Paterson, New Jersey, earns investment-grade rating

Following a long period of poor financial management, during which two mayors pleaded guilty to corruption charges, Paterson, New Jersey, has rejoined the ranks of investment-grade municipal credits, following Moody’s Ratings’ recent upgrade of the city’s general obligation bond rating to Baa3 from Ba1.

“The upgrade to Baa3 recognizes the city’s progress toward maintaining an adequate financial position while gradually weaning itself off transitional aid from the state,” Moody’s said. “Paterson is on a trend of requesting less aid from the state while increasing its reserves, which despite coming amid a significant influx of money from federal stimulus funds and aid from the state, demonstrates a better financial footing than was historically the case.”

“The city has built up adequate reserves over the past few years and is now in a much-improved position,” the ratings agency added. The city’s available fund balance was an estimated 12.6% of revenue as of 2022, Moody’s said, adding that Paterson is “likely to continue making small improvements going forward.”

Since 2013, Paterson — the state’s third largest city with a population of about 158,000 — has received more than $20 million annually in state “transitional aid,” which accounted for about 10% of city revenues. That figure peaked at $33 million in 2019, accounting for 11.8% of city revenues. Since then, however, the amount has dropped below $25 million a year, falling to $17.8 million in 2022, when it made up 5.6% of revenues.

“The city’s ability to continue making progress on this front without increasing its reliance on state transitional aid will be key to its rating going forward,” the ratings agency said.

“The expectation is that Paterson is likely to continue making marginal improvements, holding stable reserves, and at least not increasing its reliance on emergency aid from the state,” Moody’s vice president Dan Seymour told The Bond Buyer. “The city acknowledges that it’s not there yet, it’s going to continue to request aid from the state each year, but the amount being requested has been decreasing while the city’s reserves have been increasing. So, we felt that no longer warranted a speculative grade rating.”

Kathleen Long, Paterson’s business administrator and chief operating officer, acknowledged the city’s continued reliance on state aid “but we also had to take some financial steps to really make sure that long term we can eventually move off of state support. And we do believe we have taken a lot of the steps, including the creation of a larger fund balance so that we would have more liquidity for cash flow throughout the year, putting in some strong controls on overtime spending,” and using federal American Rescue Plan Act money during the pandemic for capital investments, not to plug operating deficits.

She also noted federal aid has helped the city avoid going deeper into debt. The city had about $93 million of debt outstanding as of 2021, according to Moody’s, which calls that debt level “low and likely to remain low for the time being … with no debt issuance planned for several years.”

“We think we’re on the right trajectory and it’s going to continue as we go forward, and that is going to continue to reflect positively to agencies like Moody’s,” Long said. 

Despite the progress the city has made, Moody’s warned, Paterson still faces the possibility of having its bond rating withdrawn — not merely downgraded — because of its “history of significantly delayed audited financial statements. As of today, Paterson has an audited statement for 2021 and an unaudited statement for 2022. If the city does not release an audited statement for 2022 in June, we will again consider placing the ratings under review for potential withdrawal,” the agency said.

The late audited statements “remain an ongoing issue, so there is still a good chance we will withdraw this rating if Paterson doesn’t produce audited financial statements on a more timely basis,” Seymour said.

But Long was confident that wouldn’t be a problem. “We have already engaged our auditors for 2022,” she said. “Our goal is a June 30 release of our 2022 audit and our 2023 audit at the end of the year. So, we are back on track to be consistent with those and we are fully staffed to be able to support those.”