Moody’s downgrades Kent’s bond rating again

The city of Kent’s struggle to keep revenues above expenses took another hit as Moody’s Investors Services downgraded the city’s bond rating for the second time this year.

New York-based Moody’s downgraded the city to a Baa2 rating from A1 and gave the city a negative outlook to the rating for $72.9 million worth of limited tax general obligation bonds. Moody’s provides financial research on bonds issued by commercial and government entities and is considered one of the big three of credit-rating agencies along with the Fitch Group and Standard & Poor’s.

“Disappointed,” said Kent Councilman Les Thomas about the latest rating during a phone interview. “I’m very concerned with the direction we’re going.”

Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics, according to Moody’s.

Kent Mayor Suzette Cooke said the rating “disappointed” her. But it also surprised her.

“Standard & Poor’s just came out a couple of days earlier that they had not changed our A status,” Cooke said during a phone interview. “It was quite a surprise to see the difference.”

Standard & Poor’s Ratings Services gave Kent an A-plus on its general obligation bonds. The company’s A-plus rating means the city has “strong capacity to meet financial commitments, but is somewhat susceptible to adverse economic conditions and changes in circumstances.”

AAA and AA are the highest ratings by Standard & Poor’s and D is the lowest.

Moody’s said Kent’s “downgrade reflects the city’s severely deteriorated financial position and stressed medium-term liquidity, as recurring operating deficits depleted cash and reserve levels across all governmental funds. Additionally, the city faces an outsize funding shortfall from recent reductions in sales and real estate transfer taxes dedicated to limited tax debt service.”

Moody’s downgraded Kent in February from Aa3 to A1.

In Moody’s terms, an Aa3 rating means that the city has a very strong ability to meet its financial commitments while a rating of A1 represents that the city has a strong capacity to meet its financial obligations, but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.

The Moody’s ratings range from a top mark of Aaa and then drop to Aa, A, Baa, Ba, B, Caa, Ca and C. Numerical modifiers 1, 2, and 3 also are added to letter-ratings with 1 the highest.

With the rating drop of Kent to a moderate credit risk, Moody’s also took into account the city-owned ShoWare Center’s total operating losses of more than $1.3 million in the three years since the arena opened in 2009. The city uses capital budget funds to cover the losses.

“The rating is further pressured by the long-term need to honor an unrated parity limited tax contingent loan agreement on sales tax and revenue bonds issued by a struggling city arena enterprise,” Moody’s said.

Thomas said he expects job cuts might be needed to get the city’s fiscal health in order.

“The options are to increase revenue and decrease expenses and I see revenues decreasing,” Thomas said. “Most of the expenses are personnel. Services are going to have to be cut. We need to face the music and make decisions.”

City officials estimate that sales tax revenue will be $880,000 or 5.3 percent below budget for 2012. Despite that drop, the city expects to finish the year with a fund balance of $1.7 million because of slight increases in tax revenue from building permits, plan check fees and recreation fees as well as expenses coming in about $853,000 below budget.

The City Council earlier this year referred a property tax levy increase to voters on the November ballot to help pay for street and park repairs. The council also approved hiring a consultant to help find about $2 million in cuts in the city budget. That report is expected to be released in November.

But those steps didn’t seem to impress Moody’s.

“The negative outlook incorporates Moody’s expectation that the city’s financial flexibility will continue to be challenged as it diverts a substantial portion of future operational cash flows to resolve deficits and internal debts throughout governmental funds. The outlook also reflects uncertainty regarding the city’s ability to implement its six year recovery plan, which includes additional proposed revenue from an approved utility tax increase, seeking new business taxes, a voted levy lift, as well as increased budgetary discipline.”

Cooke said the six-year plan will be part of the 2013-14 budget she presents in October to the council. She said Moody’s is right that the city has too much debt.

“We need to take care of our debt burden, which is holding us down,” Cooke said. “We already had a lot of debt when I became mayor. But this recession kicked us in the gut and the teeth in order to pay down the debt load.”

Cooke said her budget proposal will include some type of business tax to help bring in more revenue. She will disclose that proposal during her budget presentation.

“We need to diversify our tax base,” she said.

Kent is helped by having a large, relatively resilient property tax base as well as a stable local economy benefitting from location in the Seattle metropolitan area, Moody’s noted.

Moody’s reported the city could move its rating up with improved internal liquidity and available reserve levels; increased Public Facilities District (which oversees the ShoWare Center) self-sufficiency and decreased subsidy of arena debt and operations; and successful operating adjustments and revenue initiatives to align recurring expenditures with recurring revenues.

Thomas, who chairs the council’s Operations Committee that oversees the budget, placed the item on the committee’s agenda Tuesday after talking with Councilwoman Jamie Perry to start discussion about getting the city’s rating back up.

“We’ve made big cuts, we need to make more,” Thomas said. “We can’t wait until spring. Now would be better.”