Fund balance and tax base growth mean upgrade for Newark, N.J.
Improved fund balance levels combined with tax base growth from economic development projects boosted the credit rating of Newark, New Jersey.
Moody’s Investors Service upgraded Newark to Baa2 from Baa3 Monday, with a positive outlook, ahead of a $51.1 million general obligation bond competitive sale slated for Feb. 14. Moody’s had revised the city’s outlook to positive from negative 13 months ago due largely to momentum from redevelopment efforts.
“The city's tax base will likely experience steady growth in the near to medium term given ongoing development and a favorable location,” Moody’s analyst Douglas Goldmacher wrote. “The continuation of recent positive financial and economic trends will have a major bearing on future credit quality.”
The upgrade applies around $433 million of Newark’s total debt. Newark’s enhanced Baa1 rating with a stable outlook on outstanding debt issued under New Jersey’s Municipal Qualified Bond Act program remains unchanged.
Newark is selling $51.1 million of Qualified GO bonds to purchase 16 properties from the Essex County Improvement Authority. The authority will then use the proceeds for defeasing debt issued to acquire the parcels. Newark was paying for the authority debt, making the transaction a form of refunding, according to Moody’s.
Goldmacher noted that Newark has seen three consecutive years of tax base growth including a 14.5% rise in 2018 following several years of declines. Newark’s momentum is also reflected in city finances with its fund balance increasing to $58.1 million, or 8.5% of fund revenues in 2017 from $40.3 million, or 6.1% of revenues in 2016, according to Goldmacher. He added that city officials are projecting that the 2018 fund balance will increase by as much as $18 million when audited financial statements are released.
“The positive outlook reflects our expectations that the recent positive financial operations will continue, leading to a strengthened reserve and liquidity position,” said Goldmacher. “The outlook also incorporates our expectations that ongoing redevelopment will lead to material tax base expansion.”
Newark was placed at the lowest investment grade rating in May 2015 with a two-notch Moody’s downgrade during a period when it had a negative fund balance and reliance on market access for cash flow. Despite recent improvements, Goldmacher cautioned that Newark still has narrow finance levels with poverty, blight, and crime also “major concerns.”
Goldmacher credits Newark for its role as an active partner with redevelopment efforts through a combination of pushing for more housing units, clearing blighted properties, expanding parks and recruiting national brand retailers. He said the city will benefit from Mars Wrigley Confectionary opening a U.S. headquarters that is expected to create around 500 jobs,
“The city is offering various abatement deals but is endeavoring to ensure that the deals remain financially advantageous for the city,” said Goldmacher.