Sunday, July 13, 2014

Wilkes-Barre’s credit rating is upgraded

December 05. 2013 11:31PM

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Q. What is a bond?

A: A bond is an instrument of debt, much like an I.O.U.

Q. How does this municipal bond business work?

A: When a municipality needs a large amount of money (presumably for buying things such as police cars or for major construction projects), it puts a bond out for bid on the bond market. Potential investors will submit loan offers. Investors base their proposed interest rates largely on a municipality’s credit rating and perceived ability to pay back the loan. If a municipality has a lower credit rating and perhaps a budget with unrealistic revenues factored in, the municipality presents a greater risk to investors, who would likely charge higher interest rates on the loan or would not be willing to offer a loan at all.

Q. Why should I care?

A. If your municipality is run fiscally well, it could earn a higher credit rating and get better interest rates on loans. That means the municipality would not need to spend as much money paying back loans, and that could lower your tax bill (or at least not raise it as much) and save you money.

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WILKES-BARRE — Mayor Tom Leighton is touting the city’s new “positive outlook” rating from a national credit rating company, and representatives of a local bond broker and financial services company say the city has reason to celebrate.

Standard & Poor’s Rating Services revised its outlook on the city’s outstanding general obligation bonds from A- negative to A- positive, according to a recently released S&P report.

It’s noteworthy, the mayor says, because “it saves taxpayers hundreds of thousands of dollars and allows us the flexibility to invest in our city, improve our infrastructure and create jobs for our citizens.”

Pete Shelp, a certified financial planner at Janney Montgomery Scott, a stock and bond brokerage and financial services firm in Kingston, said Thursday a higher credit rating could save the city considerable cash.

Shelp said investors “look for bonds that are rated higher. … It tells them there’s a good chance they’ll get their money back,” so they offer lower interest rates. “If the city got an interest rate of 3 percent as opposed to 6 percent, that directly affects the operating budget of a municipality.”

For example, with the city in the midst of refinancing its $7.5 million general obligation bonds, a three-percentage point difference in interest rates could amount to savings of about about $225,000.

Susan Whitesell, a chartered retirement plan counselor with Janney Montgomery Scott, was surprised Wilkes-Barre earlier this week got an interest rate quote of 1.68 percent on a $3 million 2014 tax revenue anticipation note (TRAN), given that the city paid a 1.88-percent rate on a 2013 TRAN. She predicted the city would see its interest rate drop only to about 1.78 percent.

A TRAN is a loan that helps a city pay expenses until property tax revenues start coming in the spring. Leighton said the improved credit rating helped the city get a lower rate on the TRAN.

Whitesell also said that for Wilkes-Barre “to get a positive outlook now, that’s really very good,” considering the weak economy and local unemployment rate.

Shelp said Wilkes-Barre is in a better financial situation than many other cities such as Scranton, and doing much better than Detroit, which is in bankruptcy.

Other factors include: strong budgetary flexibility, with 2012 reserves at 26.6 percent of general fund expenditures; adequate budgetary performance; adequate liquidity (cash flow) to cover debt service and expenditures; adequate management and weak debt and contingent liabilities position.

S&P analyst Hilary Sutton said the change to a positive outlook reflects Wilkes-Barre’s “much improved” cash flow. She said S&P could raise the city’s credit rating again if the city operates without cash flow pressure in 2013 and 2014.

S&P downgraded Wilkes-Barre’s outlook to negative in 2012 when cash flow suffered because the Don Wilkinson/Centax agency failed to properly disburse earned income tax revenues to many municipalities including Wilkes-Barre and eventually went belly-up. When a new agency took over, municipalities eventually received their EIT revenues.

Leighton was pleased with S&P’s latest assessment, to say the least.

“This is the result of years of hard work by my administration to build a strong financial foundation for the City of Wilkes-Barre,” he said in a press release. “The city’s A- credit rating is the envy of local and county governments in the region and across Pennsylvania.”

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