Mobile will maintain an Aa2 credit rating, but the city’s outlook was revised to negative, according to a report released by Moody’s Investors Service on Friday afternoon.
The action concludes a review for possible downgrade that Moody’s began on April 28 and means the city’s $292 million in obligation bonds are secured “by the city’s general obligation, limited ad valorem tax pledge,” according to the report.
“We welcome today’s decision by Moody’s to confirm the City of Mobile’s Aa2 tax rating,” Mayor Sandy Stimpson said in a statement. “We have worked closely with Moody’s to address the concerns about the city’s declining financial health in fiscal 2012 and fiscal 2013. More importantly, we have worked to implement a recovery plan that puts Mobile on sound financial footing going forward.”
Moody’s wrote that they revised the city’s outlook to negative, not because of concerns over future financial planning, but rather because of problems in fiscal years 2012 and 2013, related to the use of reserves.
“The negative outlook reflects the rapid deterioration of general fund liquidity and reserves … as a result of sizable fund balance appropriations that were used to offset rising fixed costs, various expenditure overruns and fluctuation in sales tax revenues,” the report reads.
Even though the new administration worked to amend the 2014 budget, implemented spending cuts, is looking at an increase in the fund balance by the end of the year, and despite a projected increase in reserves in fiscal 2014, Moody’s wrote, the city still remains “challenged in building general fund balance to levels more in line with similarly rated peers due to growing fixed costs, funding for capital improvements and other general government needs.
“Todays’ decision is a validation of our commitment to get control of city spending — an effort that started when I took office and continues each day across every city department,” Stimpson said.
A downgrade to the general obligation limited tax rating would’ve resulted in higher interest rates on any future debt service, as well as an increase in the city’s existing debt, said Executive Director of Finance Paul Wesch.
“It could’ve made it so we couldn’t borrow as much money, or make debt service more expensive,” he said. “Our current bond issues would’ve also been affected.”
Moody’s highest rating is an Aaa, Aa1 is a step down from that and the city’s Aa2 is another step down. Mobile, for a number of years, was an A1 rating, Wesch said. Moody’s lowest rating is a C.
Moody’s wrote that the rating could go up if the city shows an ability to maintain structural balance, there’s a sizable increase in reserves to levels more in line with the current rating category, or a reduction in debt burden, the report reads.
The rating could go down if there’s a decline in reserves, an inability to meet fiscal 2014 projections, significant contraction in tax base, or an increase in tax burden, the report reads.