CHICAGO – Raytown, Missouri’s $40 million 2007 appropriation deal took a four notch hit due to its own fiscal strains and S&P Global Ratings’ revised credit criteria on such structures.
S&P cut the rating to BBB from A-plus on the annual appropriation-supported, tax-increment and sales tax revenue bonds. Proceeds financed the Raytown Live Project located within a tax-increment financing district. It houses a 175,000-square-foot Wal-Mart SuperCenter.
“The downgrade reflects the combination of a weakening in the city's underlying credit quality over the past several fiscal years along with the application of our updated criteria governing appropriation debt” that was published in January, said analyst Scott Nees.
Some market participants have argued that investors shouldn’t rely on backup general fund pledges subject to appropriation without deep scrutiny of the entity or activity being financed and the strength of the pledged revenues. Both can provide indications of a municipality’s likelihood or ability to honor backup moral obligation-like pledges.
S&P recently dropped a Missouri county’s industrial development bonds 10 notches to junk over the county board’s discussions suggesting it would not honor an appropriation pledge of county revenues to support a struggling retail project in which pledged sales taxes and developer payments are falling short.
The financed projects have some similarities, and the Raytown project now faces public anger for making a fiscal commitment for Wal-Mart's benefit. Still, its revenues are so far covering debt service and S&P “emphasized” that Raytown has stressed it would honor its appropriation pledge and dipping into general funds if needed in the future.
Raytown, a city of 29,000 located southeast of Kansas City, is highly leveraged due to the 2007 issue and has recorded deficits in the three most recent fiscal years. Operating reserves have plunged, while the local economy has seen only tepid growth in recent years. The city benefits from still strong reserves and liquidity and budget flexibility.
At the lower rating, Nees said the outlook is stable due to analysts’ “expectation that the city's operating budget will remain balanced in most years following the significant general fund cuts implemented this year, which, in turn, should continue to allow the city to maintain operating reserves that align with its formal 17% fund balance policy and cash levels that are stable overall."
Factors that influence the rating include the weak relationship between the 2007 obligations and the city as it falls outside the basic function as a municipality, elevated risk on the payment sources should revenues underperform in the future or should Wal-Mart choose to leave; and elevated political risk.
Public concerns expressed over the city’s fiscal obligations to the site signal “political risk and weak voter sentiment that we believe contributes to the bonds' long-term risk profile,” S&P wrote. Local press reports have called it a “sweetheart” deal for Wal-Mart are angry over the diversion of TIF revenues at a time when the city has been forced to cut its budget.
The bonds are repaid from payments in lieu of taxes that come from the TIF and Economic Activity Taxes from the project area including some sales taxes. They have so far covered debt service by slim margins and debt service has escalated moderately through maturity.
If those revenues fall short, the city can use any legally available funds to pay debt service subject to appropriation. The bonds have a reserve fund that holds about $3.8 million, which is in excess of maximum annual debt service with the exception of the final maturity in 2031 which is a balloon payment.
S&P published revised criteria U.S. Public Finance Obligors’ Creditworthiness on appropriation pledges that were aimed at introducing “greater clarity on how we view the relationship of the obligation to the obligor supporting it and also [providing] additional clarity on how we look at bonds enhanced by a moral obligation structure.”
