Paterson, N.J.'s increased preliminary property tax levy of $149.2 million is a credit positive for New Jersey's third-largest city because it eliminates the threat of major immediate cash shortfalls, according to Moody's Investors Service.
Moody's analyst Douglas Goldmacher noted in an Aug. 18 report that the city council's action will prevent Paterson from needing to issue short-term debt to pay its bills. Paterson is rated at junk-level Ba1 with a negative outlook by Moody's.
"Without an increased levy in place, the city's already-weak financial position would be even more dire, and accessing the market would have been a major challenge due to the city's weak credit quality," said Goldmacher. "Because the city's underlying credit quality is weak, market access would have been a major challenge."
Despite the new tax revenue, Paterson still "remains in a state of profound fiscal distress," according to Goldmacher, with narrow reserves, weak liquidity and declining property values. The city previously passed a $145 million property tax levy that was rejected by New Jersey's Division of Local Government Services, who said it was insufficient to prevent immediate cash shortfalls.
Paterson has dealt with political squabbles this year including a one-day government shutdown on March 1. Mayor Jose Torres and the city council have sparred over ways to address Paterson's financial woes, which has led to a series of temporary budgets. Goldmacher noted that from 2009 to 2015, fund revenues increased 18.9%, while expenditures rose 21.9%.
"The gridlock between the mayor and city council centers on disagreement over increasing taxes versus cutting expenditures," said Goldmacher. "Some government officials have argued that the city's ability to absorb a tax increase is limited given its poor population, while others have asserted that a failure to generate more revenue will lead to service cuts to programs the population needs."
Goldmacher added that in a plus for bondholders, Paterson's bonded debt is secured by New Jersey's Municipal Qualified Bond Act where the state uses state aid to pay debt service on behalf of a city. Another positive from a bondholder perspective is that Paterson's bond anticipation notes are all issued via the Passaic County Improvement Authority and are guaranteed by Passaic County, which Moody's rates at Aa3 with a stable outlook. The remainder of Paterson's debt is in the form of state loans, according to Goldmacher.
