Cedar Rapids sweats possible loss of top Aaa bond rating

Change in rating methodology could have an impact on the city’s long-held top Aaa bond rating

Rick Smith
Published: March 17 2014 | 7:14 am - Updated: 1 April 2014 | 9:43 am in

Part of the proof that city government here runs a sound fiscal ship has been its ability to maintain the top Aaa credit rating — for 41 straight years.

The top-dog fiscal status, though, may be coming to an end, city officials say.

City Manager Jeff Pomeranz and Finance Director Casey Drew said Moody’s Investors Service, the credit rating service used by the city of Cedar Rapids, has changed its rating methodology that could have an impact on the city’s long-held top Aaa bond rating.

"The city has been an Aaa city based on our financial strength," Pomeranz said. "The strengths of the city’s financial position and the manner in which the city’s finances have been managed are something I think everyone should be very proud of in Cedar Rapids.

"But where we end up on Moody’s rating will depend on Moody’s and its criteria. … It’s not business as usual. There’s a change. And it’s a change in the criteria."

Moody’s has identified 256 local governments across the nation that it has put under review, a group that includes the city of Cedar Rapids.

As it determines a city’s bond rating, Moody’s and its new methodology, Drew said, places greater weight on a city’s debt and pension obligations (20 percent of the rating consideration, up from 10 percent) and less weight on the local economy and tax base (30 percent, down from 40 percent). City government finances (30 percent) and its financial management (20 percent) are weighed as in the past.

The health of Cedar Rapids’ local economy has helped to bolster the Cedar Rapids city government’s credit standing, Pomeranz and Drew said.

Drew said Moody’s "whole new scoring system" will come with standards that, for instance, might require a certain overall taxable valuation for a city or a per capita income of a certain amount in the city, which he said could end up excluding a city from the top bond rating no matter how well the city government manages its finances.

"In the past, Moody’s never really defined thresholds like this," Drew said. "But the new score card is going to help them come up with ranges needed to qualify for a certain rate.

"Overall, what I want to make clear is that this rating is not about (the city’s) finances. … It’s more than just how the city’s finances are doing."

In addition to the city of Cedar Rapids, Moody’s has reported that it will review the bond ratings of 11 other local governments in Iowa. Those are the cities of Ames, Bettendorf, Clive, Davenport, Des Moines, Dubuque, Mason City, Okoboji, Sioux City, Tama County and Clay County. Okoboji, Tama County and Clay County may face possible upgrades to their current bond rating, the others, including Cedar Rapids, possible downgrades, the Moody’s report states.

A Moody’s report on Feb. 5 said Moody’s did downgrade the city of Davenport’s bond rating from Aa2 to Aa3.

Cedar Rapids, Iowa City, Ames and West Des Moines currently are the only cities in Iowa with Moody’s top Aaa bond rating, Drew said.

In Moody’s 10-step "investment grade" rating system, Aaa is best quality, Aa1, Aa2 and Aa3, high quality, A1, A2 and A3, upper-medium quality, and Baa1, Baa2 and Baa3, medium quality. An Aaa rating typically gives a government a lower interest rate when it borrows money.

In fact, Cedar Rapids has had a blemish in its long-held Aaa bond rating the last two years as Moody’s has qualified the rating "with a negative outlook."

A year ago, Moody’s attributed the negative outlook to the role that the federal government with its "weakened credit profile" was playing in the city’s recovery from its 2008 flood. Moody’s also cited the "risk" that is inherent in a city owning a hotel and convention center as Cedar Rapids now does.

City Council member Kris Gulick, chairman of the council’s Finance and Administrative Services Committee, said he isn’t ready to concede the end of the run on the city’s Aaa bond rating.

In May 2013, Gulick, past president of the Iowa League of Cities, said Cedar Rapids was in a "pretty exclusive club" after Moody’s continued the city’s Aaa bond rating for the 41st year in a row. Only two dozen American cities with populations between 80,000 and 200,000 had Aaa ratings, he said then.

On Sunday, Gulick said the city can make a strong case to Moody’s that city government’s financial position has improved significantly in the last year for two reasons. Firstly, local voters renewed the city’s local-option sales tax for 10 years to fix streets so the city does not need to take on new debt for that work. And secondly, the city secured $264 million over 20 years from the Iowa Flood Mitigation Board to help the city build a flood protection system.

"Our financial position really has improved because of those two things," Gulick said.

City Manager Pomeranz said Moody’s will be in Cedar Rapids later this month as the city prepares for its annual bond sale in April or May.

"Our goal is to maintain our Aaa bond rating," Pomeranz said. "So we’re going to have to present our financial position, which we have a great deal of confidence in, and then leave it up to Moody’s to make its determination."

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