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Mayor’s Office

City of Burlington Responds to Moody's Investors Service Downgrade

FOR IMMEDIATE RELEASE

June 20, 2012
Contact:  Mike Kanarick
                  802.735.7962

City of Burlington Responds to Moody’s Investors Service Downgrade

Moody’s Investors Service announced today that it is downgrading the City of Burlington’s general obligation debt rating from A3 to Baa3 with a negative outlook.  (Moody’s release follows this response.) 

What follows is a statement by Mayor Miro Weinberger in response to Moody’s downgrade, as well as several key reasons why Burlington’s financial management is now heading in the right direction:

“The Moody’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. Today’s downgrade by Moody’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.

The analysis by Moody’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 Burlington’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.”

The downgrade will increase the cost of municipal borrowing short-term and long-term, but remains “investment grade.” 
The decrease from A3 to Baa3 of the City’s general obligation debt rating will have a significant impact on the cost of future borrowing.  For example, the CAO’s office estimates that the downgrade could result in an interest rate on long-term debt as much as 1.5% 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 “investment grade” and the City does not anticipate that it will limit the City’s ability to take on the additional general obligation debt planned for FY13.

Mayor Weinberger’s FY13 budget will eliminate the operating deficit in the Water and Wastewater Funds cited by Moody’s as one of three major “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: “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 City’s cash pool. This budget will eliminate those loans by the end of FY13.”  The Water and Wastewater Funds both are increasing rates charged to customers by 5% 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.  

The Moody’s analysis focuses on short-term borrowing in FY11 that has improved substantially in FY12 and will continue to improve in FY13.
During FY12, the City has reduced its reliance on Tax Anticipation Notes to fund operations substantially.  At the end of last year, we had $11 million outstanding on these notes.  When 2012 ends this month, we expect 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 underway for several months to convert short-term debt at the airport to stable, affordable permanent debt.

While the FY13 budget includes important steps towards repairing the City’s credit ratings, considerable work remains.
What follows is a statement by Mayor Miro Weinberger regarding the work ahead:
 

“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 Moody’s before Labor Day to discuss our plans to further address liquidity and other concerns expressed in today’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.”

 

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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 (G.O. 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 

Press Release Date: 
06/20/2012
City Department: 
Mayor's Office