The city of North Branch addressed its recent bond rating downgrade by national rating agency Moody’s in a press release and at the Monday City Council meeting.
From the city of North Branch
Despite confirmation earlier this year of the city’s Standard and Poors AA- general obligation bond rating, city officials received word on June 4 that a second national bond rating agency has downgraded the city’s rating to a Baa-1 with a negative outlook, a four-notch lower rating than Standard and Poors. The downgrade reflects “governance, financial and economic linkages between the city … and the … Water and Light Commission” and what is perceived by Moody’s as a long-term financial risk that results. They state that future rating reviews of the city will consider the credit quality and self-sufficiency of both the electric and water utilities and their impact on the city’s overall finances.
“We are very disappointed in this action,” Mayor Ron Lindquist said. “The city has taken significant steps to strengthen its financial position. We have a stable and improving position with long-range financial plans in place to continue our progress toward reducing our debt burden and increasing our cash levels.”
Moody’s also downgraded the revenue bonds of the utility. The electric revenue and water revenue bonds were each downgraded to Baa3 with a negative outlook, from Baa2 and Baa1, respectively. Key factors in this action are the limited liquidity (cash) in the electric utility and a coverage factor (how much cash is generated each year to pay debt service) below the covenanted level for the water utility.
Springsted Inc., the city’s financial adviser, feels the rating action is particularly frustrating in light of difficult actions taken by the council in recent years to address the effects of arrested growth, the recession and an admittedly high debt burden.
“The city has made tough decisions and acted responsibly to get its financial house in order,” said Kathleen Aho, president of Springsted. “It seems an unfair reward to receive this downgrade at a time when remedial actions are in place, financial constraint is visible and the positive outcomes are being realized.”
Bond ratings have influence in determining what interest rates communities will borrow at when they sell bonds in the public market. They can also provide helpful outside perspectives on various elements that influence a community’s financial health. While disappointing, the rating report will be reviewed to determine if there is any useful information in it for the city or utility to consider in their ongoing management efforts.
Lindquist called the downgrade “substantial” and said a factor in the downgrade is Moody’s seeing the city of North Branch and the North Branch Water and Light Commission as one entity, rather than two entities that should be rated on their own merits. In the past, the two had been rated separately.
Councilmember Kathy Blomquist said Moody’s also reads council minutes in determining ratings, so past negative comments by the council about the Water and Light Commission might have played a role in the low rating for both.
“If you go through the minutes over the last couple of years, you’ll probably find a lot of derogatory comments about the water and light commission — that we should sell it, that we should fire the commission, that we need to increase it because they’re not doing a good job,” she said, adding that the council should make comments “based on fact.”
Lindquist said the council does make its comments based on fact.
“I don’t think there are any inaccurate facts that have been listed,” he said. “They’re $18 million in debt. The city is in $58 million in debt, and that’s why we’re sitting here trying to solve some of this.”
City Administrator Bridgitte Konrad said the city will be meeting with the Water and Light Commission and contacting Moody’s to hopefully get the city’s rating upgraded soon.
“What we’re trying to do is work on a plan that improves our bond rating and really focus on the things we need to do going forward to improve that rating, both on the city side and the water and light side,” she said.