CHICAGO – Ferguson, Missouri's bond ratings fell deeper into junk territory amid the fiscal strains of dealing with fallout from a controversial 2014 fatal police shooting.
Moody's Investors Service downgraded Ferguson's $6.3 million of general obligation bonds one notch to Ba3 Tuesday, leaving it three levels below investment grade. The city's $8 million of certificates of participation from a 2013 issue were lowered to B1 and $1.2 million from a 2012 issue was lowered to B2. A negative outlook was assigned.
The actions conclude Moody's review of the credit launched in February. The downgrade follows the city's mixed ballot results in which voters approved a sales tax for economic development but rejected a property tax hike.
The city asked for the tax hikes to fund rising costs in the wake of the police shooting of Michael Brown in 2014. Brown, an African-American, was killed. The white police officer later resigned.
City officials said both taxes were needed to tackle a deficit and the costs of financing police and municipal court reforms in a consent agreement the city recently reached with federal authorities.
"The downgrade reflects the continued pressure on the city's finances from a persistent structural imbalance and incorporates the recently approved US Department of Justice consent decree, projected to increase annual general fund expenses over the next several years," Moody's said.
The DOJ launched a probe of the city's policing tactics and court practices after the shooting. The city estimates the agreement's implementation cost in the first year could run as high as $1.5 million with costs falling under $1 million in subsequent years.
Analysts said the April 5 election results were also a factor as "both ballot measures were integral to city management's proposed solution to close a large general fund budget gap that existed before accounting for the additional consent decree costs."
Moody's remains concerned over the further balance sheet erosion given the city's limited revenue options to address its red ink and the agreement's costs. The city has said it will cut spending. Economic deterioration or substantial liabilities from pending litigation could also drive a downgrade as well as any suggestion that the city would default or pursue Chapter 9.
The certificates could fall further depending on how Moody's revises its methodology on rating state and local government lease-backed, annual appropriation and moral obligations. That comment period closed last December.
Voters shot down a proposed $0.40 per $100 of assessed value property tax hike that would have generated $640,000 annually, or 22.6% of the city's projected budget deficit. In contrast, voters approved a 0.5% sales tax hike for economic development. It's expected to raise about $1 million per year, or 28.2% of the deficit. The city operates on a $14.5 million budget.