Berkley, Huntington Woods on Firm Financial Footing

Pension funds and property tax revenues could be affected by the economic turmoil following Standard & Poor's decision to downgrade the United States' credit rating, but Huntington Woods and Berkley remain on firm financial footing, local officials said Monday.

Stock markets reacted negatively Monday to news that the United States' credit rating was downgraded late Friday from AAA to AA+ for the first time in history. The Dow Jones Industrial Average closed down 635 at 10,810; the NASDAQ closed down 175 at 2,358; and the S&P 500 closed down 80 at 1,120.*

An AAA rating is the best given by S&P, while an AA rating indicates a "very strong capacity to meet financial commitments," according to the company, which uses plus and minus signs "to show relative standing within the major rating categories."

Cities' credit ratings steady, improving

The credit rating news was rosier Monday in Berkley and Huntington Woods, but local officials said they expect to feel repercussions from the economic turmoil at the national level.

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"We just verbally received our credit rating, and the good news is we're going to keep our AA status," City Manager Jane Bais-DiSessa said. "The even better news is they're going to move us from a negative outlook to a stable outlook."

The rating is one step below the top Fitch rating of AAA. 

"Our taxpayers, it says to them: You have a stable government, and we're making good decisions," Bais-DiSessa said.

Huntington Woods also is good shape, with an AA+ rating from S&P and Moody's, said City Manager Alex Allie, who added that the city will not be rerated until 2012.

Moody's, S&P and Fitch are the three major credit-rating agencies, and Berkley Finance Director David Sabuda pointed out Monday that two of them had not changed their rating of status of the U.S. government.

"This is a lot of theatrics on the part of Standard & Poor's," in the wake of a protracted and rancorous debate about raising the United States' debt ceiling, Sabuda said.

The debt ceiling is a limit on how much money the federal government can borrow.

Allie agreed that the debt ceiling argument seemed to undermine the country's reputation.

"Watching what happened in Washington — just to raise the debt ceiling — does that give anybody any confidence that the government can solve big problems?" Allie asked.

Nonetheless, Sabuda said, "the United States government is still the safest place to invest your money in the world."

That was a message that President Barack Obama sought to drive home Monday afternoon during an unscheduled speech aimed at calming the plunging markets.

Homeowners to feel impact

One positive aspect for consumers is that interest rates are still at an all-time low — for now, Sabuda said.

"(The downgrade and market turmoil) will have an effect on the homeowner because interest rates will go up," which in turn could put a damper on home sales and construction, he said. "That may or may not affect our tax base."

The city already has seen its tax base diminish as property tax values have declined.

"Property tax values decreased 1.91 percent (the equivalent of $10.2 million) citywide for the July 1, 2009, tax collection season that funds the 2009/2010 fiscal year," Berkley's most recent audit noted. "This is the first time the city has experienced an overall decrease in its taxable value or state equalized value."

The S&P also cut the credit ratings of government mortgage lenders Fannie Mae and Freddie Mac on Monday, although Sabuda scoffed at the significance of that action.

"They were junk bond status anyway," he said. "That doesn't really tell me anything."

Sabuda said city programs will be be affected by the U.S. credit rating downgrade and market turbulence, but he declined to give more details.

"At the end of the day, it will affect how we operate," he said. "We'll make adjustments to what's happening at the federal level."

Pension investments take a hit

At this point, the nation and local municipalities are in uncharted territory, Allie said.

"The biggest issue is what (the downgrade's) doing to our markets and the fact that our investments face losses based on the stock market's decline," he said. "I figured last Friday (when the markets experienced a precipitous decline) that we essentially lost all of the gains from the first six or seven months of the year."

The city's pension fund is a diverse portfolio, Allie said, but Huntington Woods likely will have to put more money into the system to keep it funded since its investments aren't earning what they have in the past.

Even before the meltdown of the past few days, retiree costs for local municipalities were expected to increase, compounding the problem.

"Pension systems are not earning their assumed rates of return, forcing employers to put more money in," Plante & Moran audit partner Leslie Pulver said in December when he presented Huntington Woods' most recent audit. "It's really going to be hard to keep squeezing the budget without looking at what services to cut."

Allie said he hopes the markets will improve soon and urged residents to "live as normally as possible" in the meantime.

"I think the next year, politically and economically, is going to very interesting," he said.

* Figures rounded up to closest whole number.