CHICAGO -- Ferguson, Mo.'s already junk-level rating was placed on review for downgrade because of threats to the city's solvency.
Moody's Investors Service placed Ferguson's $16.5 million of debt on review late Friday. The action affects $6.7 million of Ba2-rated 2011 general obligation bonds, $8.4 million of Ba3-rated 2013 certificates of participation, and $1.5 million of B1-rated 2012 COPs.
Moody's acted after the U.S. Justice Department filed a lawsuit in February, marking the latest setback in Ferguson's struggle to recover from a controversial police shooting in 2014. The department accused Ferguson of policing and municipal court practices that violate constitutional and federal civil rights. The lawsuit followed the Ferguson city council's decision to water down a negotiated consent decree.
Moody's subsequently released a corrected version of its report Tuesday, though none of the ratings data changed.
DOJ launched a patterns and practice probe of the department following the August 2014 shooting to death of a young, unarmed African-American man, Michael Brown, by then police officer Darren Wilson, who is white.
The event triggered protests in Ferguson and around the country.
Moody's said its rating concerns are driven by the uncertainty of the potential financial impact of litigation costs from the lawsuit and the price tag for implementing the proposed DOJ consent decree.
"We believe fiscal ramifications from these items will be significant and could result in insolvency," Moody's analysts said. "During the review period, we expect to obtain additional detail on the city's current financial position, near and medium term cash flow projections, as well as financial strategies for addressing the consent decree-related costs."
The report underscored that even before accounting for costs associated with the DOJ investigation, the city acknowledged in its 2016 budget that it could become insolvent if it failed to address deficits and rapidly dwindling reserves.
The rating agency will be watching closely how two ballot proposals fare in the upcoming April election. They would raise the city's ad valorem taxes and introduce a new economic development sales tax.
"Passage of the April ballot initiatives is integral to management's proposed solution to close the existing budget gap. Absent passage of these initiatives, city management has indicated a balanced budget will be achieved with reductions in force," Moody's said.
Officials of the city northwest of St. Louis did not have an immediate response on the corrected version of the Moody's report.
U.S. Attorney General Loretta Lynch announced the lawsuit one day after the city council refused to adopt all terms of a consent decree reached after lengthy negotiations, notably rejecting a provision that would apply the decree's requirements to any policing entity.
The city, which once had a healthy balance sheet and carried an Aa3 rating, has struggled to recover from reduced fine collections and other litigation.
Federal investigators released a scathing report in March that concluded Ferguson's focus on generating fine revenue as opposed to public safety, together with racial bias, led to illegal practices.
Since the shooting, the city has implemented changes limiting court fine collections and adopted policing changes but the lawsuit says they are "insufficient to eliminate the pattern or practice of unconstitutional conduct and ensure it will not recur" without an enforceable court decree in place.
Moody's dropped the city to junk last September.
The city has estimated it would cost between $2.1 million to $3.7 million to implement the consent decree reforms in the first year. City documents put the price tag at $1.8 million to $3 million in the third year and beyond. The city operates on a $14.5 million budget.
The city's options are limited due to constrained revenue raising ability and its stagnant economy.
Missouri local governments may file for Chapter 9 bankruptcy protection by an action of the local governing body without sign-off or approval from any other agency, although the city has not indicated plans to file.
The city said in a statement officials “recognize the seriousness of this report, as well as this overall challenging time in Ferguson. We continue to work hard to improve the financial condition of the city, and believe the passage of two ballot initiatives in the April 2016 election would help tremendously. We are continuing to explore all options to restore our financial health and long-term stability.”