What Is Net Debt and How Does It Affect Collingswood's Financial Picture?

One of the most contentious issues surrounding the 2013 borough commissioners election has been discussion of Collingswood's net debt.

The question was posed of candidates at a forum hosted by area media groups April 30, and has been described as a metric of the financial health of the borough during campaign season.

But for those voters who may not have the depth of financial knowledge that the candidates do, Patch posed that question of someone who is intimately familiar with both the concept of net debt and the specific dollar figures at work in the local ledger.

Gross debt vs. net debt

Nick L. Petroni, CPA, RMA, PSA, of Petroni and Associates, has been auditing Collingswood’s books since the late 1980s. His firm also provides this service to some 15 local governments in Camden, Gloucester and Salem counties.

According to Petroni, when calculating the gross debt of a town—an annual statement of which is provided to the state—a municipality may subtract from that figure “debt that is supported by revenues that are not provided by taxation.”

Public utilities, for example, which have their own revenue streams from users and produce enough money to sustain their own operations, are termed “self-liquidating,” he said, and don’t count against the net debt of a municipality. 

“Net debt is a statutory calculation that is used to determine the borrowing capacity of the municipality,” Petroni said. “It’s what is statutorily allowed to be removed before determining what their debt limit is.”

Since the implementation of the 2-percent statewide budget cap, municipal debt limits in New Jersey may not exceed 3.5 percent of appropriations, equalized over a three-year average, Petroni said.

Collingswood is at 3.11 percent, “so they still have some borrowing capacity available,” he said.

“They’ve been paying it down every year,” Petroni said. “They’re not in a dangerous situation. They’re not above their debt limit.”

General obligation debt in the borough—$34.472 million as of the end of 2012—is “manageable,” he said, and “has not fluctuated that much” year to year.

The ratable base in Collingswood “has held its own," Petroni said, "and with this investment [in the LumberYard project], I think it’s going to recover.”

'You have to take a historical perspective'

Petroni regards the LumberYard as an investment not unlike the suburban redevelopment project being undertaken near Rowan University in Glassboro, another town for which he serves as auditor.

“If you look at the debt in Glassboro versus where it was five years ago, you’d say, ‘This town’s crazy,’” he said. “[But] you can’t just take a snapshot at one point in time and say, ‘This is the reason.’ You have to take a historical perspective.”

During the time that Collingswood was negotiating the sale of the Parkview apartments (now the Heights of Collingswood), Petroni said, the property was “throwing off revenues” to the borough that “the town was permitted to consider as self-liquidating.

“It was a public-private partnership, a redevelopment,” Petroni said. “[Collingswood] still had the debt and still had to pay the debt. Then they sold the Parkview and paid off some of that debt, and it was no longer considered self-liquidating.

“It’s not like they didn’t have the debt, they just didn’t have to count it in the net debt,” Petroni said. “[It’s] strictly a statutory calculation.”

Moody's

The other significant event that affected Collingswood’s financial picture, Petroni said, “was when Moody’s came out with their downgrade” of the borough credit rating.

“The financial condition of the municipality before and after the downgrade, there was no difference,” Petroni said.

“The problem became that Moody’s actually became the driver because once they downgraded the town—which was ready to roll the note over and continue to pay and pay down—there was no bank that was permitted to touch them,” he said.

“They were kind of a self-fulfilling prophecy in the sense that the bank regulators wouldn’t allow a bank to purchase notes that were considered junk bonds,” Petroni said.

“It really had nothing to do with the net debt and the gross debt. It had to do with what they felt was the full faith and credit of the borough to pay the debt.”

Most of the financial concerns in Collingswood are similar to “what’s happened with all the towns” in South Jersey, Petroni said: pressure from increased pension and health benefit outlays.

Still, however, he said, “Collingswood has managed that,” despite making deferred payments to its pension plans.

“I think everybody has come through the economic downturn now,” Petroni said. “Things are making a comeback.”