Narrow balances drive Westchester County downgrades
Narrow fund balance levels expected to further weaken from unbudgeted salary increases cost Westchester County, New York, both of its triple-A ratings.
Fitch Ratings and S&P Global Ratings both downgraded the county’s general obligation debt one notch to AA-plus from AAA Tuesday citing its lack of financial flexibility.
S&P kept the county’s outlook at negative a year after revising it from stable due to concerns about a lack of permanent revenue measures. Fitch assigned a stable outlook.
The actions came ahead of plans to sell $202.6 million in limited tax general obligation bonds, according to Fitch.
"The rating action reflects our view of the county's narrow financial reserves at fiscal year-end 2017 and our expectation that flexibility and liquidity will further weaken at fiscal year-end 2018, primarily because retroactive salary increases were paid to union members of the Civil Service Employee Association from fund balance in 2018," S&P analyst Nora Wittstruck wrote. “We remain concerned over the county's ability to sustainably align revenue and expenditures and rebuild reserves to a level consistent with that of similarly rated or higher-rated peers.”
Fitch analyst Shannon McCue said Westchester settled its contract with 4,594 CSEA employees in October, for the first time since the union’s previous contract expired on Dec. 31, 2011.
The new agreement forged in October includes 1% retroactive salary increases for 2014 through 2017 along with 2% raises for 2018 and 2019. The CSEA contact represents 62% of Westchester’s 4,594 county workforce, according to McCue.
“Salaries and benefits are the biggest cost pressure, and the majority of the county's workforce is covered by eight different collective bargaining agreements,” said McCue. “Management's ability to adjust the size of the workforce during economic downturns is strong, but management can only adjust wages and benefits through contract negotiations.”
Wittstruck noted that S&P’s preliminary calculations indicate Westchester’s available general fund balance could fall to $70 million, or less than 4% of expenditures when fiscal-year-end 2018 results are available. She said the sharp decline in reserves from 2017 levels of $108.2 million, or 6.4% of operating expenditures, was driven largely by retroactive salary payments owed to CSEA members that was drawn from the fund balance. The county’s fund balance target is 8% of operating expenditures.
“These downgrades are certainly no surprise,” Westchester County Executive George Latimer said in a statement. “As we have said these past few months, the county is in serious financial stress.”
Latimer proposed a $1.94 billion 2019 budget that would not dip into reserves and includes a hiring freeze among other cost-saving measures aimed at jump-starting a fiscal turnaround. The county is staring at a $71 million budget gap following a $32 million shortfall last year and a $39 million deficit for 2018.
“We have had to make hard decisions in drafting the 2019 proposed fiscal budget; we are saving wherever we can,” said Latimer, a Democrat who defeated two-term Republican County Executive Rob Astorino last year. “Regardless of the many steps we are taking to improve our footing, these problems were not created overnight and they will not be solved overnight.”
The AA-plus ratings from Fitch and S&P are in line with Moody’s Investors Service, which rates the county Aa1 and revised its outlook on Westchester GO bonds to negative from stable in October because of structural imbalance and a low reserves.
Westchester, which is situated just north of New York City and is the seventh most-populous county in New York State, has $1.1 billion in long-term GO debt, according to Moody’s.
“My goal is to have the County’s AAA bond rating, by Moody’s, S&P and Fitch, return before I leave office," said Latimer. “But, we are going to have to face up to the necessity of tough choices in the days ahead.”