The city of Kent’s fiscal health received some bad news this week.
Moody’s Investors Service downgraded the city’s bond rating one point from Aa3 to A1 and assigned a negative outlook to the rating for $78.3 million worth of limited tax general obligation bonds.
“The downgrade reflects the city’s significantly deteriorated financial position, resulting from recurring operating deficits and a depletion of cash and reserve levels across all governmental funds,” according to Moody’s, whose ratings are seen as an indicator of a city’s financial health.
Kent has been cutting its budgets for three years, including layoffs.
“It’s of great concern,” said City Council President Dennis Higgins during a phone interview Wednesday. “We have to take some action. I take it very seriously and I don’t like it.”
Kent Mayor Suzette Cooke told the City Council’s Operations Committee meeting Tuesday about the lower rating released Feb. 6 by Moody’s.
“We don’t like to see our credit rating go down but at least it has no impact on current operations,” Cooke said.
Cooke said the downgrade does not affect current indebtedness or bond payments, nor would it affect voter-approved or revenue bonds and the city has no plans to issue limited tax general obligation bonds in the near term.
“Rising costs and deteriorating revenues have forced reductions in every area of our budget,” Cooke said in a city media release. “We have significantly cut internal supports – like training and supplies, reduced staff, cut programs, and delayed projects until economic conditions stabilize. We’ve been trying to maintain a level of service that least damages our residents and job base.”
As Moody’s notes, “there is uncertainty with regard to the city’s ability to implement additional expenditure cuts as it has already enacted significant cuts over the last three fiscal years.”
In Moody’s terms, an Aa3 rating means that the city has a very strong ability to meet its financial commitments while a rating of A1 represents that the city has a strong capacity to meet its financial obligations, but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
The Moody’s ratings range from a top mark of Aaa and then drop to Aa, A, Baa, Ba, B, Caa, Ca and C. Numerical modifiers 1, 2, and 3 also are added to letter-ratings with 1 the highest.
Moody’s listed the reasons behind the lower rating.
“The negative outlook reflects the city’s very limited financial flexibility deriving from a weak balance sheet with a high fixed cost burden; the need to divert a substantial portion of future cash flows from general fund uses to resolve deficits and internal debts throughout governmental funds; and uncertainty regarding the city’s ability to implement additional expenditure cuts, preserve current levels of state shared revenues and stabilize governmental operations through structural, ongoing reforms rather than through one-time solutions.”
Higgins said he has added the Moody’s report to the council retreat agenda for Friday and Saturday.
“We have to figure out what to do about it,” he said. “We have to look at our expenditures and overall tax structure.”
Higgins said it’s going to take a combination of cuts and new revenue sources to address Moody’s concerns.
“We’ve got to do something,” Higgins said. “There are no upfront costs as the mayor said. But as far as our good reputation, it’s a concern and I have all intent on restoring it.”
On a positive note, Moody’s listed the city’s strengths as:
• Large, relatively resilient property tax base
• Stable local economy benefitting from location in Seattle metropolitan area
• Increased clarity with regard to Public Facilities District (ShoWare Center) exposure, still manageable debt burden
Moody’s listed the following challenges for the city:
• Significantly limited financial flexibility
• Substantial fixed cost burden
• Ongoing risks related to Public Facilities District exposure and potential reductions in state shared revenues
Depending how the Legislature cuts the state budget this year, Kent could lose shared state revenue it receives through the streamlined sales tax mitigation and the Panther Lake annexation sales tax mitigation.
Moody’s stated the state changes could cost the city as much as $8.5 million per year.
“It reflects that we’re so dependent on state shared revenues,” Higgins said.
The city-owned ShoWare Center has lost money each year since it opened in January 2009, including $398,000 in 2010 and $451,000 in 2009. The Public Facilities District oversees operations of the arena. But the potential losses of state shared revenue concern Higgins much more than the ShoWare Center losses.
Cooke added that city has a bare-bones budget.
“We have cut all we can cut,” Cooke said. “Now if the state cuts the streamlined sales tax or annexation tax, we will need new revenue sources.”
Cooke said the city continues to see reduced tax revenue.
“Uncertainty created by the economic recession has placed a financial burden on all levels of government,” Cooke said. “Locally, we know South King County sales tax revenue is down 32 percent. The sluggish construction industry has gutted our development fees income, and the dearth of property sales has reduced Real Estate Excise Tax revenue by 75 percent.
“As the state and King County re-align their budgets, they have either reduced committed revenues to us or transferred the responsibility of providing services down to us with no attached revenue (such as animal control). The trickle-down effect has left Kent financially vulnerable to acts and decisions outside our control.”
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