DALLAS -- Ralston, Nebraska's general obligation arena bonds were dropped seven notches to junk by S&P Global Ratings after the project struggled to produce the revenue needed to repay the debt.
S&P on Tuesday lowered the rating on the 2011 and 2012 bonds BB from A-plus and placed the debt on CreditWatch with negative implications pending receipt of documents about the city's issuance of privately placed cashflow notes.
"The rating action reflects our view of the city's ongoing structural imbalance that is likely to persist and reflects a materially weaker financial position stemming from its underperforming arena," said S&P Global Ratings credit analyst Blake Yocom.
The downgrade also reflects the need to borrow as the city struggles to cover arena expenditures, because the city's short-term financial and liquidity position would be worse without the borrowing. "The city's liquidity is very weak, coupled with what we view as weak management conditions," Yocom said.
Ralston, a city of about 6,000 eight miles that borders Omaha,
, issued the 2011 and 2012 debt to finance construction of an ice arena for recreational ice sports, spectator hockey games, college basketball, and other sporting events and performances.
The 4,000 seat venue is home to a junior hockey team, the Omaha Lancers, and the Omaha Beef arena football team.
Voters authorized $29 million for the arena and related projects in 2011. The city expected that revenues from the project would be sufficient to cover the debt service on the bonds and that it would not need to levy taxes.
However, arena revenues have fallen short – in fiscal 2015 it recorded an operating loss of $1.5 million -- and the city began to increase property and other taxes in 2015. In October 2015, Ralston City Council members passed a property tax increase and a restaurant tax to cover bond payments for the next year.
"The 80% of voters who supported the GO bond deals to finance the arena may be having second thoughts now that they face property tax hikes," Janney Capital Markets municipal analyst Alan Schankel wrote in a report Wednesday.
S&P said there is at least a one-in-two likelihood of a rating change within the next 90 days if a fiscal 2016 audit of the arena shows that the city's high overall debt burden will likely continue to pressure its finances and taxing flexibility.
Ralston Mayor Don Groesser told a local news channel on Tuesday he was surprised by the downgrade since the arena is finally operating in the black. The mayor said the arena is expected to end the year with surplus cash flow of $100,000.
"I'm disappointed that they would do something like that with our current financial position and how the city's running," said Groesser.
S&P considers Ralston's economy adequate. The city has a pension fund that is 86% funded and it has made 151% of its 2015 annual required pension payment, according to Schankel. The region has an estimated population of 6,202.
Ralston is not the first community to fiscally suffer because it put its own money behind an arena project. Several other projects across the country have suffered and in Minnesota, the city of Vadnais Heights in 2012 failed to honor lease commitment on a sports complex funded by bonds supported by a master lease agreement the city sold in 2010. The city's decision to renege on the lease eventually resulted in a bond default. The complex was subsequently sold to Ramsey County.