The Harrisburg Authority is pushing back against a Ba1 rating from Moody’s Investors Service on the authority’s $69.4 million of water bonds, calling the rating “fundamentally unfair.”
Moody’s on Jan. 18 dropped the water bonds to Ba1 — below investment grade — from A1 and placed a negative outlook on the credit. The credit downgrade was due to Harrisburg’s financial troubles and the connection between the city and the water system.
The authority owns the water system and implements rate increases. The city operates and manages the system and has access to its funds. Moody’s incorporates into the Ba1 rating the possibility that officials may tap into the water system’s funds as part of a fiscal recovery plan for Harrisburg.
Novak Consulting Group is leading a team of outside professionals to help develop a fiscal recovery plan for Pennsylvania’s capital city, which is within the state’s distressed municipalities program, called Act 47. That recovery plan is due by mid-May. In addition, Cravath, Swaine and Moore LLP is set to offer by the end of March its recommendations to the City Council on a possible bankruptcy filing.
“While we understand Moody’s concerns over the city of Harrisburg’s financial situation, downgrading the water system’s 2008 bonds is fundamentally unfair,” authority executive director Michele Torres wrote in a Feb. 9 letter to Moody’s. “We strongly believe that the water system’s operations and finances are fundamentally strong and that your rating decision was based primarily on the misguided fear that a potential Chapter 9 bankruptcy could have disastrous impact on the water system’s operations and finances. We take issue with the downgrade.”
In the letter, the authority does not ask Moody’s to withdraw the credit rating or re-evaluate the rating. Torres wrote that there is no basis for the “contention” that the city’s pending fiscal recovery plan could utilize water system revenue.
“Moreover, if the city filed Chapter 9, there will be no lengthy disruption in financial operations, as the authority’s legal counsel has opined,” she wrote in the letter.
In October, Moody’s placed the credit on review for possible downgrade and requested a legal opinion regarding the potential effects of the city entering into Act 47 or filing for Chapter 9 bankruptcy. Torres wrote those circumstances would not have a “significant impact” on the water system, according to the legal opinion.
Moody’s also raises the issue of an overdue 2009 audit. The city has yet to complete its 2009 audit, which in turn delays the authority’s ability to finish its 2009 audit.
Harrisburg has $282 million of outstanding incinerator debt that it has not made debt-service payments on. The Harrisburg Authority issued those bonds and the facility does not generate sufficient revenue to meet all its obligations.
Moody’s did not immediately respond to requests for comment.