Report: City’s credit rating drops; TID funding, debt repayment cited
According to a recent report by S&P Global Ratings (Standard & Poor) the city of Merill’s credit rating has been downgraded from “A” to “A-.”
The report was included in a special council meeting resolution on Wednesday, Oct 16, announcing the sale of $1,945,000 in General Obligation Corporate Purpose Bonds, for the public purposes of of library improvements, street improvement projects, sewerage and water system improvements, park and public grounds projects and community development projects.
According to the NYC-based financial services company, rationale for the rating reduction is considerable; ranging from negative fund balances in seven of the city’s ten TIDs, to uncertainty of debt repayment and what the company noted as “weak” overall budgetary performance.
“The lower rating reflects our opinion that the city’s tax-increment district (TID) funds have continued to pressure general fund performance, with continued negative fund balances in seven of the city’s ten TID funds in 2018, and a significant amount of money due to the general fund from these TID funds,” the report states
“While the general fund receivables from these funds has seen decrease in the past, specifically from fiscal years 2016 to 2017, the amount remained essentially unchanged in 2018. According to management, there is no specific period established for repayment. While the city has indicated that is will likely be repaid within three-to-five years, we view the timing of full repayment to the general fund as uncertain.
“Additionally, overall budgetary performance has been weak, reflecting uneven performance in recent years, leading us to believe that the general fund may be more susceptible to pressure from the TID funds. As many of these TID funds continue to underperform, we believe that additional advances from the general fund could be required, which could lead to addition rating pressure.
“The negative outlook reflects our uncertainty regarding management’s expectations of the performance of these TID funds, as we have not seen a credible plan to reduce the amount due to the general fund,The size of these receivables represents a majority of total available general fund reserves, leaving a minimal amount that is not included in questionable receivables which, in our view, is concerning and creates additional budgetary pressure.
“Overall, this trend has gone on for at least three years and still has not been adequately addressed by management, raising questions about management’s willingness and ability to address this problem. Additionally supporting the negative outlook is a historically weak and volatile operating environment, driven by a stagnant revenue climate that is creating budgetary pressure and leading to weak budgetary performance.”
Weak budgetary performance
“Merrill’s budgetary performance is weak in our opinion,” the report continues.
“The city had operating deficits if negative 1.7% of expenditures in the general fund and negative 2.9% across all governmental funds in fiscal 2018.
In analyzing the city’s budgetary performance, we adjust recurring transfers and capital expenditures funded by bond proceeds in the city’s general fund and total governmental funds. Historically, the general fund has subsidized those with negative fund balance.
“After adjustments, the general fund posted a slight deficit in 2018, differing slightly from the city’s original break-even budget, although increasing the general fund available fund balance by roughly $1,200. Across governmental funds, the city saw a smaller deficit than in prior years, after removing one-time expediters and the spending of bond proceeds. The budget for fiscal 2019 is calling fro a $1.4 million deficit, prior to any transfers or bond proceeds. Management expects operations to end with break-even results, with a slight decrease in the unassigned fund balance due to a payoff of debt.”
The S&P report aknowledged current city management is adequate, but is lacking in some key areas.
“We view the city’s management as adequate, with standard financial policies and practices under out FMA methodology, indicating the finance department maintains adequate policies in some, but not all, key areas.
“Management uses historical and outside information to project revenue and expenditures for the yearly budget. The council reviews a monthly budget-to-actual report, but based on 2019 projections versus actuals, the council did not make necessary adjustments, specifically in regard to various underperforming TID funds.
“Although Merrill does not perform long-tern planning, it does have a detailed 10-year capital plan that includes funding sources. It follows state policy when investing funds, but does not report holdings and earning to the council throughout the year. It has a general fund unassigned fund balance policy of 12%-15% of expenditures, but has not historically achieved this goal. The city does not have a debt management policy.
While the outlook for the city’s ratings may appear grim at the moment, the company does cite options the city could pursue to improve it’s rating over time.
“The negative outlook reflects our view that there is at least a on-in-three chance of lower rating within the two-year outlook horizon. The rating could be lowered if the city is unable to implement a credible repayment plan for the receivables due to the general fund, and if the city’s TID funds continue to pressure general fund performance. We could also lower the rating if volatile budgetary performance continues and the city is not able to achieve a sustained period of balanced operations.
“We would revise the outlook to stable if we were to see improvement in the city’s budgetary performance, despite its stagnant revenue climate, in addition to a reduction in the questionable general fund receivables, coupled with a repayment plan for the full amount due.”
While City Administrator Dave Johnson and most council members did not respond to request for input on the S&P Report, City Finance Director Kathy Unertl voiced her excitement for the interest rate.
“The City of Merrill received three competitive bids for the borrowing that is funding the major community investments. The 2.6106% interest rate over the next twenty-years is awesome!”
Newly elected 8th District Alderman Steve Sabatke was the only council member to weigh-in on the matter, stating ;“A great deal of money has been borrowed for all the construction we have recently enjoyed. Big cash incentives were given to individual businesses to spur growth. The theory was new, more expensive buildings pay more taxes and will cover the new loans to grow our economy. Many of us expressed concerns that we are borrowing much faster than the promised increased tax base money was rolling in. That is why there was such an outcry about our taxes going up so high last year.
“A big eye opener came last week when because of depleted funds, we had to borrow money just to make the city payroll,” Sabatke adds. “This “Sale Day Report” is similar to a credit score. It has confirmed to the whole banking world that Merrill is overextended financially as many of us predicted. This issue is now being addressed in our 2020 budget process. I must say that our hardworking city department heads and employees are very cooperative in developing a practical budget for next year.
“We made even offer a much deserved tax cut. With limited funds still available we will continue to aggressively build on the investments already made in Merrill. The main concern right now is if too much more borrowing occurs too soon our credit rating and financial woes will reach a critical level.”