Newark city credit ratings reaffirmed as outlook sours
NEWARK – The city of Newark’s credit rating was reaffirmed in a recent review by one of the major rating agencies, but the analysts downgraded their outlook for the city’s revenue in the near term as it grapples with the impact of the COVID-19 pandemic.
The city’s default rating and $2.9 million in outstanding 2011 general obligation (GO) bonds were reaffirmed at AA+, the second highest level behind AAA, by Fitch Ratings in a September review. While the hold on its ratings was a positive, the analysts also warned that Newark was likely looking at a difficult next few years.
“The revision of the rating outlook to negative reflects Fitch’s expectation that the economic slowdown brought on by the coronavirus pandemic will have an adverse impact on Newark’s financial resilience, with a sizable draw on reserves likely by year’s end in 2020 and further reserve draws possible in 2021. Lower fiscal reserves will weaken financial flexibility over the medium term, particularly as the course of the pandemic remains difficult to predict and the economic recovery is likely to be prolonged,” the agency wrote. “Further revenue pressure is likely in 2021, which will challenge management to rebuild reserves in the near term. A second potential shutdown of large portions of the economy, including the UD, in the winter due to a rise in coronavirus cases either in Delaware or the city poses a notable downside risk for the city.”
A request for comment on the city’s credit rating review has not been returned.
Much like consumer credit scores, municipal or corporate bonds are rated by agencies to determine their financial strength and ability to repay. The better the rating, the lower the interest rate a borrower will pay.
While the latest review held the city’s AA+ rating, the credit analysts are warned that the rating could be downgraded in the future, largely due to the impact of the COVID-19 pandemic.
Newark’s 2020 revenues have been strongly affected by the business closures and related economic downturn. As of early August, management estimated that the city would realize a $10 million revenue loss in 2020 on a $96 million all-funds budget.
Analysts note that Newark atypically relies on funds from its electric and water enterprise funds to subsidize its general fund, totaling $16.2 million in 2018 and 2019. This strategy comes in part from the University of Delaware’s presence as a large utility user but its exemption from property taxes. Utility funds have felt the greatest adverse effects from the spring shutdowns, however, with gross utility revenues set to decline by $5.1 million, or 7%, across all enterprise funds in 2020 compared to budget.
The city is also facing declining revenue from its lodging tax collected on hotel room rentals, with it estimated to only bring in about $297,000 in 2020 versus more than $760,000 last year.
To offset a $10 million estimated drop in total revenues, the city has instituted $5.1 million of budget cuts and will delay payment of a $2.5 million annual rebate to utility customers into 2021. The city’s receipt of $1.1 million in federal CARES Act funds from New Castle County will also help to close the gap. The remaining $1.1 million gap will be filled by reserves; more than half will originate from the general fund which had an operating surplus of $718,000 at the end of 2019.
In some good news, Newark’s strong fiscal management and low long-term debt positions it to recover to 2019 levels in the next few years, Fitch analysts said.
Newark is the latest state governmental body to be reviewed by credit agencies, with the state of Delaware and Sussex County earning the top AAA rating and the state Department of Transportation earning second-tier Aa1 ratings in reviews this summer.
By Jacob Owens