Moody’s Investors Service on Tuesday downgraded Perry County, Ky.’s general obligation bond rating to Baa2 from A3.

The drop affects $4.9 million in outstanding GO debt secured by an unlimited-tax pledge. The county also has $10.7 million in outstanding debt that Moody’s does not rate.

“The downgrade to Baa2 reflects continued depletion of total governmental liquidity through the use of previously built up reserves to subsidize the operations of the jail fund, and to cover increased road expenditures,” said Moody’s analyst John Palazzolo.

The rating notes that the bulk of operating revenue is derived from more volatile intergovernmental sources subject to fluctuations in the coal-mining industry.

The rating also reflects a weakening local economy concentrated in coal mining that has seen rising unemployment, below-average wealth levels and a higher than normal poverty rate, Palazzolo said. The county faces operational pressures with debt service representing 11.3% of total operating expenditures.

Over the last three years, Perry County’s total governmental reserve levels fell to a narrow $757,000 in fiscal 2011, from $3.3 million in fiscal 2009. Unassigned reserves available to cover general operations of the county are at $170,000.

The county receives intergovernmental funds as part of a revenue-sharing program in which the state returns a portion of the coal severance taxes to local governments in areas where mineral extraction occurs. The revenues account for nearly 65% of total operational revenues in Perry County, and saw a 26% decline from fiscal 2010 to 2011. During that same time period, jail and road expenditures remained steady or increased.

Reliance on such a volatile revenue source without sufficient reserves places excessive pressure on the county’s operations and debt service commitments, Moody’s said.

“Future rating reviews will incorporate the county’s ability to move towards structural balance and increase reserves to a level that is consistent with that of similarly rated credits.”

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.