Coralville's fiscal struggles drove Moody's Investors Service to sharply downgrade the Iowa city's water and sewer revenue bond ratings.

Moody's last week dropped its rating on the city's water enterprise revenue bonds by three levels due to close relationship and intermingling of funds between the city and enterprise system.

The agency lowered its rating on $1.5 million of debt down to A3 from Aa3 and warned of further action by assigning a negative outlook. The bonds are secured by net revenues of the system.

"The utility is an open-loop system, which allows fund transfers and loans between it and the city. Such support of the city, which has occurred in recent years via loans from the water enterprise to other funds, limits the system's ability to maintain adequate reserve levels," Moody's said.

The system also has limited liquidity with essentially no unrestricted cash. The system's credit benefits from a favorable service area near Iowa City, home of the University of Iowa, and an unlimited ability for rate increases.

Moody's also downgraded to A3 from A1 its rating on Coralville's sewer bonds and dropped its short-term rating to MIG 2 from MIG 1. A negative outlook was assigned.

The city has $4.4 million of sewer system bonds and $2.5 million of short-term notes.

Debt service is secured by the net revenues of the system.

"The downgrade to A3 primarily reflects the system's interrelationship with city, which is highly leveraged, has limited liquidity and is exposed to significant enterprise risk," Moody's analysts wrote.

The MIG 2 rating reflects analysts' expectation that the city will continue to experience satisfactory capital market access in order to redeem its short-term notes and bank loans.

Moody's earlier this year downgraded Coralville's unlimited-tax general obligation rating to A3 from Aa2, annual appropriation GO bonds and certificates of participation to Baa2 from A1, and short-term rating on the Series 2010H and Series 2011G bond anticipation notes to MIG 2 from MIG 1.

The city has $63.5 million of outstanding long-term unlimited-tax GO debt, $54.4 million of outstanding annual appropriation GO debt, $65.1 million of outstanding certificates of participation, and $10.6 million of outstanding short-term Bans backed by Coralville's GO pledge. The outlook remains negative.

The past downgrades reflect the underperformance of a city-owned hotel, which has not met its original cash-flow projections, leading to reliance on the city's highly leveraged mall tax-increment fund for debt service payments.

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