New York City suburb dropped to junk on pressured finances

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Mounting deficits cost Valley Stream, New York, its investment grade rating.

Moody’s Investors Service downgraded Valley Stream’s general obligation bonds one notch to Ba1 from Baa3, assigning a negative outlook, citing the Long Island village government's worsening fiscal pressures. The village’s fund balance has not rebounded since first turning negative in 2016.

“Valley Stream's finances will remain pressured in the near to medium term,” wrote Moody’s analyst Douglas Goldmacher in a Feb. 19 report. “Perennial operating deficits have completely eroded the village's once healthy finances.”

Goldmacher noted that Valley Stream village officials attribute the budget woes largely to declines of tax certiori refunds. Other factors that led to the deficits include a a debt service budgeting error in 2016 and employee benefits coming in 12.6% higher than final 2017 budget, according to Goldmacher. A preliminary audit analyzed by Moody’s show a 2018 general fund deficit of roughly $672,000.

“While this is a smaller deficit than seen in recent years, it does represent a further degree of financial stress and is disappointing given that the fiscal 2018 budget included several cost savings measures,” said Goldmacher. “While cash remains adequate, the prospects for an immediate return to healthy finances are limited.”

The village is projecting a surplus for the 2019 fiscal year that ends on May 31. Goldmacher noted however that the village forecast surpluses the last two fiscal years before ending with deficit operations.

“Failure to return to structural balance could have negative credit implications,” said Goldmacher.

In addition to a deteriorating fund balance, liquidity challenges have also pressured Valley Stream finances with net cash down 61% since 2012. Valley Stream’s net cash rose to $5.5 million in 2017, but Goldmacher noted the increase was offset by large increases in payables.

Valley Stream Mayor Ed Fare attributed the deficits to investments needed for safety, security and infrastructure upgrades while also holding down taxes.

"While Moody’s may not share our vision at this time, we are confident in our plan, and believe that we have turned the corner in fiscal responsibility," Fare said in a statement. “Our residents, not Wall Street investors, have always been our priority."

Valley Stream is in Nassau County immediately east of New York City. The village had a population of around 38,000 based on 2017 estimates, according to Moody’s.

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