Moody’s released its latest credit outlook analysis and found that New Jersey’s new Clean Stormwater and Flood Reduction Act, which authorizes the state’s local governments to create stormwater utilities, would be credit positive for many of the state’s cities, towns and townships, if it is executed correctly.
According to Moody’s, although the new law itself does not impact any municipal credit ratings, it does give local governments a potentially useful new tool to improve their water and sewer infrastructure.
On March 18, New Jersey Gov. Phil Murphy signed a law authorizing local governments in the state to create stormwater utilities.
With proper execution, the new infrastructure would be materially credit positive for many local governments. For geographic and geologic reasons, large parts of the state are at risk of flooding and although floods rarely reach catastrophic proportions, they are endemic and routinely cause damage.
Furthermore, the law states the problems are particularly acute in the 21 urban New Jersey municipalities with combined sewer systems, which routinely overflow and discharge untreated wastewater and stormwater. The result is increased pollution and environmental damage. Preventing or ameliorating this would help preserve property values and strengthen credit quality for the relevant local governments.
The Act authorizes municipalities, counties and certain authorities to create stormwater utilities and also assess fees and charges – based on an owner’s contribution of stormwater runoff from a given property – that would then be dedicated to stormwater infrastructure.
This would supply what is currently lacking, Moody’s said: a dedicated revenue stream to cover this issue.
The law also authorizes the issuance of debt for stormwater management purposes, which presumably may or may not be backed by the new fees, and allows for incentives to encourage the use of green technology.
However, there is a potential negative side.
Not all parts of the state are equally prone to flooding and not all communities have the same needs or ability to pay extra fees. Theoretically, such communities will not use the law, but that is not a certainty. It is possible that a local government would establish a utility it does not need and thus incur unnecessary debt or expenditures.
While stormwater utilities are new to New Jersey, they are common throughout the U.S. New Jersey’s law cites this fact and calls on new utilities to abide by industry best practices and to adhere to a new guide that the state will be publishing. While this does not guarantee successful implementation, it suggests that local governments will be operating with guidance that improves the probability of credit-positive actions.
Moody’s reported that should a local government fail to set fees appropriately or add too much debt, the result would be increased leverage without significant material benefit.