City’s bond rating downgradedPublished 12:15am Thursday, March 7, 2013
NATCHEZ — The City of Natchez has received a slight downgrade to its debt bond rating, but it still has an A on its credit report card.
Moody’s Investors Service downgraded the city’s general obligation bond rating from an A1 to A2 score, which city financial adviser Demery Grubbs said should have no impact on the city’s capacity to borrow money.
Bond ratings for a city are similar to an individual’s credit score, Grubbs said. The rating can determine the interest rate the city would get when bonds are issued to borrow money.
“Natchez falls into an A-rated category,” Grubbs said. “There are about 15 or 16 cities in the state that fall into that category, which is an excellent bond rating.”
Within the A-bond rating itself, Grubbs said, there are categories. Grubbs said there is no distinction made between an A1 and an A2 when interest rates are determined for loans.
Moody’s Spokesman David Jacobson said despite the downgrade, an “A” rating is an upper- to medium-grade rating on the ratings scale.
“It’s a one-notch downgrade,” Jacobson said. “We have 21 total ratings from the very top to the very bottom. (The city) went from the fifth-highest rating to the sixth-highest. So it’s still in the investment-grade rating.”
According to the Moody’s report, the downgrade to A2 “reflects the city’s limited financial position, including narrow cash levels within the general fund.”
The report states that while the city has “historically maintained narrow levels of reserves, we believe these levels are marginal considering the economically sensitive nature of the sales and gaming tax receipts that are a large source of the revenue for the general fund.” The report states that sales tax and gaming were approximately 50 percent of 2011 general fund revenues for the city.
“It’s basically saying it’s something the city needs to work on, not that they’re in trouble, because if they were in trouble, they would have been downgraded from an A to a B,” Grubbs said. “It’s just saying look at it and watch it closely.”
Brown said the city is actually watching the general fund more closely than it has in the past. The report, he said, only gives a snapshot of the city’s general fund.
The reason the general fund balance has fallen, Brown said, is because the city has set up separate accounts for specific pools of money. For example, he said, $1 million annual lease payments from Magnolia Bluffs Casino will go into a special fund.
The gaming funds, which have been a large source of funds for the general fund, are not going into the general fund now.
“We’re working out of special funds, rather than the general fund,” Brown said. “But we will maintain a respectable level in the general fund.”
Past administrations, Brown said, have run all the city’s money in and out of the general fund.
“We’re putting less money in the general fund, and a lot more cash in the other accounts,” he said.
The goal of setting up special accounts instead of putting all the money in the general fund, Brown said, is so the money can be easily tracked.
“It gives a better method of tracking the finances of the city,” he said. “When you have fund balances that are restricted in use, it’s harder for them to get mixed up in the form of (interfund) loans or transfers.”
The general fund is used for payroll and other general city expenses, Brown said.
If the general fund runs out of money, which it has done in the past, the city can make a loan from one of its special accounts that is taking in more money than is being spent to cover general expenses.
“If we went to borrow money, we would appear before a rating committee, and they would hear our explanation (of why they general fund balance has lowered,)” Brown said. “And we would tell them we have been operating out of special funds rather than the general fund.”
The rating affects $3 million of the city’s general obligating debt that was rated by Moody’s. The city still has an additional $11.9 million of general obligation debt that is not rated by Moody’s but was considered for the rating, according to the report.