Vastly improved fund balance levels in Newark, New Jersey leading into the COVID-19 pandemic have helped the Garden State’s largest city weather financial headwinds posed by the health crisis.
Moody’s Investors Service analyst Douglas Goldmacher credits Newark with taking proactive steps to bolster reserves after grappling with a negative fund balance that hit its low point of negative $30.1 million in 2013. The city boosted its fund balance to $69.4 million by 2018.
“They are coming into this crisis stronger than they have in a great number of years,” Goldmacher said. “They have strengthened their overall fiscal and administrative health and it has paid dividends.”
Moody’s affirmed Newark’s Baa2 credit rating and positive outlook on July 31 ahead of the city’s $105.9 million general obligation refunding bond sale held Aug.13 citing the city’s improved fund balance position to offset any short-term pandemic-related revenue dip. The city was previously rated at the lowest Moody’s investment grade level of Baa3 with negative outlook in May 2015 following a two-notch downgrade during a period when it relied on market access for cash flow.
“The pandemic is going to be a hit, but since they are stronger than they were so it is not going to be crippling,” Goldmacher said. “This is a very challenging time for the city and the unemployment rate has gone up tremendously as a result of the pandemic.”
Newark Mayor Ras J. Baraka said the bond transaction generated strong investor interest with orders nearly 11 times oversubscribed. The city lowered bond yields by 11 to 13 basis points for bonds with maturities between 2021 and 2028 and five basis points on debt maturing from 2034 through 2039, according to Baraka. The negotiated deal, which was led by Siebert Williams Shank, netted Newark present value debt savings of $14.8 with $14 million to be realized in 2020 and 2021.
“At a time when cities are facing the tough decision of having to lay off employees and reduce services, we have been able to avoid that and have kept up our Moody’s rating," Baraka said in a statement. “We are not out of the woods yet, but our finance team has worked tirelessly to enable our employees to continue to deliver critical services with no layoffs or furloughs through new revenue sources, saving $14 million dollars in this bond refinancing and saving millions more through fiscal belt-tightening.”
Municipal bond analyst Joseph Krist cautioned that while Newark has managed to maintain fiscal health so far during the pandemic, there are many economic uncertainties for the remainder of 2020 that could alter the city’s budget picture. He said the refunding deal was a wise move and adds to the many sound fiscal decisions Newark has been making since Mayor Baraka assumed office in 2014.
“The refinancing is a smart response to the pandemic,” said Krist, who is publisher of the Muni Credit News. “Cities like Newark show why municipal bond issuers need as much flexibility as they can like advance refunding capabilities."
Goldmacher credited Newark with making necessary budgetary adjustments since the pandemic struck in March by delaying certain infrastructure projects in anticipation of lost revenues. He said the $14 million of near-term debt savings would create additional budget relief and flexibility heading into 2021.
The Moody’s positive outlook also reflects expectations that Newark will continue its pipeline of $5.6 billion in ongoing economic development projects that will help yield the city future tax base growth. The city has been an active partner with redevelopments efforts by pushing for more housing units, clearing blighted properties, expanding parks and recruiting national brand retailers, according to Goldmacher.
“They are not dependent on a single project,“ Goldmacher said. “There are other communities across the nation which have been bet the farm on one thing and that is not the strategy thy Newark is deploying”
