Fargo, N.D., downgraded ahead of bond sale

Fargo, North Dakota’s general obligation credit suffered a one-notch downgrade to Aa1 from Aa2 by Moody’s Investors Service on the back of the city’s elevated debt burden that is expected to increase with upcoming bond sales.

Tim Mahoney, Mayor of Fargo

The city’s annual appropriation bonds, which are notched twice from the GO rating, were downgraded to A1 from Aa3. The city’s outlook was revised to stable from negative.

“The rating also incorporates high fixed costs relative to operating revenue,” Moody’s said. “These challenges are balanced against attributes that include Fargo's growing economy, healthy operating reserves and moderate post-retirement liabilities.”

The downgrade comes as the city prepares to price $11 million of annual appropriation bonds on Jan. 15. Proceeds of the upcoming bond sale will be used to finance the construction of a parking garage and related street and sidewalk improvements.

The city has $459 million of GO debt and $35 million annual appropriation-bonds outstanding. Going forward the city's overall debt burden could potentially more than double to finance a large-scale flood mitigation project.

This $2.8 billion project, spearheaded by the U.S. Army Corps of Engineers, was approved in 2014 and a project participation agreement was finalized between the Army Corps, the state of North Dakota and local entities in June 2016. The project is promoted as a permanent solution to flooding in Fargo, N.D., and Moorhead, Minnesota, area.

The project will be funded with a combination of federal grants, state of North Dakota commitments, and debt issued by Fargo, Cass County and the Flood Diversion Authority, which is primarily in Cass County.

Moody’s noted in the report that while a specific debt structure has not been identified, it is likely that city, county and authority debt would be supported with a combination of special assessment and sales tax revenues, some of which has already been voter approved.

City finance director Kent Costin said the downgrade was expected given the decline in construction activity in 2019. Prior to 2011, the city’s GO rating was Aa2. Strong economic conditions — including record-breaking new construction permit issuance, redevelopments and agricultural commodities — led to Moody’s upgrading the city’s rating to Aa1 in 2012.

“Recent economic conditions have been marginally impacted by a 25% decline in construction activity in 2019 and continued use of debt financing for large projects,” Costin said. “The city and its financial advisers anticipated this likely outcome as it monitored local economic metrics on a continual basis. Several once-in-a-generation, large construction projects contributed to a flourishing boom; this is a return to a normal, yet healthy, growth trajectory.”

Costin said the stable outlook reflects an expectation that the city’s tax base and economy will provide revenue growth to meet its needs. It also took into account Fargo's fiscal policies to maintain strong reserve balances, he said.

“We work tirelessly to strike a balance between fiscal control and providing excellent services,” said Fargo Mayor Tim Mahoney. “Fargo’s bond rating remains higher than its peers in the metro and once again has a stable outlook. As the regional leader, Fargo has chosen to invest in proactive projects to maintain our assets, bolster our infrastructure and support our growth potential.”

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