Moody's Investors Service said it has downgraded to Ba2 from A3 the rating on the city of LaGrange, Ky.'s general obligation bonds and lease revenue notes, affecting $11 million in rated parity debt.
The bonds and notes are backed by the city's general obligation pledge. Outlook remains negative.
The rating reflects the city's debt structure and the uncertainty surrounding the city's ability to retire its lease revenue debt. The Series 2012A general obligation lease revenue notes issued by Oldham-LaGrange Development Authority (OLDA), secured by lease payments from the city and backed by its general obligation pledge, have a scheduled principal payment of $8.1 million in June 2015.
The original 2005 term bonds, refinanced with the Series 2012A, were used to purchase and develop 1,000 acres of land for office buildings and other commercial purposes. OLDA has been unable to sell most of the land. Absent any sales to repay note holders, the city is responsible for the debt and will depend on market access for continued refinancing of the notes.
The city was planning to refund the 2012 series with long-term general obligation debt in the spring of 2014. However, debt retirement depends on the ability of the city to generate additional revenues to service these bonds. Current projections for the restructuring proposes a 20 year maturity of level debt service around $600,000 annually.
The city's mayor introduced a bill proposing the adoption of a local payroll tax on salaries and wages earned within the city's taxing jurisdiction that would bring in an estimated $600,000 annually and would be in place until the debt was retired.
The vote on the bill has been tabled twice since its inception in 2012. On July 1, 2013, the bill was voted down. The mayor reports that no alternatives to the payroll tax have been introduced and that the city will likely be forced to default on the scheduled principal payment of $8.1 million in June 2015. Moody's views the failure to implement the new revenue source in order to pay the city's debt obligations as indicative of a substantial credit risk.
Absent a executed plan to repay note holders in the near term, further downgrades of the city's rating are likely.