Foxconn obligations bring downgrade to Wisconsin village
CHICAGO -- Mount Pleasant, Wisconsin’s financial obligations to the new $10 billion Foxconn Technology Group manufacturing plant drove a one-notch downgrade and warning of potential further rating erosion ahead.
“Mount Pleasant is poised for significant growth and development as the location for the new Foxconn manufacturing facility, but is exposed to substantial associated risks as a result,” Moody’s Investors Service said of its decision to lower the rating to Aa3 from Aa2 Thursday.
“Local borrowing to support the project, both directly and indirectly, has resulted in a high overall debt burden, which will remain a key credit challenge for the village,” analysts added.
The southeast Wisconsin village between the Illinois border and Milwaukee faces additional risks associated with the project due to uncertainty over the enforceability of guarantee provisions in the event of a breach of development obligations. The risks is offset somewhat by the village’s growing tax base, healthy fiscal position, and moderate pension burden.
Even after the downgrade, a negative outlook was assigned reflecting “a significantly increased overall debt burden, which could pressure the village’s financial position in the event revenues generated by the Foxconn development fall short of expectations.”
Mount Pleasant -- home to about 26,000 residents – pushed to house the development for the promise of new economic activity from commercial and residential development and job growth expected from the facility that will manufacture LED screens.
Under an agreement with the village and Racine County, the company guarantees to create or pay taxes on a minimum incremental valuation of $1.4 billion by 2023. Mount Pleasant has demonstrated strong valuation growth between 2013 and 2018, with the $2.9 billion tax base averaging solid annual increases of 4.7%, Moody’s said.
Although it’s carrying a negative outlook due to the risks, the village's financial position is expected to remain stable due to prudent fiscal management which has resulted in positive operations and healthy reserve levels of $8.8 million, or 38.5% of revenues in 2017.
The village established a tax increment district, or TID, for the Foxconn plant in November 2017 with both the village and county acquiring land within the area with the village responsible for a significant amount of infrastructure and public safety.
“While direct debt remains moderate, the village's overall debt burden has risen significantly given local efforts to support economic development,” Moody’s said.
The village has $35.5 million of general obligation debt that’s impacted by the downgrade but is exposed to approximately $355.3 million in overlapping debt related to the Foxconn development, which includes village tax increment district and sewer debt as well as county borrowing.
In July, the village privately placed with Morgan Stanley a $83 million sewer revenue bond anticipation note to finance the extension of sewer service within the Foxconn TID. The debt matures in 2022, but the village plans to refund the BANs with long-term sewer system revenue bonds through the state's Clean Water Fund Loan program in 2020.
The village plans to issue $125.1 million in TID revenue bonds in September 2018 to extend water service to certain parts of the tax district as well as road and public safety facilities expenditures. The bonds will carry the state's moral obligation pledge.
Officials report plans to issue approximately $2 million in GOs and $23.7 million in TID revenue bonds over the next year in conjunction with the Foxconn project, Moody’s added.
Moody’s in May dropped Racing County ahead of its $68 million short-term issue to finance land purchases for the Foxconn plant. Moody’s also revised its outlook on the county’s Aa2 general obligation rating to negative from stable. Moody’s downgraded the GOs one notch in late 2017 ahead of a $79 million BAN issue.
The campus will house a 20-million-square-foot facility. The Taiwanese company's choice of Wisconsin for the plant was announced by Gov. Scott Walker, President Donald Trump and Foxconn leaders at a White House ceremony last year and Trump attended the June groundbreaking. Walker has argued $3 billion in state incentives is worth the thousands of jobs and economic development he says the Foxconn project will bring to the state.