Moody’s removes city of Kent’s negative bond rating outlook; financial position still ‘somewhat weak’

Moody’s Investors Service removed the city of Kent’s negative bond rating outlook because of its improved general fund budget but still says the city has a “somewhat weak” financial position.

New York-based Moody’s affirmed the Baa2 rating it gave to Kent in 2012 but revised the rating outlook to stable from negative on the city’s limited tax general obligation bonds (LTGO) outstanding in the amount of $61 million, according to the Feb. 6 Moody’s report.

Moody’s twice downgraded Kent’s bond rating in 2012, from Aa3 to A1 and then to Baa2. The company didn’t issue any reports on the city in 2013.

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.

Here’s a summary of the report:

“The affirmation reflects the city’s still somewhat weak, though improved, financial position. Governmental fund balances have largely recovered with the exception of the Capital Improvements Fund, which owes $20 million to other city funds and carries a large negative fund balance. The city’s financial difficulties are largely a result of operational and debt costs related to an under-performing events center (ShoWare Center) that the city supports, as well as the city’s own somewhat elevated debt costs.

“These challenges remain a key credit factor as the city plans to continue to support the events center and its related debt. The city’s local economy and large tax base remains credit strengths.

“The revision of the rating outlook reflects our belief that the city has largely stemmed continued deterioration of its finances through the implementation of a recovery plan. The city’s ability to rebuild positive fund balances in all governmental funds will be a critical aspect of future reviews.”

Moody’s also issued the following about the city’s rating:

STRENGTHS

• Improved general fund balance

• Decreasing interfund loans

• Large tax base with average wealth in the Seattle metro area

CHALLENGES

• Limited financial flexibility given the continued support of the ShoWare Center

• Extremely weak financial position in the Capital Improvements Fund

WHAT COULD MAKE THE RATING GO UP

• Positive governmental fund balances sustained at levels similar to peers

• Reduced support of (Public Facilities District, ShoWare Center) operational and debt costs

• Sustained lack of reliance on healthy enterprise funds

WHAT COULD MAKE THE RATING GO DOWN

• Deterioration of governmental fund balances

• Increased reliance on interfund loans to manage general operations

• Unwillingness to fulfill provisions of contingent liability agreement

Moody’s provides financial research on bonds issued by commercial and government entities and is considered one of the big three of credit-rating agencies along with the Fitch Group and Standard & Poor’s.

Standard & Poor’s raised its bond rating for Kent to AA- from A+ in December. It also gave the ShoWare Center an AA- rating up from A+ because it said the city has provided credit enhancement under a contingent loan and support agreement.

“The stable outlook reflects our view of the city’s ability to adjust expenditures and enhance revenue so as to improve its budgetary performance in fiscal 2013 and thus achieve what we consider an adequate budgetary flexibility,” according to the Standard & Poor’s report.

Kent Mayor Suzette Cooke said during her State of the City address on Feb. 5 that the City Council deserves credit for the higher rating because of its new financial policies to build up reserves. She said the new business and occupation (B&O) tax adopted by the council that started in January 2013 also helped boost revenue along with a recovering economy.