Suffolk County, N.Y., downgraded amid coronavirus budget stress
Just ahead of the expected approval of a 2021 budget, Suffolk County, New York, received its third rating downgrade this year.
Moody’s Investors Service lowered Suffolk’s general obligation bonds one notch to Baa2 from Baa1 late Friday and revised its rating outlook to negative from stable, citing diminished sales tax collections during the COVID-19 pandemic.
After the downgrade, Moody’s rating on the Long Island county is one notch below S&P Global Ratings and Fitch Ratings, which both downgraded the county’s GOs one notch to BBB-plus in March, just as the pandemic was taking hold, citing its lack of reserves to combat the health crisis.
“Their finances are very strained,” said Moody’s analyst Douglas Goldmacher. “Their cash position and liquidity are very weak.”
The Democrat-controlled Suffolk County Legislature is scheduled to approve County Executive Bellone’s proposed $3.19 billion budget Monday evening. The spending plan cuts 500 county employees and halts police academy classes to help offset a projected $400 million shortfall in sales tax revenues — compared to pre-pandemic forecasts — over the next two years.
Bellone, and Suffolk County Comptroller John M. Kennedy did not immediately respond for comment on the budget or Moody’s downgrade.
The county executive previously said cuts could be avoided if the federal government provides Suffolk and other large local governments with another COVID-19 relief package. Negotiations on a new federal stimulus package have been stalled between congressional Democrats and the Republican-controlled U.S. Senate. And the election of Joe Biden suggests a package will pass early next year, but with the GOP appearing to remain in control of the Senate, it may not be as generous as hoped.
While $285 million of federal CARES Act funds Suffolk received last spring covered 2020 revenue losses, Goldmacher said, closing a large shortfall in 2021 will be more “dire” absent aid from Washington and major expenditure cuts. The county’s overreliance on cash-flow borrowing, he said, is another major credit weakness.
Federal assistance “would certainly be a potentially major factor, depending how much aid they get,” he said. “At this juncture we don’t know exactly what that would look like, so it is not something we have assumed in our analysis.”
"Suffolk’s cash position and reserve position is weak enough where they don’t have enough internal liquidity to really manage and they need to rely on the short-term market for cash flow,” Goldmacher said. “It’s an indication of the difficulties they have with cash flow management and the timing of their revenues.”
S&P credit analyst Nora Wittstruck said the downgrade last March reflected anticipated fiscal headwinds Suffolk would encounter during the pandemic, and S&P will likely review the rating early next year in conjunction with its typical issuance cycle.
Fitch analyst Shannon McCue declined to comment beyond the Oct. 1 report where the rating agency affirmed Suffolk’s debt at BBB-plus with a negative outlook ahead of a $280 million borrowing. Pandemic–related revenue losses, the report said, would constrict county finances in the next couple years.
Suffolk is planning to sell $100 million tax anticipation notes by competitive bid Wednesday, with Capital Markets Advisors as financial advisor and Harris Beach as bond counsel. The county plans to sell $410 million of TANs in December, which Kennedy has said may be partially financed through the U.S. Federal Reserve’s Municipal Liquidity Facility.
Greg Saulnier, managing analyst at Refinitiv’s Municipal Market Data, said the Moody’s downgrade would only have a “marginal impact” on pricing for the TAN deal, since it was only a one-notch downgrade and investors were likely not surprised by the development.
There hasn’t been much trading activity on Suffolk debt lately, he said, but some long-term bonds due in 2030, insured by Assured Guaranty, traded last week at 130 basis points above the MMD triple-A scale. The same bonds, he said, traded at 119 bps over on Nov. 4 and 113 bps over on Nov. 3.
“We typically find that trading precedes a ratings downgrade/upgrade so this may be indicative that the market knew it was only a matter of time,” Saulnier said.