Town Gains 3.217798 Percent Interest Rate on Bond Sale

The town secured a 3.22 percent interest rate on its sale of $25 million in longterm bonds Tuesday, and all three rating agencies affirmed the town's highly-prized AAA bond rating, though one firm placed a "negative watch" on the rating.

The winning interest rate bid on the $25 million bond sale came from Fidelity, which bid 3.217798 percent. The next lowest bid was from Janney Montgomery Scott, which bid 3.227677 percent. A total of nine firms bid on the $25 million bond sale; the highest bid was 3.407350 percent.

"We're ecstatic with the results of the sale," Town Fiscal Officer Paul Hiller said at a press conference Tuesday afternoon. "It's the lowest we've had in many, many, many years, if not ever, as the town of Fairfield is concerned."

First Selectman Ken Flatto said the winning bid two years ago on the town's sale of longterm bonds was 3.8 percent. "This year, we bested that and had even lower rates, which is phenomenal," he said. "The lower the interest rate, the less the community has to pay each year in interest costs for the bonds."

The $25 million in bonds sold Tuesday are to finance, among other projects, the ongoing expansion and renovation of Stratfield School ($9 million), the upcoming expansion and renovation of Fairfield Woods Middle School ($5.33 million), road paving ($2.9 million), the new railroad station ($2.5 million) and infrastructure improvements ($1.2 million.) The $350,000 for a girls' Little League field and infrastructure for a park on Hoyden's Lane wasn't included in the sale because that project, while it was approved by the Representative Town Meeting, may be subject to a referendum, Flatto said.

The $350,000 that would have been sold for the girls' Little League field instead was used for Stratfield School's expansion and renovation. If the athletic field ultimately is approved - either because a referendum doesn't take place or the referendum fails - it would be financed through a short-term bond sale next year, Flatto said.

Moody's Investors Service, Standard & Poor's and Fitch Ratings affirmed the town's AAA bond rating in advance of Tuesday's sale, though Moody's placed a "negative outlook" on that rating. Standard & Poor's and Fitch placed a "stable outlook" on the rating, which is the highest outlook it can achieve, since there isn't a rating above AAA. The town has held a AAA bond rating since 1974.

First Selectman Ken Flatto attributed Moody's negative outlook to a deficit in the town's internal service fund which is used to cover worker's compensation claims, health insurance claims and risk management.

"They were concerned because that fund has had, for the last two to three years, a slight deficit," Flatto said. "We don't consider it that significant. Moody's, in particular, focused on that fund and said they wanted to send us a message."

"Moody's said, 'We want you, over the next few years to reduce that deficit.' That's the major reason they gave us a negative watch. Our goal is to get that watch removed and be back to a stable outlook for 2012-13," Flatto said.

The report from Moody's that deals with the negative outlook says, "The negative outlook reflects the town's improved yet still weak financial position in comparison to similarly rated credits and an inability to eliminate a long standing internal service fund deficit."

Flatto noted that Standard & Poor's and Fitch Ratings gave the town's AAA rating a stable outlook and that Fitch had given the town a negative outlook on its AAA rating several years ago due to what Fitch considered an underfunded "undesignated fund balance," or rainy-day fund. Fitch later removed that negative outlook.

Flatto said rating agencies, due to the tough economic climate, are under pressure to scrutinize businesses and governments more than they did three to four years ago. "Because of the credit industry changing so much and Wall Street getting hammered...they want to disclose risks that much more carefully," he said.

Flatto and Hiller said the town's undesignated fund balance was about 5 percent of its annual budget, which is within the guidelines of 5 to 7 percent that bond rating agencies like to see. "I think they're pleased we've been able to improve that," Hiller said.

Flatto, though, said Moody's wanted the rainy-day fund percentage to be 7 percent of the town's budget and he said town officials "pledged to try to reach 6 to 9 percent over the next two to three years."

Flatto said the town's annual debt service is about 10 percent of its budget, which he would like maintained. Hiller said the town's overall debt, which includes debt from when the town built a new wastewater treatment plant via a state loan, was about $222.5 million - $172.5 million in bonded debt, $25 million in new debt bonded today and $25 million in debt from the sewage plant reconstruction. "They think that our debt levels are moderate and manageable," Hiller said of the rating agencies.

Flatto said, "I really believe we are at approximately the maximum we should be with our debt levels...We want to keep [annual] debt service at 10 percent of the annual budget, and I'd like us not to exceed that."

The town on Tuesday also sold $18.1 million in bond anticipation notes, and the winning bid of 10 bids on that sale was 0.325345 percent from JP Morgan. Citigroup bid the exact same percentage, and the tie was broken because JP Morgan got its bid in first, Hiller said.

"It is pretty rare to have a tie like that," Flatto said.

The bond anticipation notes are short-term, one-year bonds, Flatto said.

Hiller said rating agencies look to see if there is a high level of interest among financial firms in acquiring Fairfield debt, and he said Tuesday's sale proved there was.

"One of the many, many advantages of the AAA rating is there is a desire in the investment community for high-quality paper, and nothing can be higher than Fairfield paper," Hiller said.

Hiller said the difference in interest rates that a AAA-rated town and a AA-rated town could achieve amounted to one-tenth to one-quarter of 1 percent.