Missouri county lashes out after non-appropriation talk spurs downgrade to junk
CHICAGO — A Missouri county's officials say Moody's Investors Service acted unfairly when it stripped the county of its investment grade after commissioners stated their intention not to honor an appropriation pledge.
Moody’s cut Platte County’s general obligation rating to the junk level of Ba1 from Aa2 Friday, and its lease appropriation rating to B1 from A1. It assigned a negative outlook was assigned.
The downgrade “reflects the county's lack of willingness to fulfill a contractual obligation to make payments sufficient to pay principal and interest” on the county Industrial Development Authority’s $32 million, 2007 issue for the Zona Rosa retail project, Moody’s wrote.
About $29 million is still outstanding.
“The county's lack of willingness to honor its intentions under the financing agreement with the Industrial Development Authority represents a lack of willingness to pay on an obligation that supported debt issued in the capital markets,” Moody’s added.
An appropriation to make up the expected shortfall in pledged sales tax and developer payments from the troubled shopping center project remains in the current budget.
However, commissioners at an August meeting discussed their intention to halt appropriations to make up shortfalls unless a long-term sustainable solution that did not involve annual county aid was found. Final approval is still needed to free up the current appropriation.
The county, in a statement after the Moody's downgrade, defended its steps aimed at “protecting taxpayers” and its legal position that appropriation is not guaranteed because it’s subject to annual approval.
It’s an argument other governments have used to bail out of bond commitments, but rating agencies and the buyside take the position that failure to honor an appropriation pledge is tantamount to a default on an obligation that relies on the sponsor government’s support to attain ratings near the sponsor's.
“The bond documents are clear that the county’s participation is subject to annual appropriation only — nothing beyond that. And in January we appropriated for a possible shortfall and we have not taken any official action since then,” presiding Commissioner Ron Schieber said in a statement.
"Moody’s repeatedly states in their report that the county has a lack of willingness to pay, which again is a clear misrepresentation of our position,” Schieber said.
“The commission has not taken any action to un-appropriate the payment in the 2018 budget. What was stated in the August meeting individually by each commissioner was that without a long term sustainable solution he or she was not inclined to make the payment,” the county said in response to further questions. “Fortunately though, the payment is not due until Dec. 1st.”
Moody’s followed S&P Global Ratings which, after listening to a recording of the public meeting, on Sept. 7 slashed the rating on the revenue bonds by 10 notches to B-minus from A. It also put the rating on watch. The county said it expected the downgrade on the Zona Rosa bond issue.
The bonds were originally rated AA-minus based on the strength of the county’s guaranty subject to annual appropriation. “We view this as a willingness issue rather than the ability to pay,” S&P wrote, given the county’s healthy balance sheet and taxing flexibility.
The county entered into a financing agreement whereby the county agreed, subject to annual appropriation, to transfer funds to the trustee in an amount sufficient for the payment of the bonds should pledged sales tax and developer payments fall short.
S&P doesn’t rate the county, but Moody’s does and followed up a week later with its downgrade. Moody’s does not rate the Zona Rosa project bonds.
Moody’s assigned a negative outlook that “reflects uncertainty over a potential December 1, 2018 default” on the bonds, which are backed by the county's contractually obligated appropriation pledge.
The county could win back its investment grade rating if it demonstrates a “willingness to consistently honor commitments to pay debt issued in the capital markets over a multi-year period.” Further rating erosion looms in the event of a “failure to timely appropriate or transfer budgeted appropriations to trustee for provision of contractual obligations” or the county sees an “erosion of reserves.”
The 421-square-mile county in the northwest Kansas city suburbs has an estimated population of was 94,970.
The mess is a reminder that the essential nature of a project is a primary factor in assessing whether a municipality might live up to its obligations, not just whether the municipality has the ability to pay, said Richard Ciccarone, president at Merritt Research Services LLC.
“These are political actions in which the outcome may not be expected by ratings agencies and investors,” Ciccarone said. “The less essential a project the less reliable credit quality is.”
While the appropriation remains on the books, Ciccarone said rating action was warranted but the level of action is open to debate.
“It’s absolutely necessary for a downgrade that signals to investors who trade the bonds that there’s active questions and a high degree of risk,” Ciccarone said. The right level of a downgrade remains a question because the appropriation remains on the books and the county is seeking a solution, he said.
Matt Fabian, partner at Municipal Market Analytics, said the rating agencies acted more swiftly then he expected “signaling that they are taking willingness much more serious than they ever had.”
County leaders blamed their predecessors for making funding commitments to nonessential projects.
“Funding private development with taxpayer dollars is not a basic county function. That is as true now as it was eleven years ago,” Commissioner John Elliott said in the statement.
“We believe that the downgrade of the Zona Rosa bond alone is eleven years too late. This bond issuance would likely not have occurred had this been the initial rating, as it should have been,” according to the county government's statement. The county recently passed an ordinance requiring a referendum to support bonds issued through development agencies.
Developer payments and sales tax collected in the shopping center go to repay debt. The project has struggled with high vacancy rates for several years but pledged revenues covered debt service until last year.
The developer last year failed to make its $500,000 annual payment, so the trustee drew on a letter of credit to cover debt service. The trustee has not renewed the letter of credit and the developer's struggles continue; it is now in default on its mortgage.
Sales tax collection in the development district averages about $1.5 million a year and the county has estimated that by fiscal 2026 it will need to appropriate $1.5 million in legally available funds, up from $634,000 in fiscal 2018, if taxes don’t grow.
The bonds had lost value in trading last week with prices at 77 cents to 82 cents on the dollar after trading at full value the previous week before the S&P action.