CHICAGO – Genesee County, Mich., and the Karegnondi Water Authority’s A2 ratings remain intact despite the risk associated with Flint’s support for the new water system.
Moody’s Investors Service late Friday affirmed the A2 ratings assigned to the county and water authority’s combined $413 million of general obligation limited tax debt. The county and Flint are partners in the authority, which is building a new system to deliver Lake Huron water to participants.
Flint’s move in 2014 to temporarily use water from the Flint River after its water contract with Detroit expired and until the new line was completed later this year created the water contamination crisis plaguing the city.
“Affirmation of the county's A2 rating is based on its flexibility to make adjustments to absorb the full operational and debt service costs for KWA should the financially distressed city of Flint be unable to fulfill its obligation,” Moody’s wrote.
The rating reflects the county's large tax base and weak demographics, solid reserves, and manageable debt burden with significant liabilities related to the existing KWA issuance and future borrowing planned.
“The rating also considers the constitutional and statutory limitations on the revenues available to pay debt service," according to Moody's.
The A2 assigned to the KWA bonds is based on Genesee County’s GOLT pledge of contractual payments and a step-up requirement should Flint water revenues or Genesee County water revenues fail to cover debt service.
The county, about 60 miles northwest of Detroit, could see its credit deteriorate if it fails to promptly adjust water rates should Flint fail to make timely KWA debt service payments or higher than projected costs associated with the project pressure county financial operations, Moody’s warned. About 24% of the county’s 426,000 residents live in Flint.
The system was established in 2010 and is being financed with an initial investment from a $220.5 million bond issue in 2014. The project includes an intake facility, 63 miles of pipe, and two pump stations. While only Flint and Genesee County will initially use the system, other KWA members may tap into the water system at a later date. KWA expects to eventually supply raw water to a three-county area consisting of 2,232 square miles and over 500,000 residents.
The city joined the authority as a means to insulate itself from Detroit’s rising rates and save money. When its contract to receive Detroit water expired, the city began treating water from the Flint River, but residents complained of a yellowish color and strong odor. Tests later found lead levels exceeding federal standards.
Last fall, the city reconnected to the Detroit system with state financial help but it did not solve the city's problems because the water delivery system's pipes were contaminated with the lead-laden water.
The crisis has drawn scrutiny of state and federal failures to move quick enough to address the crisis, lawsuits, criminal probes, and spurred recall efforts and calls for Gov. Rick Snyder to resign. The Democratic presidential candidates debating in Flint over the weekend joined in the choir.
Genesee is responsible for paying roughly 66% of the debt service and Flint 34%, according to bond documents. The KWA expects the pipeline system to be up and running this year with the first debt-service payment due on May 2017.
The preliminary official statement warns of investor risks that include the ability of Flint and Genesee to charge and collect revenues from the system as well as system completion risk. The possibility that Flint would file for Chapter 9 is another risk, according to the documents.
"If Flint fails to fulfill its payments obligations under the contract for any reason, including a bankruptcy filing by Flint, Genesee will be required to pay Flint's share of the debt service on the system bonds," the POS says.
"While this provides protection for the issuer, such payments could cause significant financial strain on the general fund of Genesee and the net revenues of the Genesee System, potentially limiting the extent of this protection."