WILKES-BARRE — The newly obtained credit rating Luzerne County officials celebrated in March has been downgraded by Standard & Poor’s due to the rating organization’s “worsening view” of county management and the county’s “political gridlock.”
County Manager Robert Lawton sent the council members a copy of the downgrade, which reduces the county’s rating two notches from BBB to BB.
The county’s rating also has been placed on a credit watch list with “negative implications,” according to Standard & Poor’s.
Standards & Poor’s said it has a “very weak” assessment of management conditions due to prior-year “structural imbalances and political instability and gridlock weakening the county’s financial position and operations.”
The county’s cash and financial flexibility have dropped in recent months due to two major developments, the organization said:
• Delays in the county’s receipt of $22 million in state funding due to the state budget impasse.
• The county council’s decision to reject a temporary $20 million loan to ensure the county meets its debt repayments and other financial obligations through the rest of the year.
The council may vote again on a similar borrowing proposal from the administration Tuesday night.
The report says the county reports about $4.5 million in remaining cash and no means to pay an $8.5 million debt repayment due Dec. 15 or all remaining payroll.
The county’s continued lack of a reserve and county deficit, which is currently $13.1 million, also played a role in the downgrade, the report said.
County officials had planned to deposit $4.7 million from the halted homestead tax break into the reserve in both 2016 and 2017 to help wipe out the deficit and start building a nest egg for emergencies. However, the council is set to vote Tuesday night on a proposal to again use that money for operating expenses in 2016 to help avoid the manager’s proposed 8-percent tax hike.
Using this money for operating expenses instead of of the reserve could “jeopardize” efforts to improve the county’s financial standing, Standard & Poor’s said.
It noted the county is “significantly under its cap” of imposing a property tax up to 25 mills. Taxes are currently 5.7456 mills, which equates to a payment of $575 on a property assessed at $100,000.
The report points to strides in 2014, when the county increased taxes 8 percent and stopped shoring up its budget with one-time fixes, such as cash advances on delinquent taxes owed to the county. A structurally balanced budget was adopted for 2015, it said.
However, improvements are needed in the way the county monitors the budget and manages cash, the report said, citing a 2014 general fund operating deficit of 3.6 percent.
Standard & Poor’s may lower the rating to CCC or CC if county officials don’t intend to pay their obligations and a default is “imminent.”
Rating agencies put government entities through the ringer because their ratings help buyers weigh the stability of potential investments without the cushion of insurance in a default.
According to online investment reports, credit ratings are opinions about an entity’s ability to meet future financial obligations.
County Manager Robert Lawton said the downgrade won’t impact the existing debt because a council majority restructured much of the outstanding variable rate debt to lock in a fixed interest rate. He stressed this restructuring saved the county $3.8 million this year and will save about $3 million annually over the next five years or more.
However, the downgrade could impact the county’s access to lenders and interest rates on any borrowing going forward, including tax anticipation loans, he said.