BRADENTON, Fla. - Moody's Investors Service dropped Covington, Ky.'s general obligation bond rating two notches to Baa1 citing a history of deficit spending by the city, whose finance director recently pleaded guilty to stealing $800,000.
The rating downgrade from A2 affects $2.7 million of outstanding debt rated by Moody's, which said it also considered another $44 million of the city's debt in its credit analysis. The outlook is negative.
"The downgrade to Baa1 reflects a history of deficit spending that has led to an extremely limited financial position with no near-term plans to rebuild reserves, which is compounded by the city's reliance on economically sensitive revenue streams," analyst Joshua Travis said March 20.
The rating also considers recent administrative and personnel changes implemented to help prevent future theft of city resources, he said.
Former finance director Bob Due, who was indicted on 15 counts, pleaded guilty March 13 to abuse of public trust, theft by deception, unlawful access to a computer, and 12 counts of criminal possession of a forged instrument.
Following a special state examination and a report about Covington's finances, Kentucky Auditor Adam Edelen said the former director "had complete control over the city's financial systems, allowing him to steal at least $793,000 over the past decade."
"The report boils down to this: One individual had unfettered access to millions of taxpayer dollars without a single person looking over his shoulder for well over a decade," Edelen said in a release at www.auditor.ky.gov. "That this could happen for that long in the 5th largest city in Kentucky is astounding and frankly inexcusable."
Auditors reviewed more than 66,000 checks, and unveiled a scheme that allowed the former finance director to write 68 checks to himself, his spouse, his aunt, and a vendor under his control, said Edelen. Due is scheduled to be sentenced April 17.
Moody's mentioned the theft in its March 20 downgrade, and said that Covington has replaced the finance director and approved several new positions, including an assistant finance director, an internal auditor, a revenue manager, and an information technology director.
"The changes reflect management's commitment to preventing future occurrences and ensuring that public funds are properly managed going forward," Travis said. "The city expects that it will be able to recover most of the money that was stolen, which will be added to existing general fund balance."
In downgrading the city's GO rating, Moody's also said it considered the city's large tax base, below average socioeconomic indices, variable-rate debt exposure, and elevated pension burdens.
Moody's said it also considered the city's favorable location in northern Kentucky, along the Ohio River, and across from the Cincinnati.