions at Moody's - was that Town Board members were not informed about the BAN sale. That sale was intended to bring in monies to cover projects that have already been approved for borrowing, including $300,000 for the infrastructure at that housing project (for which revenue bonds have been sold), plus $300,000 for computer software. What's strange about all this is that some of the works that the BANs are supposed to pay for are already completed...and paid for.

Speculation now points toward Town Supervisor Bill McGintee and his Budget Officer Ted Hults, with some in the community wondering if the bonds are really designed to bring money in to improve the town's financial instability, or if they are going to be used to pay back money taken from other town accounts to cover the project bills in the first place.

If it sounds shaky, no need to wonder why Moody's dropped the town's bond rating to an A2 - meaning financial obligations are considered only upper-medium grade and are thereby subject to credit risk - low credit risk actually, but that designation puts East Hampton at the lowest among the five East End towns. The low rating means that now if money is borrowed, it's paid back at a higher interest rate. What's particularly upsetting about the new lower credit rating is that East Hampton Town fell from its top-line Aa1 to the A2 - four financial levels lower - immediately, in one bad report.

The East Hampton municipality had been subject to a "negative outlook" as per Moody's back in '06, when the town failed to complete required town financial audits. But the actual drop in status is based on a few things (according to Moody's May 19th report): the heady dissolve of a once $12.3 million budget surplus to an almost $5 million town deficit, the reserves from highway and sanitation funds dipped into to shore up a $6.8 million operating deficit, and the failure of tax increases and other fees to replenish the over-budget hole.

There are even more reasons cited in the Moody's report, and all of it points to the Investors Service general disdain for the economic plans currently in place. Whether it's bad planning, bad governing or just bad luck concerning the McGintee administration's economic agenda, what's most important is how the A2 now impacts the town.

Luckily, legions of affluent residents will keep East Hampton Town from going bankrupt any time soon, but with the recent rating downgrading, it could make borrowing to fix the Town's deficit that much harder. If it were an area that saw a lower standard of living, it could be brutal, keeping necessary structures like schools from being built, hampering the acquisition of insurance, and as mentioned before, raising interest rates on loans. So in reality, this A2 doesn't mean boarded-up buildings on Newtown Lane and piles of uncollected garbage, but with so many strikes against the Town Supervisor, it mostly amounts to increased questions for him come stump time plus likely speed bumps for the man's future political career.