A major credit-rating agency has dropped the City of University Place’s financial rating and given the city a negative outlook, meaning there’s a risk of another downgrade over the next 18 months.
Moody’s said the city faces “significant inflexibility in its budget over the long-term” given its heavy debt burden, low cash balance, falling property values and restrictions in borrowing more money.
The agency acknowledged the city of 31,000 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 in December 2013 to pay for improvements to the Town Center property. The city plans to refinance the entire loan in two years.
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.”
The city had looked at refinancing this year, but deputy city manager Eric Faison said officials decided against it due to the high costs associated with doing so before the debt’s maturity.
“I can’t emphasize enough that we’re still an A-rated security,” Faison said of the city’s drop from an A1 to an A2 rating.
The announcement comes three months after another major rating agency, Standard and Poor’s, looked at some of the same information and reached a different conclusion: retaining the city’s A+ rating – two levels below a prime AAA rating.
A UP city news release Friday noted “it’s not uncommon for rating agencies to reach slightly different rating conclusions based on the same underlying facts.”
Changes in ratings can result from factors such as the fickle nature of rating agencies to the instability of the economy. On Aug. 8, the worst day on the stock market since 2008, S&P downgraded at least two City of Tacoma bonds whose repayments were tied to federal money. They went from AAA to AA+.
Despite the unpredictability, ratings matter because they can raise or lower a government’s cost of repaying new bonds.
University Place’s lower rating will not affect city operations, the city said.
While S&P 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 of the city’s $48 million debt backed by tax revenue, also known as general obligation.
The city took out most of that debt to develop the Town Center project. Moody’s noted UP can’t borrow additional money without going to voters.
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 primarily due to payments on Town Center.
The city is expected to end this year with a balance of $170,000. It has unrestricted money in other funds, including an $860,000 reserve.
Faison noted 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.
Although it might have looked better to Moody’s to refinance the $1 million and keep the money in the general fund, Faison said, “we thought the right thing to do is every opportunity we get, pay down debt.”
Christian Hill: 253-274-7390
christian.hill@thenewstribune.com
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