The City’s ability to borrow money and pay it back at the lowest possible interest rate took another hit today. The hotel bond is rated as an A. The highest rating is AAA. There are 3 levels of A ratings and the City is now scraping the bottom of the top category.
According to Standard & Poor’s rating definitions, a AA rating differs from the highest rated obligations (AAA) only to a small degree. The obligor’s capacity to meet its financial commitment on the bond is very strong. An A rating is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. The next level, BBB, indicates that adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the bond. Anything below BBB is regarded as having significant speculative characteristics.
The problems with the City’s bond rating began when spending started to outpace revenues, and the City went on a borrowing spree. This started with the borrowing of $127 million for the arena and millions for sewer and water system projects while gambling became more competitive in the state and property tax caps took effect. The City used to hold an AA rating status but was identified by rating agencies as trending from stable to negative last year. This negative trend applies to all bonds or loans taken out by the City except for loans taken out related to the sewer system. Thus far, rate increases have outpaced spending with regards to the sewer system, although that is poised to change as an EPA plan to address combined sewer overflows is approved. Water system bonds and the arena bonds were downgraded from stable to negative.
Now the hotel bond rating demonstrates a further deterioration in how investors view the reliability of the City to repay its creditors. An A rating itself is certainly not a crisis, but the negative trend, as the City sets out to borrow $77 million for the hotel and medical school cannot be ignored. This rating will require that the City’s debts be repaid at a higher interest rate than if the City had maintained its AA rating. It can also create problems with any attempts to refinance the loans to lengthen repayment periods or take advantage of historically low interest rates.
In high school, getting an A is something to cheer about. In municipal bonding, it is not. It solidifies as fact the downward spiral of the City’s borrowing capacity that began five years ago. At a time when revenues haven’t covered the amount spent for nearly four years, it is hard to accept the extra blow of paying 2 to 3 points more in interest than other communities with better credit. The hotel bond allows up to 7% in an interest rate. AAA bond rated cities are paying 4%. The difference between 4% and 7% on a 20 million loan paid over 20 years is 17.2 million in interest versus 9 million in interest. It matters, and an extra 8 million in interest for a struggling City is a huge problem.
Stephanie Brinkerhoff-Riley
3rd Ward City Council Member