A3
rating affects $5.8 million of rated long-term general obligation debt
outstanding
SEASIDE HEIGHTS (BOROUGH
OF) NJ
Cities (including Towns, Villages and Townships)
NJ
Opinion
NEW YORK, December 18, 2012 --Moody's Investors Service has downgraded
the Borough of Seaside Heights, NJ to A3 from A2, affecting $5.8 million
in outstanding Moody's rated bonds. The bonds are secured by the borough's
general obligation, unlimited tax pledge.
SUMMARY
RATING RATIONALE
The downgrade to A3 reflects our expectation of
financial pressure from increases to an already high debt burden to pay
for Hurricane Sandy recovery costs and projected 2013 declines in beach-related
revenues, which constitute a significant 41% of total Current Fund revenues,
as the borough works to rebuild. The A3 rating also incorporates the borough's
limited, declining tax base and below-average wealth levels.
STRENGTHS
-Improved
financial position with structurally balanced operations in recent years
-
Healthy utility operations with strong liquidity
CHALLENGES
-
Significant reliance on tourism-related revenues
-Additional short-term
borrowing related to post-hurricane boardwalk reconstruction will increase
already high debt burden
-Loss possible in the ratable tax base
due to the storm and ongoing tax appeals
-Limited tax-base with
below-average wealth levels
DETAILAED CREDIT DISCUSSION
HURRICANE
SANDY CAUSES DAMAGE
Hurricane Sandy made landfall near the borough
on Oct. 30, 2012, causing ocean surges that city officials estimate resulted
in $14.1 million of damage, including clean up costs, personnel overtime,
and infrastructure damage to the boardwalk, water utility, electric utility
and other city property. While the total $14.1 million damage estimate
represents 113% of annual borough revenues, Seaside Heights plans to fund
these costs with reauthorized note proceeds and special emergency notes,
raised and amortized down over the next five budget cycles. Further, 40%
of the city's revenues are directly related to seasonal beach and parking
activity during the summer months as of fiscal 2011, making these economically
and weather-sensitive revenue sources vulnerable to possible declines
over the near term as the borough rebuilds damaged beach infrastructure.
The borough has been working closely with the Federal Emergency
Management Agency (FEMA) to ensure that near term federal funds are reimbursed
to the borough for outlays associated with emergency public safety, cleanup
and debris removal. The borough will also work with FEMA to apply for
reimbursements related to capital and infrastructure damage, in a process
that Moody's expects could take a year or longer to fully complete. The
storm's impact on the tax base could further contract an already declining
tax base, although borough officials estimate losses in assessed value
to be modest. We expect the assessed valuation decline to be relatively
short-lived until the rebuilding of the majority of homes and businesses
are added back to the tax assessments over the next one to two years.
SEASONAL
AND LIMITED TAX BASE EXPOSED TO POSSIBLE NEAR-TERM CONTRACTION
Moody's
believes that the borough's relatively small $719 million tax base may
contract further as a result of property damages from Hurricane Sandy.
The tax base is primarily residential (only 28% owner-occupied) representing
55% of the borough's tax base. The largest tax payers are amusement park
and other boardwalk-type enterprises. Damages to these boardwalk-related
enterprises and residential homes from Hurricane Sandy may drive declines
in the ratable base in the near- to medium-term while owners complete
construction.
The Borough of Seaside Heights, situated on
the Jersey Shore in Ocean County, NJ (G.O. rated Aaa/ negative outlook)
is 80 miles south of New York City (G.O. rated Aa2/stable outlook) and
95 miles east of Philadelphia, PA (rated A2/stable outlook) and thus draws
vacationers from both major metropolitan areas. Between 2008 and 2012,
equalized values declined by an above-average 17.5% over the four years
with a decline of 6.7% in 2012. Assessed values have also fallen, although
more moderately, by 3.6% over the same four-year period. As residents
submit property tax appeals based on market depreciation and property
damage from the storm, assessed values may decline further in the medium-term.
Wealth levels are below-average. PCI has declined to 73% of the nation
from a 86.5%, while MFI has improved to 63% from 54%, but remains below-average.
Residents below the poverty line constitute a significant 24.1% of the
year-round population.
IMPACT OF HURRICAN SANDY EXPECTED
TO PRESSURE FINANCES
Moody's expects the borough's financial situation
to become challenged in the near-term given its significant reliance on
tourism-related revenues. As a summer destination, a substantial amount
of the borough's revenues are seasonal and reliant on beach traffic. Property
taxes, the most predictable source of revenue, comprise a modest 36.3%
of the borough's revenues, while another 23.3% comes from beach fees and
parking meters, two sources of revenue which are highly dependent on summer
traffic. If municipal court fees, alcohol licenses and rentals are included,
seasonal revenues account for a very high 40.9% of total Current Fund
revenues. We expect the reconstruction of the boardwalk and beach-related
enterprises to be delayed and as a result, tourism-related revenues to
decline in fiscal 2013. Management reports, however, that strong contractual
provisions with the boardwalk developer will ensure timely completion
prior to the summer season, mitigating potential declines in beach-related
revenues.
