Earlier this month, Saugerties town officials were incensed when they received word from Moody’s that the town’s bond rating would be downgraded from A-1 to A-2. Moody’s said this was because of the town’s level of debt and use of the fund balance to lower taxes last year’s budget.

But the town wasn’t alone in this: the Saugerties school district was also downgraded last year, from Aa3 to A-2.

A bond rating, like a credit score, determines the rate of interest when a municipality or school district borrows money. “The rating is what tells investors about the municipality’s or school district’s ability to pay off the bond,” explained Bruce Tuchman, senior vice president of investments with the Wells Fargo Advisors office in Kingston.

The higher the rating, the lower the interest needed to attract investors, since a higher rating means a more stable financial situation. In order to sell the bonds for a lower rated municipality or school district, the interest payments would have to be higher.

Tuchman pointed out that although the ratings for both had fallen, they were still within the “A” tier, which is “still a good rating.”

In the case of the town, Moody’s cited $9.3 million of outstanding debt and the drawing down of the fund balance to offset potential tax increases as evidence of a “deteriorated financial position.” Supervisor Greg Helsmoortel took issue with this reasoning, saying the $7 million library expansion/renovation debt should not have been included in the debt total because the library is a separate taxing district. Also, most municipalities have used fund balances over the past few years to keep taxes low in the bad economy.

The school district’s downgrade will impact $18.45 million in outstanding general obligation bonds. Moody’s assessment of the school district’s financial outlook came in August, but little was made of the news at the time. However, now that the district is preparing its budget, the effects are coming to bear: thousands of dollars extra in interest.

Moody’s, in its release to investors, explains that it downgraded the district’s rating because “it reflects the material decline in the district’s already narrow financial position.”

The rating comes in response to the district’s 2009 position, when it had $739,000 in cash, which equaled a “very limited 1.5 percent of General Fund revenues.”

Moody’s said this revenue flow was due to an accounting error, which saw the district budget twice for what was actually a one-time payment of $1.6 million in state building aid. To make up for the over-budgeting, the district issued Revenue Anticipation Notes (RANs) for cash flow purposes.

The negative outlook, according to Moody’s is also because of an “uncertainty related to future state aid delays and/or cuts.”

Additionally, Moody’s cited the fact that at the end of the 2009 fiscal year, which ended June 30, the district had a $1.3 million deficit.

The Saugerties budget was funded by 43 percent in state aid, and 54.6 in tax revenue in 2009. In 2010, to support a $52.7 million budget, the district appropriated $250,000 of its fund balance to help limit the amount of last year’s tax increase. The district expected to reduce its $1.3 million deficit from 2009 to $500,000 at the end of the 2010 fiscal year, Moody’s said.

On a positive note, Moody’s complimented the district for amortizing its principal (80.9 percent repaid within 10 years) and for not planning on borrowing big money in the near future.

Allen Olsen, school district business administrator, said the district is not too worried about the downgrade in the Moody’s rating because it will cause the district to incur additional interest payments of only tens of thousands of dollars. He said the district’s debt is all short-term. If the bonds were long-term (20-year to 30-year bonds) then the interest hike would be well into the hundreds of thousands.