Political gridlock in Trenton, New Jersey, is taking a toll on the city's bond rating.
An impasse between city council and mayor so severe they could not agree to authorize debt service helped drive Moody's Investors Service to downgrade the city's general obligation bonds to Baa2 from Baa1 and lower the outlook to negative from stable.
A directive from New Jersey's Division of Local Government Services ultimately ensured debt service was paid.
But the downgrade "reflects the city's recently worsening governance issues which are now weakening the city's credit quality," Moody's said in its Aug. 23 downgrade report.
City Council President Kathy McBride, along with council members Robin Vaughn and Sonya Wilkins, refused to sign off on the proposed budget, objecting in particular to a $24.7 million tax levy that would have gone to the district's school system.
Since then, the state capital has operated on a month-to-month basis by emergency funding orders from Gusciora and recently had a brush with default over the $14 million debt service payment due in July before the state intervened and ordered the obligations to be met.
According to Douglas Goldmacher, vice president and senior analyst at Moody's, analysts took into account the reaction of city and state officials to the unfolding crisis before deciding on the downgrade.
"Their governance has increasingly become a source of weakness," he said. "Once we had gathered enough information, we were confident that the credit profile had deteriorated."
The longer basic functions, like being able to fund public services, make debt service payments, and pass a budget, remain unmet "the more problematic it is from a credit perspective," Goldmacher said.
On the plus side, "the city's reserve position is quite healthy, even excluding the $73.8 million in ARPA funding," Moody's wrote.
Short of further state intervention or takeover, as the state did in Atlantic City in 2014, a political agreement between the warring factions seems the only viable way forward, according to Goldmacher.
A lawsuit brought in July by Trenton's Department of Education against McBride and the City Council over the school tax levy resulted in recent ruling by a Mercer County Superior Court judge that the levy be approved.
On Tuesday, members of City Council rebuffed an attempt by Mcbride to secure funding for an attorney to appeal the court's decision in a 3-to-3 vote.
Uncertainty around the budget still remains, however, and until its resolved, the city's credit quality remains at risk.
"I think investors want to know, what's the path out of this?" said Goldmacher. "It can be resolved by themselves, by mayor and council coming to an agreement and passing the necessary budgets, or it can be resolved by the state stepping in to one degree or another. Or nothing can happen, in which case it will get worse."
The Moody's downgrade impacted $252 million in outstanding debt. Moody's also noted the city's elevated poverty rate and high debt burden as credit stressors. Trenton has about 90,000 residents, according to the U.S. Census.