The borough's financial position has improved
in recent years, but not sufficiently to withstand the expected pressures
from the impact of Hurricane Sandy at the previous rating level. Due to
an extremely hot summer in 2010, leading to substantial beach traffic,
the borough increased Current Fund by an estimated $460,000 in fiscal
2010, a still-narrow $590,000 or 4.9% of revenues, up from a slim 1.1%
in fiscal 2009. Additionally, in fiscal 2010 the borough paid down deferred
charges resulting from prior years' operating deficits. Favorably, Current
Fund balance, net of deferred charges, went from a negative 4.7% to positive
2.2% of revenues. In fiscal 2011, year-end results improved again with
Current Fund balance increasing to 7% of Current Fund revenues and 5%
of revenues, net of deferred charges. The borough defers payment of a
large portion of the school tax levy, $2.44 million; the deferral is a
high 47.8% (out of a permissible 50%) of the total school levy. The deferral
of school taxes is an off-balance sheet liability which Moody's believes
could create fiscal vulnerability in the event that school property tax
receipts are ever reduced.
ABOVE-AVERAGE
DEBT EXPECTED TO INCREASE FURTHER WITH SANDY-RELATED DEBT
Moody's
believes that the borough's debt position, an above average direct debt
burden of 1.3% (compared to the state median of 0.7%), will grow as it
issues new debt to finance Hurricane Sandy recovery costs. Prior to FEMA
reimbursement, the total costs of recovery are estimated at $14.1 million.
However, the borough plans to use reauthorized note proceeds to lower
the amount of additional debt needed to $10.3 million. We expect FEMA
to reimburse the borough 75% of that amount, leaving a balance of $2.58
million. This amount of additional debt in the form of special emergency
notes would increase the borough's net direct by 25% to a high of approximately
1.7% of equalized value. As special emergency notes, the state requires
the borough to pay down principal over five years. As a result, annual
debt service could increase by approximately $500,000, or 50% of current
debt service, which currently comprises a comfortable 8.4% of fiscal 2011
expenditures.
Amortization of outstanding debt it rapid at 97.9%
of principal within 10 years, reflecting the large of outstanding short-term
BANs (42% of outstanding debt). Market access for three series of BANs
maturing in February 2013 and the upcoming special emergency notes will
be an important credit consideration moving forward.
WHAT
COULD CHANGE THE RATING UP
-Stable financial operations
in 2013
-Limited decline in tourism-related revenues
-Limited
decline in tax base
- Stable debt burden and debt service
costs
-Adequate market access for short-term notes
WHAT
COULD CHANGE THE RATING DOWN
- Strained liquidity that would
necessitate cash-flow financing
-Significant deterioration
of the township's tax base and wealth indicators
-Material
weakening of the borough's financial position
KEY STATISTICS:
2000 population: 2,887 (estimated 8.7% decline since 2000)
2012 equalized valuation: $719 million
2012
equalized value per capita: $249,159
2010 Per Capita Income
as a % of State and US: 57% and 73%
2010 Median Family Income
as a % of State and US: 63 and 47%
Net Direct debt burden
as % of Full Value: 1.3%
Overall debt burden as % of Full
Value: 1.8%
Payout of principal (10 years): 97.9%
Fiscal
2010 Current Fund balance: $876,000 (8.8% of Current Fund revenues projected)
The principal methodology used in this rating was
General Obligation Bonds Issued by U.S. Local Governments published in
October 2009. Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
REGULATORY DISCLOSURES
For
ratings issued on a program, series or category/class of debt, this announcement
provides certain regulatory disclosures in relation to each rating of
a subsequently issued bond or note of the same series or category/class
of debt or pursuant to a program for which the ratings are derived exclusively
from existing ratings in accordance with Moody's rating practices. For
ratings issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the rating action on the support
provider and in relation to each particular rating action for securities
that derive their credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and in relation
to a definitive rating that may be assigned subsequent to the final issuance
of the debt, in each case where the transaction structure and terms have
not changed prior to the assignment of the definitive rating in a manner
that would have affected the rating. For further information please see
the ratings tab on the issuer/entity page for the respective issuer on
www.moodys.com.
Please see the credit ratings tab on the
issuer/entity page on www.moodys.com for additional regulatory disclosures
for each credit rating.
Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of
interests.
Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%)
and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated
entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an
ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of
the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this
matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information
on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating
history.
The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and
accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and
accurate based on the information that is available to it. Please see the ratings disclosure page on our website
www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that
has issued the rating.
Analysts
Josellyn
Yousef
Lead Analyst
Public Finance Group
Moody's Investors Service
Julie
Beglin
Additional Contact
Public Finance Group
Moody's Investors Service
Contacts
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA
Moody's downgrades the borough of Seaside Heights' (NJ) long-term G.O. rating to A3 from A2 following impacts of Hurricane Sandy
