Coralville gets recommendations to improve bond rating

City has been criticized for high debt, financial incentives to attract business

Gregg Hennigan
Published: January 28 2014 | 6:50 pm - Updated: 29 March 2014 | 2:46 am in

Coralville has an image problem, and fixing that could benefit the city financially, a consultant said Tuesday.

To try to help, Barry Fick of Sprinsted Inc., based in St. Paul, Minn., delivered recommendations to the City Council for strategies and policies for Coralville to improve its bond rating.

The city hired Fick’s firm last summer following several downgrades to Coralville’s bond rating. The city also has been criticized locally for its high debt and its use of financial incentives to attract businesses.

Coralville’s main rating with Moody’s Investors Service dropped six notches between April 2012 and May 2013 and was given a “negative outlook.”

The ratings are similar to a person’s credit score and are often viewed as being indicative of financial health. A lower rating means higher borrowing costs for a city.

Moody’s marked the city down for its high level of debt and its financial involvement in what Moody’s considers non-essential government purposes, including a hotel, golf club, performing arts center and brewery.

Fick, however, said he thought the downgrades were more a result of Moody’s perception of Coralville’s financial situation, rather than a problem with how the city does business.

Coralville has just 19,000 residents, and ratings agencies view it as a small town. But it is more of a regional center, he argued, with its retail offerings and the nearby presence of the University of Iowa Hospitals and Clinics.

The latter, he said, helps sell hotel rooms, and a UI medical building in the city’s Iowa River Landing district draws visitors to stores there.

To help change that perception, two analysts from Moody’s were invited to tour the city in November.

Fick’s recommendations also indicate the city can take action on its end, however. He said the city already informally does much of what he suggested, but formalizing them will increase transparency.

“The policies really require that the city have more of a written record of various things,” he said.

They include:

  • Create a debt identification model. The city has been using informal models to assure it has sufficient funds to pay off debt, but that planning has not always been fully clear to rating agencies and others, according to Fick.
  • Make enterprise funds “closed.” Enterprise funds include services for which the city charges a fee. The ability to transfer money from an enterprise fund to another city fund is called an “open” fund structure, and Fick said credit rating agencies do not like that because it reduces overall financial transparency and can make underperforming funds appear stronger than they are.
  • Adopt a policy requiring various city funds maintain a minimum level of liquidity. This would let the city offset unanticipated cash shortfalls or expenses, according to Fick. He also suggested the city adopt a policy requiring each tax increment financing project to have a minimum fund balance to ensure there is enough money to pay off the debt if there is a delay in a TIF payment or the value of the property declines.
  • Adopt a policy requiring the city to meet certain criteria used by credit rating agencies.
  • Adopt formal policies covering debt, economic development, tax increment financing and investments.

City Administrator Kelly Hayworth and Mayor John Lundell said the City Council will take up the recommendations at a future meeting, probably after its wraps up its work on the city budget a few weeks from now.

“Since we asked for the recommendations we should seriously consider implementing them,” Lundell said.

Hayworth does not foresee any problems with that, but city officials will need to look at the details of each one.

“I think all of the policies are doable,” he said.

Fick said the goal should be to get the “negative outlook” designation from Moody’s changed in a year and then have the bond rating increased over the next couple of years.

“It’s going to take some time to get the credit rating back up to normal,” he said.

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