DECATUR — The city's limited cash reserves, high debt and other factors led Moody's Investors Services on Friday to downgrade its credit rating from A1 to A2 with a "negative outlook" for improvement.
Moody's, which gave the A2 rating to the city's most recent bond sale of $6.1 million, said the outlook remains negative because of ongoing financial pressures and high pension costs that are only set to increase. The Decatur City Council on Monday is set to vote on a budget that includes a $3.2 million deficit, drawing down its $3.7 million cash reserves significantly.
"We definitely don't like to downgrade, but it really reflects exactly what we've been communicating to the council and the community the past year: Our unemployment is higher than the state and national average, our economic vitality, while we think we have a good outlook, it's not there yet," City Manager Tim Gleason said.
Investors and the financial industry use the credit rating to measure the risk and profit potential for lending or buying government bonds from cities like Decatur. Moody's sets the rating in relation to the city's outstanding bonds. A better rating typically means the city can get a lower interest rate on debt. The grades A1 and A2 are both considered "upper-medium grade" by Moody's.
On the plus side, the rating reflects what Moody's called "satisfactory financial operations," and home-rule status that would allow it to raise taxes and fees and to be more flexible in handling debt.
Moody's said the following factors could lead to an upgrade:
- Significant, sustained improvement in operating fund reserves
- Expansion and improvement of the local economy
- Moderation of pension liabilities
The credit rating could decline if the city's reserves decrease further or it acquires more debt or pension costs.
The downgrade comes as the council prepares to approve budget figures for 2018, which include paying debt service and bonds the city is managing. Gleason said the city treasurer does not believe the downgrade to A2 will make a significant change to those city expenses.
The report also reflects ongoing struggles for Decatur, which includes a smaller tax base due to population loss, and increased borrowing due to the need for several major infrastructure upgrades to take place at once. After the city initiated the $91 million dredging of Lake Decatur, officials took on major work to the sewer system after an order from the U.S. Environmental Protection Agency.
"What Moody's cites as the reasons for the downgrade, they tie perfectly into the community revitalization (project)," Gleason said. The city's got to be involved in the discussion to try and turn the community around — all of it's connected."
The hope, Gleason said, "is that we've hit the bottom, and the turnaround will be coming in the near future." Gleason said city initiatives like the neighborhood revitalization are meant to push that turnaround. Macon County Sheriff Howard Buffett recently announced the donation of $1 million to the neighborhoods project, which involves a cadre of resident volunteers and city officials working to develop local programs and strategies to combat blight and disinvestment from the city's older, low-income neighborhoods.
Moody's reference to low cash reserves comes despite it climbing from just $500,000 a couple years ago to $3.7 million today. Still, "it should be around $10 million," Gleason said.
Decatur's A2 grade still beats Springfield and St. Louis, both rated A3, and Chicago, Ba1. Bloomington currently has a Aa2 rating from Moody's, just two grades below Champaign, which has the maximum Aaa rating.