Staff Writer
Moody’s
Investors Service lowered Middletown’s bond rating Monday, and city
officials are saying pension obligations and new standards set by the
credit-rating agency are largely to blame.
Moody’s reported that
the city’s credit rating was being downgraded from Aa2, the
third-highest rating on the agency’s 21-level scale, to Aa3. The agency
cited concerns about Middletown’s “deteriorating” tax base and
demographic profile, reliance on economically-sensitive income tax
receipts for the majority of its general fund revenues and the nearly $1
million loan from the general fund to finance Weatherwax Golf Course.
The
rating downgrade means it will cost the city more to borrow money for
future capital projects. Finance Director Michelle Greis said the
ratings drop would have a “minimal” cost impact to the city of an extra
nickle for every $1,000 borrowed moving forward.
“So when we issue
debt, we’ll have to pay a little more in interest,” Greis said, noting
the city still has the fourth-highest rating available.
General
obligation bonds are a financing tool similar to a home mortgage that
cities use to finance large capital projects over a multiple year
period. Such projects include new roads, neighborhood improvements like
sidewalks and curbs, and certain economic development projects.
Bonds
are used when a city’s capital needs exceed the ability to fund these
projects on a “pay as you go basis.” They allow the city to pay for
projects over a longer period of time.
Cities typically pay the
holders of these bonds back through a number of funding sources such as
property taxes, sales taxes and city fees.
A good credit rating lowers the investment risk for lenders and provides the city with a low interest rate.
The
statewide pension system, known as the Ohio Public Employees Retirement
System, was a key reason for the city’s downgrade and could result in
further deterioration of the city’s credit rating, Greis said.
“One
of the new (Governmental Accounting Standards Board) requirements is
due to pensions and unfunded pensions,” Greis said. “In two years, GASB
is requiring that all local governments take on their piece of what
their liability will be.”
What that means for Middletown is it will look like they have more debt than they actually do, she said.
While
the downgrade is a negative reflection upon the city, Moody’s did cite
some strengths in its assessment of Middletown, including the “expected
stability of financial operations despite recent series of fund balance
declines” and “strong management team that is expected to maintain sound
financial reserves going forward.”
City Manager Judy Gilleland
said Moody’s report gave an honest assessment of the city’s financial
picture, but it’s a picture many other local governments are seeing. The
city of Cincinnati also saw its bond rating lowered from Aa1 to Aa2,
because of concerns about its pension systems and continued reliance on
one-time solutions for a structurally unbalanced budget.
“They
emphasized many positive aspects of the Middletown community and our
city organization and also identified those areas in which we know we
have financial challenges,” she said. “Unfortunately many cities across
the nation are seeing a decline in their revenues and resulting change
in their bond rating, Middletown being among them.”
There are
about a dozen factors Moody’s reviews in determining its credit ratings,
including a municipality’s budget management, demographics, and level
of wealth. The agency said there are ways to increase credit ratings,
which include diversifying operating revenues, improving residents’
standard of living and sustaining growth in the city’s tax base.
But
if Middletown’s 15 percent reserve fund balance declines, or there is
“ongoing deterioration” of the city’s tax base or demographic profile,
that could result in more downgrades, according to Moody’s report.
Middletown’s
income and property tax receipts have been on the decline over the past
three years. The city collected $3.4 million in property taxes in 2010,
$3 million in 2011 and $2.7 million in 2012. Likewise, income taxes
dropped from $10.97 million in 2010 to $10.76 million in 2011 and $10.6
million in 2012.
TAXES and you think paying 116,000,000 for school buildings makes sense?
Income taxes are projected to rebound in 2013,
increasing to $11.6 million, while property taxes will remain flat at
$2.7 million, according to the city budget.
Meanwhile, the city is
on pace to subsidize its 36-hole golf course by $357,000 this year. But
Gilleland said “the golf season is still young,” and the city may yet
lower that projected cost if Weatherwax’s receipts are good.