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October 18, 2012
Moody's: Thumbs up for Edmonds financial rating
EDMONDS, Washington (STPNS) -- Moody’s Investors Service just finished a review of the City of Edmonds’ finances, giving city officials a green light to refinance outstanding general obligation bonds.
Moody’s gave the City a good rating, which is a plus for city taxpayers because it enables the city to refinance outstanding bonds at lower rates. The city refinances bonds when conditions make it profitable to do so.
But it’s also a plus for city officials, demonstrating they have done a yeoman’s job in tough times dealing with the city’s financial challenges.
“It’s similar to refinancing a house,” City Finance Director Shawn Hundstock said. “When the rates are down, we borrow money (at a better rate) to pay off the old debt.”
As a result of that review, Moody's affirmed the strong Aa3 rating for the City's limited tax general obligation bonds and Aa2 for unlimited tax general obligation bonds.
Moody's cited the City's "sound financial position and modest debt burden" as some of the factors contributing to the rating.
While Edmonds’ creditworthiness ratings have stayed the same – near the top of Moody’s ratings’ scale – other cities in Washington – Tacoma and Kent for example – recently had their credit ratings drop due to declining revenue, increasing expenses and overall poor economic conditions in those cities.
By refinancing its debt, Edmonds could realize a savings of more than $1.4 million over the life of its bonds.
Moody's also cited the City's "improved general fund reserve levels" when assigning the credit rating.
The City Council adopted a new reserve policy last July that calls for setting aside a minimum of two months, or 16 percent, of General Fund revenue in a new Contingency Reserve Fund.
“We wanted to start complying with industry standards for reserves,” council member Diane Buckshnis said. “We needed to bring Edmonds up to date. And the bond companies are very interested in that.”
The Contingency Fund was fully funded up to the 16 percent target with transfers-in totaling nearly $5.3 million.
According to Mayor Dave Earling, the 2013 Proposed Budget presented to council on Oct. 16 was a balanced budget using none of the reserves the City has worked so hard to put together and set aside.
“The independent review by Moody's and the strong credit rating they affirmed is confirmation the City is on solid ground financially and is making strides in addressing its long-term economic challenges," Earling said.
The rating report issued by Moody's can be found on the City's website at: http://financeref.edmondswa.gov/Edmonds_NIR_October_2012.pdf.
In that report, Moody’s issued a list of both strengths and challenges in Edmonds’ finances.
They list Edmonds’ financial strengths as:
• somewhat large tax base in close proximity to Seattle
• above average socioeconomic indices
• improved general fund reserve levels
• low debt burden
Moody’s also sees challenges that Edmonds may face:
• sales tax revenues recovering, but remain below peak levels
• some exposure to risks related to PFD (Public Facilities District)
That exposure to risk in the PFD is the City’s covering of debt for the Edmonds Center for the Arts.
According to Moody’s, “The bonds are payable from the PFD's general revenues and sales tax revenues and further supported by the city's absolute and unconditional obligation, under a contingent loan agreement, to provide funds to the district for debt service payments.
“The debt service on the… bonds escalates through maturity in 2025, but maximum annual debt service would still represent only 1.3 percent of fiscal 2011 expenditures.”
While a matter to watch, Moody’s doesn’t think the debt is of high concern in regards to the credit rating.
Its report states: “Given the General Obligation bonds are already incorporated into the city's debt profile, the additional burden from the Series 2008 (PFD) bonds is viewed as modest.”
Hundstock concurs: “We’ve built that payment into the budget, and at some point, the ECA will begin paying us back.”
Moody’s also points to Edmonds’ low debt burden, and no immediate borrowing plans.
“The city's direct debt burden is low relative to peers at 0.4 percent,” Moody’s said. “Debt service on outstanding bonds declines gradually, and 2013 annual debt service comprises a manageable 4.3 percent of fiscal 2011 expenditures.
“Payout of debt is above average with nearly 70 percent of bonds repaid in 10 years. The city does not plan to issue additional debt in the near term.”
Compared to some other cities’ debt burden, Edmonds is in great shape.
“There’s a state limit on how much you can borrow,” Hundstock said. “We’re pretty far below that limit.”
Full valuation of the city is around $5.7 billion. At that level, the state would limit Edmonds to around $137 million in borrowing capacity.
“We only have about $19 million outstanding,” Hundstock said.
While the financial picture is positive now, Moody’s report also listed factors that could significantly change the City’s ratings:
What could move the rating up
• Significant increases in assessed valuation and improvement in socioeconomic indices
• Long-term trend of substantially increased and maintained reserve levels
What could move the rating down
• Increased subsidization of PFD debt and operations
• Substantial increase in limited tax supported debt
• Reduced general fund balance to levels below similarly-rated peers
These “what if’s” not only show what Moody’s is watching for but also give city officials a gauge of how the city is doing financially.
“They want to make sure we’re conservative in our thinking,” Buckshnis said.
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