Southern Illinois city takes four-notch rating hit over over budget strains

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Carbondale, Illinois — home of Southern Illinois University’s flagship campus — was slapped with a four-notch downgrade over budgetary and pension strains ahead of a $3.6 million refunding.

S&P Global Ratings cut the rating to BBB-plus from AA-minus as the rating is capped due to the city’s structural imbalance. The outlook is stable.

"The downgrade reflects our view of the city's structural imbalance, which caps the city's rating at BBB-plus. In addition, we do not consider the city as having a credible plan to address this structural imbalance, as it intends to redirect funds originally intended for its chronically underfunded public safety pension funds, in addition to revenue earmarked for its capital projects fund, to its general fund in fiscal 2021," said S&P analyst David Smith.

S&P views the city's underfunding of its public safety pension plans' actuarial determined contribution an indicator of structural imbalance. The COVID-19 pandemic-driven economic shutdown and recession fuels further concerns over the city’s financial prospects.

“Although social risks are in line with the sector, we believe they are currently elevated given the health and safety risks posed by the COVID-19 pandemic that could disrupt and weaken the city's local economy and revenue collections, particularly under a prolonged recession scenario,” S&P said.

The city said it maintains flexibility to deal with its gaps as a home rule community.

“We understand the agency’s ratings due to our recent fiscal years disappointing performance. We do obviously disagree with their position regarding our plan to deal with the deficit," said finance director Jeffrey Davis. "As a home rule community, there are multiple options available to generate additional revenue. However, these are policy decisions that must be weighed carefully before enacting.”

The city previously enacted a food and beverage tax to supplement required contributions and makes payments in excess of statutorily required contributions in prior years in an attempt to increase the funding status of the pensions, Davis said.

The borrowing will refinance debt sold in 2010 and 2011. “We are taking advantage of the lower interest rates in today’s market and not extending the terms of the debt past the existing bonds,” Davis said.

The city planned to review insurance quotes due this week and intends to enter the market as soon as next week. Bernardi Securities is the underwriter.

Carbondale is located in Jackson County and is home to SUI’s flagship campus, a stabilizing institution for the city's local economy, S&P said.

The move to remote learning as the pandemic accelerated in March has added to the tax wounds for many towns and cities that are home to higher education facilities.

Davis said city revenues have suffered but it’s the overall shutdown that’s strained coffers.

“The move to remote learning was part of the reduction in revenue related to Covid-19, but the state wide restrictions on businesses that were classified as non-essential cannot be removed from culpability in those losses,” Davis said. “We are accustomed to fewer students in May, June, and July” so the impact has been so far limited.

Sales taxes for March and April were down almost 27%, or $675,000 compared to last year. Hotel & Motel Sales taxes were down an additional 39% or $80,000. Graduation ceremonies account for a large amount of overnight stays in local and regional hotels.

The state is currently in phase four of its reopening plan with non-essential businesses open but large gatherings are banned until phase five and that won’t occur until a vaccine or better treatments are widely available.

Gov. J.B. Pritzker has also warned the state could move backward in some regions if cases continue to rise at current levels along with positivity percentages. Pritzker recently warned that southern Illinois was among 13 regions with troubling numbers that could result in mitigation measures if not reversed. The city and county have stepped enforcement on masking and social distancing, and restaurant and bar limits.

Southern is currently planning for students to return for the fall semester that begins Aug. 17. The school will offer traditional face-to-face courses, hybrid courses, in which some instruction is face-to-face but parts of the course may be provided online or in alternative formats, and courses fully online or in another alternative format. Southern operates another campus in Edwardsville. The combined enrollment is about 26,000 with slightly more at Edwardsville.

“Carbondale and SIU do have a geographic advantage over some of the other Illinois Universities. We are almost six hours away from Chicago” and “many of our students come here to capitalize on that distance away from ‘home,’” Davis said. “The southern Illinois region is full of many outdoor activity opportunities that allow our community members to explore and relax in a socially responsible way. If the campus does revert back to a fully remote learning setting many of those students who chose to come to Carbondale will stay here as long as they are able to.” The popular Shawnee National Forest is nearby.

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