CHICAGO — Ferguson, Mo.'s use of reserves to paper over budget deficits prompted a warning from Moody's Investors Service that the city's Aa3 rating could face a downgrade.
Moody's revised the city's outlook to negative from stable late Tuesday while affirming its Aa3 general obligation rating and A1 and A2 ratings on its certificates of participation. The city has $7.3 million of GOs and $10.9 million of COPs backed by an appropriation.
The city's credit standing has so far weathered the civil unrest that followed the August shooting to death of an unarmed black man by a white police officer and its financial profile is expected to remain sound, Moody's said, due primarily to reserves that remain ample despite a 2014 draw and possible 2015 draw.
Michael Brown's death prompted violent protests that spread nationally and were renewed after a recent grand jury decision not to charge the officer. In the near term, some private businesses have been destroyed and the city faces higher costs for public safety. Over the longer term, the unrest could impact city sales tax collections and possibly its property valuation which has declined in recent years, Moody's said.
Sales tax collections are Ferguson's largest source of revenue, accounting for 28% of the city's operating revenue, Moody's said.
"While the recent civil unrest in Ferguson does not present a direct credit pressure, it may result in lagging sales tax revenue. We will monitor sales tax trends to see if there is any longer term impact on the city's primary revenue source," Moody's wrote.
The city's healthy reserves have shielded the city's credit as it recovered from the recession, providing a cushion for fluctuations in revenues and expenses. The city drew down $2.3 million in reserves in fiscal 2014 that ended June 30 due to the cost of renovations to its police station and community center. After the draw, reserves remained well above the city's fund balance policy of 45% of revenues.
The city initially expected to replenish some of the reserves drawn in the last fiscal year but sales tax collections are lagging budgeted projections and the city is facing $150,000 in public safety overtime.
"The negative outlook incorporates estimated draws on operating reserves in fiscal 2014 and a likely further draw in fiscal 2015 due to negative variances from budgeted revenues and expenditures," Moody's wrote. "The ability to manage the financial impact of any such variances and the maintenance of healthy operating reserves will be a focus of future credit reviews."
Moody's added that despite the potential for an additional draw, the city expects to remain well above the general fund balance policy.
The city levies a 1.25% general fund sales tax, a 0.5% capital improvement sales tax, a 0.5% park and stormwater sales tax, and a 0.25% fire protection sales tax.
The rating level reflects the city's moderately-sized tax base of $770 million within the city of St. Louis metro area; favorable financial operations marked by successive surpluses and healthy reserves; and a manageable debt position, Moody's said.
The city's tax base saw valuation declines of 9.6% in 2011 and then 8.8% in 2013. The city undergoes a biennial reassessment cycle. The city benefits from a diverse employment base with the local school district and St. Louis Community College being among the largest employers, giving the base some stability.
The city suffers from wealth levels that fall below state averages and income averages have steadily deteriorated over the last several decades. Its reliance on economically sensitive sales taxes poses another challenge.
While the city has various pending litigation suits outstanding, Moody's said it does not expect a material impact on the city's credit profile.
The city has an above average but manageable debt burden with no borrowing plans on the horizon. Principal amortization is slower than average with 50% of all debt retired within 10 years. Moody's said it considers the city's unfunded liabilities manageable.
The city's debt portfolio includes two series of appropriation-backed capital improvement bonds not rated by Moody's from issues in 2005 and 2006. The city has a swap on the floating rate bonds that were privately placed with Bank of America, also the swap counterparty. The swap agreement can be terminated upon a default by the city under the contract including failure to pay, bankruptcy, and illegality.
As of June 30, 2013, the city faced a negative valuation on the swap of $288,000. "We believe the terms of the variable rate obligations and the swap do not pose significant risk to the city as the risk is mitigated by substantial reserves currently held by the city," Moody's wrote.
A commission appointed by Gov. Jay Nixon is holding hearings to craft recommendation on social and economic policy changes in the aftermath of the turbulent protests.
The protests have also drawn attention to the reliance on court-related fines by Ferguson and other St. Louis County municipalities to balance their books. Missouri State Auditor Tom Schweich last week announced guidelines for his planned audit of 10 municipal court systems, including Ferguson's, amid growing public and legislative concerns about abuses.
