This is the first in a two-part series exploring the "negative outlook" given to Fairfield by a credit rating agency.

When three credit rating agencies gave Fairfield a triple-A score heading into last Tuesday's bond sale, there was one blemish in the reports.

Moody's Investors Service issued this town a negative outlook. The warning reflected in part the town's "improved yet still weak financial position" compared with other triple-A rated towns, the report said.

If Fairfield doesn't strengthen its cash reserves, then the ratings agency could strip the triple-A rating from the town, the report said. A worsened credit rating would raise interest rates for Fairfield when it looks to borrow funds to finance projects through issuing bonds.

Should this be cause for concern or is Moody's simply being moody?

First Selectman Ken Flatto argued for the latter. "My understanding is they've been doing that with many of their ratings," he said, classifying the report as "much more fussy" than the norm.

"Frankly, because they got beat up pretty bad for not critiquing towns and businesses before the financial meltdown," Flatto said, "they seem to be bending over backwards looking for problems."

A closer look

At present, the town's cash reserves -- also known as the general fund balance -- are around $12.5 million, said Paul Hiller, the town's chief fiscal officer. Because Fairfield has an annual budget of around $252 million, that equates to roughly 5 percent of the overall budget.

That money can be drawn from for any number of things, according to Flatto. If disaster strikes, the town can use the reserves to replace a burnt-down police station, to fight a major lawsuit or to do something else.

But holding the money comes at some cost. "We don't want to be over-reserved," said Board of Finance Chairman Tom Flynn. "That would just mean that you're hanging on to taxpayers' money."

Nevertheless, Fairfield's general fund balance has been on an incremental rise over the past few years. A year ago, the balance was about $11.2 million, or around 4.4 percent of the overall budget. Before that, the fund had dropped to as low as 4 percent, Flatto said, as the town dipped into the reserves to balance budgets and fund school construction projects.

Flynn said the Board of Finance put an end to that practice a few years back, and that doing so has allowed the town to nurture the reserves back to its current level. At this rate, town officials project that the reserves will return to more than 6 percent of the overall budget next year.

Still, the Moody's report charges that it remains too low. The report stated that the town's general fund policy requires it to be maintained between 6 and 9 percent of the overall budget.

Asked to comment on that part of the report, Flynn wondered aloud where the policy came from. He said that no such policy has ever come before his board. Flatto said that Flynn is right. The range is more of an "administrative policy," Flatto said, which he gave to Moody's analysts about seven years ago as a general target for the town's management.

But even if Fairfield has 6 percent reserves, it would remain significantly lower than what most triple-A communities in Connecticut are saving, the Moody's report argued. The median general fund balance for this state's triple-A municipalities is around 12.5 percent, the report stated.

Asked to comment on this, Flatto argued that because Fairfield is larger than most of the other triple-A rated communities in Connecticut, the percentages get skewed. Fairfield's reserves can be significantly larger in dollar terms compared with other towns, but because its budget is vastly bigger, the reserves comprise a smaller percent.

If Fairfield's budget were $125 million, for example, the reserves would account for 10 percent of the overall budget.

But a burnt-down police station, for example, would affect large and small communities just the same -- both would need to build a new one. So Fairfield's reserves, he argued, are sufficient.

More insight can be gleaned by consulting a report by Standard & Poor's on its own 169 triple-A rated municipalities across the country, of which Fairfield is one.

Among them, Fairfield ranks third worst in terms of cash reserves. But the two towns beneath it are neighbors -- Stamford, which had reserves totaling 3.9 percent of its overall budget in 2009, and Greenwich, which actually had negative reserves worth 6.9 percent of its overall budget, making it the sole Standard & Poor's triple-A rated town in the country to have reserves below zero.

How does Standard & Poor's respond to the wildly divergent savings rates?

"We do not prescribe an optimum fund balance level to achieve a `AAA' rating," the report stated. "We are more concerned about our view of the predictability of a municipality's revenues, its policies and procedures, and its record of these practices."