Moodyâ s Investors Service announced Wednesday that it is downgrading the City of Burlingtonâ s general obligation debt rating from A3 to Baa3 with a negative outlook for $73.2 million in GO bonds, as well as downgrading $12.1 million in other obligations.It also said that the city's cash balance at the end of fiscal 2011 is significantly negative.
Moodyâ s (see statement below) said that while the underlying Burlington economy and tax base are its strengthâ s, the pending lawsuit by Citibank over Burlington Telecom, Burlington Telecomâ s future viability, and operating deficits in the water and wastewater funds, which the mayor addresses below, are its principal challenges.
Burlington Mayor Miro Weinberger issued the following statement in response to Moodyâ s downgrade; he also mentions several reasons why Burlingtonâ s financial management is now heading in the right direction:
â The Moodyâ s downgrade recognizes what Burlingtonians have long known ‘the financial management of the City by the past administration was problematic in numerous ways, particularly with respect to the $17 million cash pool loan to Burlington Telecom. Todayâ s downgrade by Moodyâ s reminds us that, while the past administration is gone, the damage done by its past actions is lasting and will take time and serious work to repair.
â The analysis by Moodyâ s lays out a roadmap to financial recovery that includes reduced City reliance on short-term borrowing and a reduction of cash pool loans to Burlingtonâ s various enterprises. This roadmap confirms the prudence of numerous rehabilitative actions taken over the last year, including new initiatives by my administration during the last 2 and 1/2 months that will positively shape the coming year.â
The Moodyâ s downgrade will increase the cost of municipal borrowing short-term and long-term, but city bonds remain â investment’grade, thus avoiding at least for now â junk bond’status.
Weinberger said, â The decrease from A3 to Baa3 of the Cityâ s general obligation debt rating will have a significant impact on the cost of future borrowing. For example, the CAOâ s office estimates that the downgrade could result in an interest rate on long-term debt as much as 1.5 percent higher on the planned issuance of $3 million in general fund long-term debt during FY13, which will result in additional interest of $55,000 in the first year. However, this rating is still â investment grade’and the City does not anticipate that it will limit the Cityâ s ability to take on the additional general obligation debt planned for FY13.â
Weinberger said that the Burlingtonâ s FY13 budget will eliminate the operating deficit in the Water and Wastewater Funds cited by Moodyâ s as one of three major â challenges’faced by the City.
Weinberger highlighted the elimination of the deficits as a key element of his budget in his letter to the City Council on June 15, stating:
â The most troubling finding of the FY11 audit was that the City has very limited liquidity. The Burlington Telecom situation is by far the largest driver of this situation and that, of course, remains unresolved. However, as of today, the Water and Wastewater funds also owe seven figure loans to the Cityâ s cash pool. This budget will eliminate those loans by the end of FY13.â
The Water and Wastewater Funds both are increasing rates charged to customers by 5 percent in FY13 to enable them to pay back their pooled cash borrowings by June 30, 2013. Based on expected cash flow in both funds resulting from the increased rates, the City expects the Water Fund to be debt free by the end of FY13, and the Wastewater Fund debt free by the end of FY14.
Moodyâ s analysis focuses on short-term borrowing in FY11, which Weinberger says has improved substantially in FY12 and will continue to improve in FY13.
During FY12, the city reduced substantially its reliance on Tax Anticipation Notes to fund operations. At the end of last year, Burlington had $11 million outstanding on these notes. When 2012 ends at the end of June, Weinberger expects that borrowings under this note will not exceed $3 million ‘an $8 million improvement in liquidity over the course of FY12. In addition, work has been under way for several months to convert short-term debt at the airport to stable, affordable permanent debt.
Burlington International Airport is operated by the city and the problems with Burlington Telecom have spilled into all the cityâ s finances, including BTV.
