116 3rd St SE
Cedar Rapids, Iowa 52401
A rating agency Tuesday downgraded $194 million of Coralville municipal debt, citing the city's heavy borrowing against tax increment financing funds and the need to subsidize its city-owned hotel-convention center.
Moody's Investor Services lowered ratings on four categories of municipal debt. It maintained a negative outlook on Coralville's debt, indicating the risk of another downgrade over the next 12 to 24 months.
The outlook includes the expectation that the city may further borrow against its tax base and tax increment districts “given a lack of policies regarding debt management and debt issuance,” the rating agency wrote.
While the revised ratings remained on the investor quality end of Moody's scale, the trend has negative implications for borrowing costs as the city continues to finance its costly Iowa River Landing redevelopment project.
The rating referred to the need subsidize the city's $58.6 million Coralville Marriott Hotel and Convention Center, which opened in late 2006 in its Iowa River Landing development.
“The negative outlook reflects the potential risk from the hotel, which could require unexpected contributions for debt service payments or improvements beyond what the city has set aside in the near to medium term,” the memo said.
Coralville's reliance on tax increment financing revenue from the Coral Ridge Mall and surrounding retail areas to fund the Iowa River Landing, where it is developing its own retail project around a microbrewery and department store, has generated public criticism and a call for the state to reform its TIF laws.
Coralvile City Council member Bill Hoeft said Wednesday he had not received the specifics of the downgrade, although he knew it had been received.
Hoeft said the financial performance of the city's hotel-convention center had been affected by the economic downturn in 2008 and effects of the 2008 flooding on business. But he said the city build the hotel with a significantly lower number of rooms than studies suggested was feasible, and there are hopes that business will improve.
Much of the city's debt came from Iowa River Landing, Hoeft said. City Council members are cognizant of the debt burden and “plans are in place to repay the debt pretty aggressively,” he said.
“While we are 100 percent behind the Iowa River Landing Project, we are cognizant of the debt and want to pay that down,” he said.
One of the plaintiffs in a lawsuit challenging reliance on public funds to develop Iowa River Landing said the downgrade memo validates the group's concerns about the city's reliance on public debt to develop the area.
“We think there's a better way,” said Kevin O'Brien, a McDonald's franchisee. “There should be more private money invested and less public money.”
If the city and citizens work together, O'Brien said, they should be able to identify solutions that don't involve large amounts of debt.
Coralville City Administrator Kelly Hayworth and City Finance Director Terry Kaeding were out of the office Wednesday, and efforts to reach other city officials were not successful. City leaders have previously said that the hotel-convention center was projected to lose money in its early years. They said the hotel keeps conventions in the region that might otherwise leave the state.
Moody's lowered its rating on $63.5 million of GOULT (general obligation unlimited tax rating) debt to A3, (upper medium grade) from Aa2 (high quality and very low credit risk).
The Moody's rating on $54 million of annual appropriation general obligation bonds and $65 million of certificates of participation was lowered to Baa2 (medium grade with some speculative elements) from A1 (upper medium grade and low credit risk).
Finally, Moody's lowered short-term rating on its Series 2010H and series 2011G Bond Anticipations notes from the MIG 1 (superior credit quality) category to MIG 2 (strong credit quality). Those notes totaled $11 million.
A four-notch downgrade, such as the one on the GOULT debt, “does not happen very often,” said David Johnson, a Moody's spokesman.
The rating memo included some positives, noting that it incorporates “the city's strong economy and ongoing growth in property valuations.”