City of Jackson Moves Forward with Strategies to Improve Water and Sewer System Revenue Bond Rating Amid Moody’s Review and Downgrade
The City of Jackson is moving forward with strategies to improve its rating on its Water and Sewer System Revenue Bonds, following Moody’s Investors Service’s action to downgrade.
On November 25, 2014, Moody’s took an action to downgrade the rating on the City of Jackson's Water and Sewer System Revenue Bonds from A1 to A2, affecting approximately $239 million in rated debt.
The primary reason for the downgrade was performance of the water and sewer enterprise in FY 2013. Moody’s cited the system’s financial position, specifically weak debt service coverage in FY 2013, as the key factor for the downgrade. Moody’s also issued a negative outlook on the system, citing the uncertainty surrounding the system’s current financial position, its ability to absorb additional debt for consent decree related projects, as well as additional risk associated with a swap agreement and the system’s high water loss for this outlook.
While Moody’s recognized the strengths as being adequate system networking capital, a sizable customer base and limited customer concentration; they also highlighted several challenges to the system, including inadequate debt service coverage, economic stability due to institutional presence, declining unrestricted cash, limited rate raising history and an undeveloped financial plan.
Mayor Tony Yarber said he and the City Council will work together to implement strategies to improve the bond rating.
“Over the past several months, the city has taken aggressive steps in anticipation of the Moody’s review. Those actions included increasing water rates and sales tax, overhauling the personnel management of the Department of Public Works and the forensic auditing of the system and contracts,” said Yarber.
“This will not deter us. We’re embarking on a mission to make Jackson a national leader in infrastructure investment. While this setback will make it more expensive in the short term, we fully expect that successful deployment of these strategies and development of a strong financial plan for the City as a whole will put us on track to regain our strong credit rating.”
Jackson City Council President DeKeither Stamps said he was encouraged by the strengths cited in the report, including the steps the city has already taken to address infrastructure and revenue issues.
“Public Works is constantly addressing water loss issues through repairs and replacement of the city’s infrastructure, and the city is currently developing a infrastructure master plan that will address water and sewer infrastructure improvement needs. Once this master plan is approved, the proceeds from the 1 percent sales tax will be used for additional improvements,” Stamps said. “Even with all of the steps the city has taken, it will take a continued, collective effort to move this city forward.”
Public Works Director Kishia Powell said an initial action plan is being implemented.
"While this ratings downgrade is disappointing to us, we fully understand the factors considered by the rating agency in their decision and these were issues that concerned us as an administration. This is another inherited issue that we have to contend with, but I knew coming on board that financials had to be one of my key priority areas in managing the Department."
Two months prior to the rating review, Ms. Powell defended a decision to bring on a nationally known financial management firm (Raftelis Financial Consultants), to assess the Water and Sewer enterprise financials and proactively start development of strategies that will not only stabilize the Department's financial situation immediately, but also ensure both an improved and sustained financial position in the near future. These strategies include:
• Identifying and prioritizing the major challenges facing the system.
• Developing a long range financial plan, including a focus on building capital to support infrastructure improvements.
• Development of an infrastructure master plan including a focus on reducing water loss by replacing water pipes.
• Proactively identifying and addressing issues and challenges impacting revenue collection associated with the meter change out program (Water Infrastructure Improvement Program).
• Enhancing the city’s support and oversight of the the meter change out program.
• Implementing financial policies and practices to strengthen the water and sewer enterprise.• Improved management and oversight of water and sewer enterprise funds.
Moody's issued this statement on November 25:
Moody's downgrades to A2 the City of Jackson's, MS water and sewer revenue debt
Global Credit Research - 25 Nov 2014
Outlook remains negativeNew York, November 25, 2014 -- Moody's Investors Service has downgraded to A2 from A1 the rating on the City of Jackson's, MS Water and Sewer System Revenue Bonds, affecting approximately $239 million in rated debt. The outlook remains negative. The rating takes into consideration approximately $27 million in state revolving loan funds (SRLF) which are not rated by Moody's.
SUMMARY RATING RATIONALE
The downgrade reflects weak management practices evident in poor revenue projections, significant water loss and less than sum sufficient debt service coverage in fiscal 2013. The A2 rating also reflects the system's sizeable customer base, economic stability provided by institutional presence, and limited concentration within the top customers.
The negative outlook reflects the uncertainty surrounding the system's current financial position, its ability to absorb additional debt for consent decree related projects, as well as additional risk associated with a swap agreement and the system's outsized water loss.
Adequate system net working capital
Sizeable customer base, economic stability due to institutional presence
Limited customer concentration
Inadequate debt service coverage
Declining unrestricted cash
Limited rate raising history
Undeveloped financial plans
Sizeable consent decree will require additional system leveraging
The negative outlook reflects the near term uncertainties surrounding the system's financial position and increased capital needs related to the consent decree and an aged infrastructure. Future issuances related to the abatement of the consent decree and significant system needs will challenge the system's ongoing debt coverage ratios and liquidity. The outlook also reflects the additional risk posed to system expenditures associated with the swap agreement, as well as the system's outsized water loss. We will monitor the city's progress towards improving the system's financial metrics, satisfying the requirements of the consent decree, and addressing necessary system improvements.
WHAT COULD MAKE THE RATING GO UP
Trend of improved financial performance including strengthened coverage ratios and bolstered liquidity
Implementation of comprehensive plan to address consent decree requirements and aging facility infrastructure
WHAT COULD MAKE THE RATING GO DOWN
Failure to improve debt coverage ratios
Trend of declining financial flexibility, whether for capital or operational needs
Increased leverage of system assets and/or revenues
The principal methodology used in this rating was Analytical Framework For Water And Sewer System Ratings published in August 1999. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.