Weinberger, regarding the work ahead on improving the Burlingtonâ s credit rating, said:
â In the 2 and 1/2 months since the new administration began we have been focused on a budget that moves the City in the right direction. Work to improve stability and strengthen our balance sheet will not end with passage of the budget. I intend to meet personally with the representatives of Moodyâ s before Labor Day to discuss our plans to further address liquidity and other concerns expressed in todayâ s ratings announcement, and to develop further action steps with the City Council in the months ahead. I am confident that the City is now heading in the right direction, and we will gain momentum as the year progresses.â
Moody's downgrades City of Burlington's (VT) general obligation rating to Baa3 from A3
Global Credit Research - 20 Jun 2012
Downgrades certificates of participation to Ba1and Ba2; outlook for all ratings is negative
New York, June 20, 2012 -- Moody's Investors Service has downgraded the City of Burlington's (VT) general obligation to Baa3 from A3, affecting $73.2 million in long-term debt. The bonds are secured by an unlimited tax pledge. Concurrently, Moody's has downgraded $3.6 million of certificates of participation, Series 2000 and 2002 (Police Facility) to Ba1 from Baa1and $8.5 million of certificates of participation, Series 1999A, 1999B, and 2007 (Parking) to Ba2 from Baa2. The outlook on the general obligation debt and the certificates of participation has been revised to negative and is taken off review.
SUMMARY RATINGS RATIONALE
The downgrade of Burlington's general obligation rating to Baa3 from A3 reflects the additional strains on the city's pooled cash from non-self-supporting enterprise funds, compounding the prior year draws used for the expansion of Burlington Telecom (BT). These draws greatly reduced the city's liquidity to narrow levels, resulting in a high reliance on cash flow borrowing to maintain financial operations and continue to meet debt service obligations. The city's cash balance at the end of fiscal 2011, net of cash flow borrowing, is significantly negative.
The general obligation rating also factors in the city's strength as the economic center of Vermont (GO rated Aaa/stable outlook), as well as its manageable debt profile. The Ba1 and Ba2 ratings on the COPs reflect the city's general credit profile while incorporating appropriation and essentiality risks of the projects.
The negative outlook reflects the potential for additional liquidity strain given the uncertainty surrounding the outcome of the recent lawsuit regarding the BT lease and the potential repayment of an interfund loan to BT. On September 2, 2011, Citibank filed a lawsuit against the city following the non-appropriation and subsequent termination of the BT lease. While the impact of this lawsuit on the city's General Fund is unclear, given the current regulatory environment and city charter provisions, Moody's expects that any obligation borne by the General Fund may adversely affect the city's credit profile. Additionally, the lawsuit is likely to hamper any plans by the city to formulate a viable long-term solution for the telecommunications and the repayment of funds owed to its pooled cash account. The outlook also reflects significant challenges as the city attempts to reduce the reliance of its other enterprise funds on pooled cash and return to self-supporting operations.
STRENGTHS
- Stable underlying economy and tax base serving as the economic center of the state
- Manageable debt profile
CHALLENGES
- Potential exposure of the General Fund to any judgment or settlement resulting from the recent lawsuit
- Long-term viability of BT which would ultimately result in the repayment of funds
- Operating deficits in the city's Water and Wastewater Funds resulting on additional drains on pooled cash
Outlook
The negative outlook reflects the city's considerable reliance on cash flow borrowing, ongoing strain related to its various enterprise funds, and the potential negative effect on the city's financial position from the Citibank lawsuit. Moody's will continue to monitor the city's cash position, its ability to address weakened positions of its enterprise funds, and its ability to meet day-to-day operating requirements and General Fund debt service payments.
In addition, Moody's will continue to monitor the city's status of pooled cash and ability to manage its array of short-term debt instruments to meet near-term liquidity.
WHAT WOULD MAKE THE RATING GO UP
-Reduction or elimination of the amount due from BT to the pooled cash account
-City prevailing in the lawsuit
-Significant reduction of enterprise fund exposure to the General Fund and reduced reliance on pooled cash
-Reduced reliance on short-term cash flow instruments
WHAT WOULD MAKE THE RATING GO DOWN
- Increased exposure of the General Fund to BT losses and obligations stemming from the lawsuit for changes in the statutory environment
- Inability to make meaningful progress towards repayment of the interfund loan
- Lack of a viable plan to place the telecommunications system on a more sustainable path
- Growth of the negative net asset position of the Telecom Fund
- Lack of, or challenges attaining, market access to fund operations via renewals on its lines of credit
- Structurally imbalanced General or School Fund operations, reducing the city's financial flexibility
- Increased exposure to losses the city's various enterprises
Moodyâ s 6.20.2012. City of Burlington 6.20.2012