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Cedar Rapid's Long-Held Bond Rating Slips

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CEDAR RAPIDS, Iowa For some 40 straight years, officials have boasted about the city's ability to retain a top Aaa bond rating as they have taken on debt to pay for city projects.

The top rating by Moody's Investors Service has translated into lower interest rates and has been a testament to the health of the local economy and the soundness of the finances at city hall.

But this week, Moody's downgraded the city of Cedar Rapids's bond rating one notch, from Aaa to Aa1, a move anticipated since January when Moody's announced that it had changed the methodology it uses to rate cities across the nation.

City Manager Jeff Pomeranz and Finance Director Casey Drew said on Wednesday that Cedar Rapids is not alone in feeling the effect of Moody's methodological change. In Iowa, Ames (now Aa1), Dubuque, Bettendorf, Sioux City (all now Aa2) and Davenport (now Aa3) are among cities who have seen their bond rating slip a notch.
Body copy ragged right: Pomeranz said he believed that the city's bond rating would have remained Aaa if Moody's had not changed the "score card" it uses to rate the health of cities.

Dennis Bockenstedt, finance director for the city of Iowa City, said he expected Iowa City to keep its Aaa rating.

The new score card places greater weight on a city's debt and pension obligations (20 percent of the rating consideration, up from 10 percent) and less weight on the local economy and tax base (30 percent, down from 40 percent).

City government finances (30 percent) and a city's financial management (20 percent) are weighed as in the past.

Pomeranz and Drew said New York City-based Moody's now looks for communities to have higher per capita incomes and higher total property valuations before it awards a top Aaa bond rating to a city government's debt.

City Council member Kris Gulick, chairman of the council's Finance and Administrative Services Committee, said Moody's changes in criteria for an Aaa rating that relate to income levels and total community valuation make it "highly unlikely we will ever be able to achieve those levels."

Pomeranz said the one-step downgrade in Moody's 10-step investment grade rating system still puts the city's bond rating in a high-quality category.

He also said Moody's could not have been more complimentary of the city's financial operation in its new ratings report on Cedar Rapids city government.

"The city's financial operations are expected to remain sound going forward due to a combination of prudent financial management and a moderate degree of revenue-raising flexibility," the Moody's report stated. It also reported that the city has a "healthy balance" of 35 percent or $39 million in its general-fund operating budget.

"They are giving us an A," Pomeranz said. "If you were in school, you're getting an A."

Gulick said the rating downgrade comes in a year when the city's financial position is stronger than a year ago because voters approved a local-option sales tax to fix streets, so the city doesn't need to take on new debt for street work.

The Moody's report said Cedar Rapids's city government faces "challenges" of "above average debt" and the risk that comes with city ownership of the city's downtown hotel. The hotel, now renovated and being operated as the DoubleTree by Hilton, had been in receivership before the city's purchase in 2010.

Gulick said credit-rating agencies such as Moody's typically are concerned when city's own "non-core assets" like a hotel, a concern which Moody's expressed a year ago.

"I think in the longer term, from my perspective and the mayor echoes this, too we're not going to be in the hotel business forever," Gulick said. "In fact, if someone came to us and wanted to acquire the hotel, we'd probably talk to them."

In Ames
Duane Pitcher, finance director for the city of Ames, said Wednesday that he does not believe that either Ames which also has seen its Aaa rating slip to Aa1 or Cedar Rapids will face substantially higher interest costs on debt because of the rating change.

Pitcher said Moody's decision to change its methodology comes in the wake of "a fair amount of heat" that ratings agencies faced after they bestowed high ratings for troubled mortgage-backed securities in recent years. A few cities also ended up not living up to their ratings, he said.

In downgrading Ames's bond rating, Pitcher said Moody's expressed concern about the statewide pension system, which he said is underfunded, and it also noted that the city of Ames owns an uncommon asset, a hospital.

Cedar Rapids's Pomeranz and Drew said they believe that the increase in interest costs on the sale of future Cedar Rapids debt payments will be "negligible" because of the change in the city's bond rating.

Pomeranz said Cedar Rapids also is considering seeking a bond rating analysis from a second rating agency, Standard & Poor's, to see if the city can land an Aaa rating from it.

If that doesn't work, he said the city will still point out to investors that it holds a high bond rating of Aa1 even if it's not the top Aaa.

But, Pomeranz added, "You may hear less bragging about it."

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