The city of University Place announced Friday that its credit rating has been downgraded.
Moody’s, one of the three major credit rating agencies, cited the city’s high debt burden and diminished ability to meet those obligations in lowering the rating to A2 from A1.
Moody’s A investment grade are obligations of “upper-medium grade” subject to low credit risk. It also gave the city a negative outlook, meaning there’s a risk of another downgrade over the next 18 months.
Although lower, Eric Faison, assistant city manager of administrative services, said the new rating is still a good one.
“I can’t emphasize enough that we’re still an A rated security,” he said.
The announcement comes three months after another rating agency, Standard and Poor’s, looked at some of same information and reached a different conclusion: retaining the city’s A+ rating – two levels below its prime AAA rating.
While S&P’s analysis looked at two bonds totaling $22.5 million the city issued in 2009 to pay for construction of the civic and library building, Moody’s examined all the city’s $48 million debt backed by tax revenue, otherwise known as general obligation.
The city’s news release noted “it’s not uncommon for rating agencies to reach slightly different rating conclusions based on the same underlying facts.” The rating does not affect city operations.
Moody’s noted the city can’t borrow additional money without going to voters. The city took out most of that debt to develop the Town Center project aimed at increasing its tax base.
The rating agency noted the city’s general fund balance — the money left over after it pays its bills for the year — declined from more than $4 million in 2009 to $588,000 in 2010 primary due to payments on Town Center. The city is expected to end this year with a balance of $170,000. The city has unrestricted money in other funds, including an $860,000 strategic reserve, that are estimated to total $1.2 million at year’s end — or about 10 percent of its general fund revenues.
Faison notes the city withdrew $1 million from its balance to repay a loan it took out to pay the bills to prevent even deeper budget cuts in 2010. The city had to lay off about one-quarter of its employees. Although it might have looked better to Moody’s to refinance the $1 million and keep the money in the general fund, he said, “we thought the right thing to do is every opportunity we get, pay down debt.”
The city faces “significant inflexibility in its budget over the long-term” give its heavy debt burden, low cash balance, falling property values and restrictions in borrowing more money, Moody’s said.
The agency acknowledged the city faces difficult circumstances and has made “substantial efforts” to get on solid financial ground, including reducing operating costs by about $4 million.
It also touched on a $12.5 million debt payment that comes due for the city in December 2013 to pay for Town Center improvements. The city plans to refinance the entire loan in two years. It had looked at refinancing it this year, but Faison said officials decided against it due to the high costs associated with doing that before the debt’s maturity.
Moody’s suggested that could prove a challenging proposition, citing the “near-term market and economic uncertainties that could result in a less than favorable refinancing environment.”
Faison responded the city would be in a stronger position by paying down debt and saving money.
“By the end of 2013, we should have a strong cash balance,” he said.
Moody’s said the city’s rating could go up with a “significant increase” in general fund revenues and reserves or a large increase to the city’s tax base.
It could go down with a lower general fund balance, significant decline in the city’s tax base or an “inability to refinance the 2013” debt payment.
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