By Jane Roh
Sept. 18, 2011
Collingswood’s downgrade to junk status by the ratings agency Moody’s may have raised questions about whether other New Jersey towns are in danger of seeing access to credit dry up.
Most are not.
Nine months after Wall Street analyst Meredith Whitney sparked a sell-off by predicting — in a “60 Minutes” segment — a massive crash in municipal bonds, the market is relatively stable.
“Although the economy has affected local government finances, it generally hasn’t affected them strongly enough to cause defaults,” said Mitchell Savader, CEO of Manhattan-based Savader Asset Advisors.
“We have had a negative outlook on both the local government and state sectors now for three years,” said Jack Dorer of Moody’s Investors Service. “No question there are pressures in the marketplace. But the vast majority of municipalities is holding up very well.”
In fact, local and state government defaults actually decreased the first half of 2011, largely due to steep slashes in spending and borrowing in recent years.
“The nature of the municipal bond market is, there are very few defaults or bankruptcies against municipalities. Even if there is a significant increase, relatively speaking we’re still talking about a very, very small portion of the overall market,” Savader continued.
“Looking at government finance, the vast majority of them (rated entities) are run fairly well and for years, so they have the wherewithal to fund problems.”
On Monday, Collingswood was among the 0.6 percent of public entities rated by Moody’s to receive a “large, multi-notch downgrade,” or a downgrade of two or more notches. The borough was dropped an astonishing six notches, from A1 to Ba1.
The downgrade was a reflection of doubts over how Collingswood would fully pay off $8.5 million for the LumberYard, a luxury housing and retail complex near the PATCO Hi-Speedline. The borough will make an extended maturity deadline of Dec. 7, but not without borrowing another $4.5 million to purchase unsold condos, which it will try to lease.
According to a Moody’s analysis of how the agency adjusted municipal ratings through the Great Recession, a little more than 100 of the nearly 18,000 municipal entities it rates have received a super-downgrade. No state has been slapped with that downgrade. Most have been taken down just one notch, as New Jersey has by all three ratings agencies.
Neither Fitch nor Standard and Poor’s rates Collingswood, whose population is 14,000. The Camden County town is the latest government entity to join a select club; among the larger ones of late are Harrisburg, Pa., and Jefferson County, Ala.
“There is a subset of local governments that did things historically that put them in a very vulnerable position,” Savader said. “Now they are having to deal with that vulnerability from a much weaker position.”
Jefferson County Friday averted what would have been the largest municipal bankruptcy in U.S. history, growing out of a botched sewer bond refinancing effort. Harrisburg last week avoided default by taking out a high-interest loan. The city’s fiscal crisis was driven in part by a costly incinerator project.
And now Collingswood may be on the brink because of the LumberYard, envisioned in 2006 as a luxury condo complex for sophisticated urbanites who appeared eager to flock to the suburb, previously a diverse, blue-collar enclave.
The housing crash brought construction on the LumberYard to a near-halt. The commercial side of the development has seen mixed results.
“I thought it was a great location when I heard about the condos going up,” said Russell Viggiano, owner of the 88-year-old Texas Wieners.
The South Philadelphia merchant believed a captive audience at the condos would allow him to springboard into other Jersey towns. The second Texas Wieners opened at the LumberYard in 2009 and was gone by August 2010. Viggiano is still working to make up the $40,000 to $50,000 he lost.
“When I started seeing the construction trailers pulling out of there because the bank wasn’t lending and people weren’t moving in, it started drying up for me,” he said.
Cate Long, a municipal bond market analyst for Reuters, awarded Collingswood the “Muniland Absurdity of the Year Award” after the downgrade.
“Generally a municipality would not be involved in financing a private housing project like that, especially a luxury one,” she said. “They generally put up a separate legal structure or housing authority, and 99 percent of the time they fund senior or low-income or housing for the disabled. It’s generally housing the private market doesn’t want to build.
“I’ve never seen anything like this.”
James Maley, a development consultant as well as the town’s longtime mayor, said the borough invested in the LumberYard because the private market would not. Previous projects, such as The Heights off Collings Avenue, have yielded returns for property owners, whom Maley regards as investors.
“We’ve been working this way for 15 years, and it’s why we are what we are today.”
Collingswood today is a hipster and foodie destination that attracts artists and young families. It also has a particularly vibrant gay population; same-sex couples were key in gentrifying the borough.
“I appreciate her views but has she ever come here? Come on over and take a look,” Maley said, referring to Long’s “award.”
Long, said it wasn’t necessarily the borough’s mission to lead gentrification efforts. She also defended Moody’s, saying ratings agencies have actually allowed municipalities to have greater access to credit over the last year. Long also said Collingswood has issued an unusually large number of bonds for a town its size.
“Every time you issue a bond, you pay a lot of fees. These are a lot of bonds with very high (banking) fees,” she said.
Even if Collingswood is eventually upgraded — as bond counsel Philip Norcross of Parker McCay insists, according to Maley — it could still become much more expensive to access cash, a key factor in a time of declining revenue.
Moody’s said the problems of towns like Collingswood and Harrisburg appeared to be tied to specific decisions and did not portend a trend.
“These are extreme cases,” said David Jacobsen. “There is no sign what’s happening in Harrisburg is going on in adjacent municipalities.”
“Collingswood has $1.2 million cash on the books. They have $8.5 million due this fall,” said Julie Beglin, a contibutor to the downgrade report.
“This is a big dollar amount for them.”