MOUNT WASHINGTON - When Mount Washington officials received word recently that Moody’s Investors Service downgraded $7.4 million in city general obligation bonds they were astonished.
Adding insult to injury, the credit rating agency issued a pointed statement criticizing the city’s handling of its finances, which city officials perceived as baseless.
“The downgrade reflects the city’s relatively stagnant tax base, weak financial management practices, and unresolved internal controls,” according to the recent statement issued by Moody’s.
“(City Treasurer Peggy Brinkman) and I spent all day fluctuating between disbelief, anger and heartbreak at the comments made by Moody’s,” said Mount Washington Mayor Joetta Calhoun.
“I have not seen the rating report from Moody’s and am bewildered by the negative language.”
Moody’s announced the downgrade three months after the Mount Washington City Council voted to consolidate and refinance two bond issues.
Financial adviser Joe Lakofka of Lexington-based regional investment banking and securities brokerage firm Ross, Sinclaire & Associates said Moody’s has rated the municipal bonds since they were first issued in 2002.
The city sought credit ratings on the bonds shortly after the council decided to refinance in order to get a lower interest rate.
In addition to performing a financial analysis based on Mount Washington’s 2011 audit, a Moody’s representative spoke to Lakofka and city officials in a conference call.
During the call, Moody’s analyst Nathan Phelps asked city leaders about financial reporting, taxation and the overall financial shape of the city.
Once the interview was over, Moody’s’ rating committee reviewed the analyst’s findings and the information provided during the conference call.
Three months later, Moody’s lowered the rating on the city’s bonds from Aa3 to A1.
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk. Obligations rated A are judged to be upper-medium grade and are subject to low credit risk, according to Moody’s Web site.
The bonds were originally rated A2 and were upgraded when Moody’s recalibrated all municipal debt to AA3 in 2010.
When asked how the downgrade could affect city bonds, Moody’s spokesman David Jacobson said if the city issues new debt it may have to pay a higher interest rate on that debt.
Additionally, he said current city bond holders could see the value of their bonds go down.
As for exactly why the city bonds were downgraded, Jacobson couldn’t say, but he did say that the rating is under review due to insufficient information.
Jacobson said if adequate information is not obtained within 30 days, Moody’s will take the appropriate rating action, which could include additional rating pressure and/or withdrawal of the rating.
Whatever course of action Moody’s pursues is inconsequential to the city at this point because Ross, Sinclaire & Associates has already secured a higher bond rating from Assured Guaranty.
“The facts are Mount Washington will be refinancing the 2002 bonds in the next 30 days. The bond rating from Moody’s will not be needed,” Calhoun said.
Lakofka said the interest rate is expected to drop from 4.2 to 2.2 percent, which would save the city around $400,000 over the course of the 10 year repayment term.
He said the fact that Assured Guarantee is backing the bonds and that the city can get such a low interest rate shows it’s in good financial shape and has excellent credit.
Lakofka speculated that the city’s tax base may have contributed to Moody’s downgrade, but he said there’s only so much a city can do to control revenue.
“You can’t hold the city accountable for things out of its control,” he said. “The best evaluation of the city is seeing that they’re doing what’s best for the taxpayers and getting a great interest rate.”
Lakofka added that even with the downgrade, Moody’s rating on the city’s general obligation bonds is good.
He pointed out that Mount Washington has the same Moody’s general obligation bond rating as 11 other Kentucky cities, which include Jeffersontown, LaGrange, Leitchfield, Pikeville, Richmond and Somerset.
“Looking at one rating doesn’t mean a lot unless you look at other cities and the way they’re rated,” Lakofka said. “Of all Kentucky cities, Mount Washington ranks in the top 10 percentile.”
Calhoun said City Hall expected the downgrade because rating agencies like Moody’s have tightened their review process since the financial crisis.
What they weren’t expecting was the negative press the city received following Moody’s announcement of the downgrade.
The press release from Moody’s said the downgrade “reflects the city’s relatively stagnant tax base, weak financial management practices, and unresolved internal controls.” Pay attention.
“Since I have been in office the city has received only squeaky clean audit reports from the city’s independent auditor. Our latest audit did not even list recommendations for any needed improvement,” Calhoun said. “It concerns me that people are reporting on the issue without investigating, but most of all it concerns me because they’re hurting the city’s reputation.”
In his report of the city’s 2011 audit, Bob Ryan identified no deficiencies in internal control over financial reporting that he considered to be a material weakness.
“I think the bottom line is that we wouldn’t be able to get lower interest rates if we didn’t have proven strong financial management and internal control practices and that is supported by our auditor’s report,” Calhoun said.