CHICAGO - Ferguson, Mo. lost its investment-grade rating Thursday when Moody's Investors Service dropped its rating four notches in a sign of the financial fallout from the fatal 2014 police shooting of Michael Brown.
Moody's dropped the city's general obligation rating to the highest junk level of Ba1 from Aa3 and its lease revenue ratings to Ba2 and Ba3, from A1 and A2, respectively.
The downgrade "reflects severe and rapid deterioration of the city's financial position, possible depletion of fund balances in the near term, and limited options for restoring fiscal stability," Moody's wrote.
The action impacts $6.7 million of outstanding GO bonds, $8.4 million of certificates of participation from a 2013 issue, and $1.5 million of 2012 certificates. The COPs are payable from available revenue and subject to appropriation. The credits remain under review for further downgrade or withdrawal due to a lack of information.
The once plentiful reserves of the city northwest of St. Louis are dwindling and the city could be headed toward insolvency as soon as 2017, Moody's said.
"Key drivers of this precipitous drop are declining key revenues, unbudgeted expenditures, and escalating expenses related to ongoing litigation and the Department of Justice consent decree currently under negotiation," Moody's wrote.
"We believe fiscal ramifications from these items could be significant and could result in insolvency," Moody's wrote. "We expect additional detail within the next few months as to the city's final audited fiscal 2015 results as well as options and financial strategies for addressing these looming costs."
A March report from Justice's Civil Rights Division found the Ferguson police department engaged in unlawful and discriminatory practices partially driven by the city's reliance on court fine revenue to support its budget. Advocacy groups have filed a series of lawsuits challenging municipal ticketing operations.
Between draws in fiscal 2015 which ended June 30, and fiscal 2016 projections, city reserves are expected to fall by 70% compared to audited fiscal 2014 levels.
The declines mark what Moody's called a severe departure from the city's prior financial profile which was bolstered by positive operating results through 2013. The city expects to post a $2.6 million shortfall for the previous fiscal year.
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 rating also factors in the city's moderately sized tax base with a trend of declining assessed valuation, below average socioeconomic profile, and average debt burden.
Moody's said it continues to seek information on the city's near- and medium-term cash flow projections, legal costs, and the terms of any insurance coverage that could reimburse the city for settlements and related expenses. The city has yet to provide the requested information, voicing a reluctance to discuss information that may impact ongoing litigation and negotiations, Moody's said.
The Justice Department conducted the review after the shooting of Brown, who was unarmed, by white Ferguson police officer Darren Wilson, in August 2014. It prompted massive protests and riots that drew national attention and damaged dozens of city properties.
The killing of Brown focused attention on aggressive policing tactics and the heavy reliance on court fines to prop up local government budgets. Critics say stiff court fines imposed by local governments like Ferguson's result in aggressive policing tactics that disproportionally target low-income and minority residents.
Along with taxes and other revenue streams in 2010, the city collected over $1.3 million in fines and fees collected by its court. For fiscal year 2015, Ferguson's city budget anticipates fine revenues to exceed $3 million - more than double the total from just five years earlier, according to the report. The increase was not tied to crime figures.
The city has said it's taken action to with new laws to limit the use of revenue generated by court fines and fees to 15% of its budget. The city has also revised various policies on collections.
The Missouri State Auditor's office launched probes into 10 local governments' use of court fines to ensure they comply with the law and plans more.
Most Missouri local governments face new restrictions on the use of municipal court fines under legislation signed in July by Gov. Jay Nixon. A Nixon-appointed commission recently issued a report that suggested a sweeping overhaul of police tactics and court fine practices.
The city said it expected to issue a statement on the downgrade later Thursday or Friday.