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The S&P assessment did not consider the town's Madoff related losses to be significant, "While we believe the town's pension losses could pose a near-term challenge because it now has to budget in increases to its pension contribution, overall we believe that funding levels remain well above satisfactory levels and that they are not a credit concern." The town has also faced declining tax revenues in the last year, but the report indicated that Fairfield has a 99 percent tax collection rate. In response to these figures Flatto stated, "Given the difficult economic climate we are grateful for our strength relative to other communities."
In terms of the actual bond auction, Hiller noted that there was, "aggressive bidding by many of the biggest financial firms in the world." Top purchasers included Citigroup, JP Morgan Chase, Eastern Capital, Piper Jaffray, and Barclays Capital. Flatto is confident that new bonds, which carry a record low interest rate of 40 basis points (i.e. 0.4 percent), will shave $1 million off of the town's annual debt service which is currently $26.5 million. The municipal debt service comprises ten percent of the town budget, and funds both the interest and principle of the town's aggregate debt which is $220 million. Paul Hiller expects the town to repay 63 percent of the town's overall debt, over the next ten years.
Looking ahead, Flatto believes that future public works projects will have much smaller budgets and necessitate fewer bonds. Moreover, he predicts that there will be a marked decline in major construction over the next five years. Previous projects, such as the renovation of the high school were described as "catch-up." The obvious exception to this forecast would be the Metro Center. If this development plan is revitalized it would necessitate the issuance of $5 million worth of bonds, in addition to the $1 million already outstanding for the project. However, Flatto does not believe that the new train station and metro center will affect the budget, since the town plans to repay those debts with parking fees over the span of 20 years.
Flatto is also trying to reduce costs by splitting the expenditures of multi-year projects into a series of annual bond sales. He described this practice as, "a strategy for avoiding long term interest rates." Current annual bonds mature with interest of approximately 4 percent compared with long term bonds which have interest rates between 3 and 4 percent. The difference is that the long term rates are guaranteed in the bond agreement.
This strategy does pose some risk since interest rates fluctuate, while building contracts do not.
Professor Bridget Lyons, Chair, Department of Economics & Finance at the John F. Welch College of Business at Sacred Heart University told the Minuteman that, "while financing with short term borrowing can lead to lower borrowing costs, especially in the near term, the strategy is not without risk. First, short term rates in general may rise in the future and then when the bond issues are refinanced borrowing costs will be higher.
This is quite possible since the current low short term rates reflect weak economic conditions and Federal Reserve policy, both of which are unlikely to persist. Also, investors may become increasingly concerned about the creditworthiness of municipalities and demand a higher return on municipal bonds. While municipal bonds have historically had relatively low rates of default, many municipalities now face shrinking revenues and looming budget deficits. Add to this liabilities related to underfunded pension obligations and you have a scenario where municipalities will face higher costs to borrow. At the end of the day, the decision is not so different from the decision faced by homeowners on whether to take an adjustable or fixed rate mortgage."
