On the heels of the City Council decision not to approve the administration’s recommended financing package for water/sewer rate increases to cover consent decrees and court orders, Moody’s Investors Service has informed the city that its water and sewer system revenue bonds are being downgraded. The downgrade is from an A2 rating to a rating of Baa1, with a negative outlook. Chief Financial Officer (CFO) Rick Anderson says, "The decision by Moody’s affects $1.72 billion in bonds currently outstanding. It will complicate and make dramatically more expensive our ability to secure future financing needed to carry out capital projects required to meet the terms of consent decrees and court orders."
According to Moody’s, the rating downgrade reflects the materially weakened financial condition of the system. Moody’s attributes the weakened financial state to a combination of increased operating costs, slow revenue growth, and increased debt service.
Moody’s lowered bond rating follows a lowered bond rating from Fitch Ratings earlier this week (from "A" to "A-"). The downgrades are expected to add significantly to the cost of future city borrowings for the Water and Wastewater system. According to Anderson, the higher cost of issuing bonds with the lower rating could translate to nearly $100 million on the $1.3 billion the city projects borrowing over the next two years.
Anderson commented on Moody’s action. "This is a sad day in Atlanta’s financial history. In modern times, the City of Atlanta Water and Sewer system has always been an "A" credit, and a downgrade to the "BBB" category is disheartening. We have worked hard over the last two years at restoring the city’s financial stability, and have made much progress on many fronts. But in this instance, the debt loads from prior bonds issued by the city, increased operating budget requirements to bring the system to adequate service levels, and the unprecedented capital requirements of federal and state orders and regulations, have just been too much to overcome at this point. Mayor Franklin and I have talked with Moody’s in the past few days, and while they, and Fitch, commend the Mayor’s actions in attempting to address the effects of past neglect of the system, they still reach their conclusions based upon their analysis of the total financial picture of the system."
The CFO added, "It took the city decades to get into this situation, and we won’t get out of it quickly. It will take the same kind of focused financial discipline that solved the city’s general fund problems. It requires setting rates that will provide for top-level service delivery, and funding for capital improvements needed to meet court and regulatory requirements and to keep the system efficient. It requires lean budgets and efficient operations, and efficient management of the capital program. But most of all it will require tough decisions and sacrifice, even more than that which was required to straighten out the general fund. We’ve done it before, and we will do it again. If there is a good side to the message Moody’s has sent us, it should be a boost to the city’s resolve to do what it takes to get the Water and Wastewater system financially stable."
The ratings downgrade by Moody’s Investor Services applies only to Water and Sewer System Revenue Bonds, and does not affect the ratings by Moody’s of the city’s Airport Revenue Bonds (A1), or General Obligation Bonds (rated Aa3).
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