Moody’s Investors Service downgraded Omaha’s unlimited-tax general obligation debt to Aa1 from Aaa last week, while also cutting its rating on about $40 million of the city’s special tax revenue bonds and $78 million of outstanding special obligation bonds.
Moody’s revised the outlook to stable from negative at the lower rating.
The downgrade comes as Nebraska’s largest city faces a set of operating challenges, including a growing unfunded pension liability and a decline in reserves. At the end of fiscal 2007, Omaha reported a $4.7 million operating deficit and dipped into its reserves, according to Moody’s.
With just under $30 million in its reserves by the end of fiscal 2007, the reserves totaled roughly 12% of the city’s general fund revenue, well below the 33% median for cities rated Aaa under Moody’s criteria. Analysts at the same time praised management’s focus on maintaining a fiscal balance, along with a new spending freeze and additional cuts that could help avoid a projected deficit in fiscal 2008.
Another challenge is Omaha’s unfunded pension liability, which had grown to $426.2 million at the end of fiscal 2007. The liability could continue to grow under the city’s current agreement with the police and fire and general employees’ funds, wrote Moody’s analyst Molly Shellhorn in a report on the downgrade.
“Moody’s recognizes management’s commitment to addressing this issue and believes the city will be able to make incremental progress over the next few years,” Shellhorn wrote. However, “failure to meet actuarially determined pension contributions is not consistent with the expected financial practices of Aaa-rated cities.” On top of its pension liability, the city has a roughly $300 million liability stemming from post-employment health care benefits.
On the positive side, Omaha has a large and diverse $25.3 billion tax base and a growing population as well as several large-scale redevelopment projects in the works that are expected to increase revenue in the future. The city’s debt burden is manageable and its financial position is “adequate” at the Aa1 rating, according to Shellhorn.
Moody’s downgrade came as Omaha planned to come to market with $18 million of new-money GOs, part of its annual borrowing to finance an array of capital projects.
Standard & Poor’s continues to rate the city AAA.
