Norwalk officials warned reserves must hold as debt approaches $650 million capacity

Norwalk City officials heard a Munistat presentation on Feb. 24 that laid out how Moody’s and Standard & Poor’s score municipal credit and warned that weakened reserve levels could jeopardize the city’s AAA headline ratings as debt rises.

Bill Lindsey, the city’s municipal financial advisor for debt issuance, said Moody’s weights economy, financial performance and leverage at 30% each and institutional framework at 10%, while S&P places greater emphasis on financial performance and reserves. He told the joint Finance and Claims Committee and Board of Estimate and Taxation that the city’s headline AAA ratings rest on historically strong liquidity, reserves and well-funded pension and OPEB accounts, but those offsetting strengths must be maintained as debt increases.

"We were able to increase that debt capacity number to $650 million," Lindsey said, explaining that the city’s modeled general-fund principal outstanding stood at about $439 million at the end of the fiscal year and that roughly $102 million of authorized-but-unissued principal remained. "We're approaching that $650 million threshold," he added, while noting the city’s projection did not show a breach of that threshold under current assumptions until the early 2030s.

CFO Jared Schmidt confirmed the city’s unassigned fund balance is "just over $80 million" as of FY25, a figure reported in the FY25 audit. Lindsey cautioned that Moody’s available-fund-balance measure differs from the city’s policy measure: Moody’s rolls total governmental funds (including capital project deficits and Board of Education funds) and certain enterprise/internal-service current net assets into the calculation, which reduced Norwalk’s Moody’s fund-balance metric in the FY25 audit.

A council member on the committee noted the available-fund-balance ratio had fallen to about 24.8%, down from 25.8% the prior year and 27.3% earlier, and attributed the decline partly to higher employee-benefit costs and prior use of reserves. "We cannot ask the taxpayer this year or in the future to pay more taxes to top up the fund balance of money that we overspent in previous years," the member said, urging the council and BET to prioritize reserve rebuilding in upcoming budget deliberations.

Lindsey and staff emphasized that debt alone is only one component of rating methodologies; Moody’s treats debt, pension and OPEB on equal footing but assigns only a 10% weighting to debt when mapping to headline ratings, while S&P gives debt and pension a larger relative weight in the debt metric. Both agencies, the presenter said, look at a mix of economy, management practices, reserves and liabilities; under S&P’s numeric mapping Norwalk sits near the cusp between AAA and AA+.

The presentation included a 'debt waterfall' projection that amortized newly issued authorized principal and accounted for grant offsets on major school projects; under Munistat’s assumptions the modeled debt trajectory approaches but does not exceed $650 million before the early 2030s. Lindsey warned that if reserve metrics continue to deteriorate—as they did in FY25—the agencies might not apply the notching adjustments that elevate scorecard-indicated ratings to the headline AAA that Norwalk currently enjoys.

The committee discussed potential consequences of a downgrade, with members noting higher debt service and pressure on the operating budget if interest costs rise. Committee members thanked Munistat and the finance staff for clarifying the mechanics of the scorecards and urged colleagues to consider reserve levels when setting a budget cap and during upcoming budget negotiations.

The joint session closed after the questions so the full city council meeting could begin at 7:30 p.m.