In late July, Standard and Poors hammered the rating on a Sarasota County bond issue just six days before it did the same to its rating of U.S. Treasury Notes. The county rating dropped four notches. But the county’s bond consultant says it could rebound.
Ed Stull, the managing director of First Southwest Company, told county commissioners Tuesday that S&P has changed its outlook to “positive” on the county’s ESLPP (environmentally sensitive lands and public parks) bonds. “The new outlook was positive and indicates it might increase the ESLPP bond rating,” he said.
County commissioners reacted to the downgrade by increasing the reserves backing the bonds, and then paying a visit to S&P in New York last month. Stull indicated the actions may have kept the ESLPP bonds from the fate of other Florida issues. “They were more pessimistic on the outlook for property taxes throughout Florida,” he said.
The two other bond rating agencies – Moody and Fitch – followed S&P’s lead in cutting the ESLPP rating. On Aug. 25, Moody changed its prognosis of the bonds to “stable” from “negative,” Stull said. All three rating agencies still give the county’s other property-tax backed bonds their highest rating, AAA.
The ESLPP bonds are backed by only a fraction of the county’s property tax collections. They have been falling for years as a reflection of the real-estate-value crash in the county. Bond raters feared if property values continued to skid, the tax fraction could not repay the bond-holders.
Normally when bonds are downgraded, interest rates rise. But paradoxically the downgrade of U.S. Treasury Notes led to a decline in interest rates, down a full percentage point in the last month. “Interest rates are at historic lows,” he said. “The 10-year Treasuries and General Obligation bond rates are near historic lows.”
And that represents an opportunity, said Stull. He suggested the county consider refinancing two utility revenue bonds, paying off the old bonds with with a less-expensive issue. Stull compared it to a homeowner refinancing a mortgage to get a lower interest rate. “We’re looking at considerable savings,” he said, suggesting it could save about $2 million in overall interest.
Because the bonds are backed by utility payments, any savings would be reflected in utilities bills. Or a rate increase might be deferred. The utility department will come back on Sept. 28 to present a full picture on the utility bond “refunding.”
Commissioner Jon Thaxton suggested the county might want to “contemplate the possibility of these downgrades on our own, before the credit agencies contemplate it.” Their action was probably based on a year-over-year slide in property tax receipts, he said. “Perhaps we could have taken pre-emptive action to stem off the four-point downgrade to maybe a two-point downgrade,” said Thaxton.