Ratings agency downgrades Coralville bond ratings again

CORALVILLE – A ratings agency has downgraded several bond ratings for Coralville, continuing a trend from recent years and coming during an ongoing debate over the city's financial practices.

Lower ratings mean higher interest rates for the city. Such ratings also are often viewed as a measure of a local government's financial health.

A member of a group that has been critical of how the city does business said the report from Moody's Investors Service does not come as a surprise.

'It's a downward trend. And I think up to this point city officials have been kind of dismissive about it, and I think this is kind of a wake-up call,' said Tom Bender, a developer with property in Coralville and a member of Citizens for Responsible Growth and Taxation.

Moody's last Friday issued several ratings downgrades for Coralville, including its general obligation unlimited tax rating, tax increment financing revenue debt, sewer enterprise revenue and water enterprise revenue.

The action follows a string of rating reductions for Coralville by Moody's in the past few years. Criticism of the city's debt level and its use of tax increment financing has increased in that time, particularly following the millions of dollars the city gave to Von Maur in 2011 to build a department store in town.

Tony Roetlin, the city's finance director, said city staffers and elected officials take the downgrades seriously and will look at a 'host' of strategies to try to bring the ratings back up. He said it would be premature to say how that may be done.

He also said the Moody's ratings are not the sole indicator of a city's financial well-being.

'It's one element, so that opinion on the finances doesn't necessarily mean bad decisions were made or Coralville is a bad place to live or anything like that,' said Roetlin.

However, the ratings downgrades will have negative financial consequences for the city. Much like a person, credit ratings affect the interest rates paid by a local government.

The city's outstanding debt – it was the third-highest among Iowa towns last June 30 at nearly $279 million – played a key role in Moody's decisions. The downgrade of the general obligation unlimited tax rating 'reflects the city's markedly elevated debt burden and highly leveraged TIF districts, with only limited financial cushion to shield against future stress,' according to a Moody's report.

That rating, abbreviated as GOULT, is the most important one, with the other downgrades flowing from it.

The GOULT rating has dropped six notches since April 2012 and is now to Baa2, with a negative outlook. That's a significant drop in a short period of time, said David Jacobson, a Moody's spokesman.

At Baa2, Moody's considers the city's financial obligations to be a moderate credit risk for investors. That's two notches above what is unofficially termed junk status.

Coralville also had two short-term ratings for bond anticipation notes downgraded to what is known as MIG 3, which Jacobson said is low for a note. And he pointed out that all of the new ratings have negative outlooks.

"Which means there's downward pressure on all the ratings, and there's a chance they could be downgraded again," he said.

Moody's also takes Coralville to task for issuing debt for what the agency characterizes as non-essential government purposes. That includes the city-owned Coralville Marriott Hotel and Convention Center, Brown Deer Golf Club, the Coralville Center for the Performing Arts and Backpocket Brewing.

The report said the city is an 'outlier among local governments nationwide' for its ownership stake in those enterprises and the level of risk to which they expose the city.

It also notes that the city has more projects in the works, including a possible parking ramp and the purchase of more retail space.

'The city's continued investment in economic development projects overshadows recent progress made to reduce its debt burden and restore government-wide liquidity and is a key factor in this downgrade,' the report states.

Mayor Jim Fausett said Coralville plans to reduce its debt as quickly as is feasible. He also said that while the ratings downgrades are a concern, he believes the projects cited by Moody's are good for the city.

'I guess it's not enough of a concern that we have pulled back in our horns, so to speak, and are afraid to do our projects as planned,' he said.

Doug Paul, another Citizens for Responsible Growth and Taxation member, compared the city to a drug addict who refuses to acknowledge he has a problem.

'These downgrades are extreme and they are going to get worse unless the City Council puts a stop to the abuses,' he wrote in an email.