Moody's Give Scarsdale a "Negative" Outlook

Moody's Investor Service, the bond rating agency, has given the Scarsdale School District a "negative" outlook while maintaining the triple A rating. In a report released last week, Moody's revised their outlook based on the district's declining fund balance, rising labor costs and the tax cap legislation.

According to their report,the district's decision to drain reserves to meet current expenses has reduced the fund balance and Moody's predicts that "that management will be challenged to produce structurally balanced budgets over the next two years which will likely result in the continued reduction of reserves for one year or more." Though they credit Scarsdale with a "large and extremely affluent tax base and a low tax burden," they note that the district budget will continue to be pressured by rising wages and benefit costs and the tax cap which requires a 60% vote to override budgets that exceed the designated cap.

Moody's says that the rating could go down if the district "continues to authorize Fund balance declines in excess of current expectations" and depletes the "General Fund balance beyond current expectations at end of fiscal 2015." This year after state auditors determined that the district's health care reserve of $777,715 no longer complied with state law, the Board allocated those funds toward the proposed 2014-15 school budget. In addition, the total fund balance is projected to be $14.7 million at the end of the 2013-14 school year and is estimated to be at $12.6 million at the end of the 2014-15 school year.

We spoke to several experts who agree that it is unusual for a district to have a triple a rating so that Scarsdale remains in a very strong position. Even this "negative" outlook should have little impact on a new bond offering under consideration for voter approval later this year. However, the new outlook does validate concerns that drawing down reserves could have a big impact down the road.

We asked, Assistant Schools Superintendent Linda Purvis for her interpretation of the news and here is what she shared. "I think what they are saying is what we have also been saying, which is that we have been relying too heavily in recent years on using fund balance to keep tax growth down. That can't go on forever. A triple AAA rating is only for the strongest, most stable organizations. There are only about a dozen school districts in the state with this rating. One measure of stability for a government is the fund balance. If it isn't there, you are inherently more unstable. Some people have said over the years that the District has held on to too much fund balance. Moody's is telling us that, from a bond rating perspective, this is not true. Continued use of reserves to fund ongoing expenses is not a long- term plan for fiscal stability."

We also spoke to Robert Berg, who has argued that the district was holding on to excessive reserve funds and advocated for the return of those funds to the taxpayer by including the use of reserves in upcoming operating budgets. Here is what he said.

"The big positive is that the School District, for now, maintains its Aaa rating, which is pretty rare among NY State school districts and municipalities today. But I would not be surprised if the bond rating is dropped if we go ahead with a $20 million bond offering later this year, especially given some of the possible capital projects that have been suggested. That's not to say we should delay or avoid a bond offering – that would be foolish if we can lock in near historically low rates and undertake important capital projects. But in this economic environment, we need to be particularly judicious as to what projects are undertaken. For instance, the Wellness Center, which was a lightning rod in last year's budget defeat, comes back as an expanded and doubly expensive proposal this year – now projected at 6,000+ square feet in size and $2 million in cost sans equipment. I would think that Moody's would be more impressed with expenditures such as replacing the Quaker Ridge roof or providing Edgewood with a usable library rather than a bigger, fancier Wellness Center and a still incoherent physical education curriculum. The Moody's press release describing its report on Scarsdale notes that the District will be challenged to produce structurally balanced budgets over the next two years. I agree. Rising fixed costs associated with wages and employee benefits and the tax cap constraints will sorely test the District's abilities to continue to provide an excellent education while not forcing residents, especially empty nesters, out of their homes with tax increases that exceed the CPI. Fortunately, the new Superintendent, Dr. Hagerman, appears to have substantial experience dealing with such difficult realities, and I expect that he and the Board will approach these challenges with a fresh and creative approach, and a willingness to engage the entire community in these decisions."

(Editor's Note: though Berg is entitled to his opinion, it should be noted that Moody's does not judge the appropriateness of the projects to be funded by a bond. They look at financial impact and trends that could destablize the district's finances.)