Moody's Investors Service said it has downgraded the general obligation rating of the city of Mequon, Wis., to Aa2 from Aa1.
The city has $36.9 million in GO debt outstanding.
The downgrade to Aa2 rating on Mequon's GO debt reflects the city's close governance ties to Mequon Water Enterprise (A3).
Moody's said it believes the city's general financial operations could be impacted due to the pressures facing the city's water system. While the city considers the water utility a separate entity, city officials can influence cost allocations, payment in lieu of tax (PILOT) forgiveness, and rate setting.
The rating agency's opinion weighs the severity of the challenges facing the water system against the city's general obligation credit attributes, which include a large and affluent tax base, solid financial operations with relatively modest reserve levels, below average debt burden with average principal amortization, and low unfunded pension liabilities.
Moody's also downgraded to A3 from A2 the rating on the city of Mequon Water Enterprise's revenue debt.
The A3 rating affects $13.1 million in outstanding water system revenue bonds.
The downgrade to A3 rating reflects the system's failure to generate sufficient net revenues to meet the level of debt service coverage required by its rate covenant for four out of the past six years, Moody's said. The rating also reflects the modestly sized system with a stable, affluent customer base; limited options to increase revenues given the lack of local rate setting authority, average debt ratios, and adequate legal provisions.
