Jackson got some tough love this past November — report cards from the two largest bond rating agencies, Moody’s and Standard & Poor’s. One report was OK, the other not so good. The occasion was the updating of the agency ratings prior to a $17.5 million refunding bond underwriting set for December.
As any teacher will tell you, report cards, especially tough ones, are a necessary but important part of the learning and adjusting process. Such inspections aren’t fun, but having experienced analysts from S&P and Moody’s dig through the city of Jackson’s books is a useful and healthy thing. Their analysts do this day in day out for states and municipalities across the country. They know where to look, what questions to ask and how to identify signs of trouble or financial stress. The agency reports are a vital service for investors and a critical discipline for cities, states and the elected officials who run them. At the same time, the reports offer important feedback for citizens who want good stewardship of the property and sales taxes that fund basic city services.
Note: The city’s general fund is the primary account funded by revenues such as property and sales taxes and through which administrative and operating expenses of the city are paid. Enterprise functions such as water and sewer have separate funds.
Here are some key points from the two reports:
S&P maintained its AA-/Stable rating for Jackson’s General Obligation bonds and cited as adequate both Jackson’s economy and the city’s management. But the report goes on to express concern with budgetary performance, “Continuing a negative trend, fiscal 2015 budgetary performance is estimated to be weak with a general fund operating deficit of approximately 9 percent … annually recurring transfers out of the general fund to support governmental activities have pressured the city’s financial position, even after accounting for one-time expenditures from the general fund and use of bond proceeds from the total governmental funds.”
Moody’s was much tougher in its assessment, downgrading Jackson’s GO bonds four notches from Aa2 to A3. The downgrade reflected “the city’s deteriorating financial position resulting from significant operating deficit in fiscal 2014 expected to persist through fiscal 2016. … It also incorporates the lack of clarity regarding resources to close the expected budget gaps, which could potentially erode all available reserves. Future reviews will focus on management’s ability to balance the budget and generate sufficient revenues to improve the balance sheet.”
A common thread through both reports is the concern over transfers from the general fund to other funds as the key driver of the city’s deficit. From the Moody’s report, “The General Fund routinely provides support to several funds, including Parks and Recreation, Medical Insurance and Transportation. Transfers to these funds are expected to continue, with support to the Medical Insurance Fund likely to increase with growing health care costs.”
The good news is Jackson’s bond rating is still “investment grade” by both agencies and there is ample opportunity to improve the situation. It won’t be quick and it won’t be easy, but success is achievable with diligence and resolve. The agencies offered these comments as to what it would take for a ratings upgrade:
- S&P: “While unlikely within our two-year horizon, a significant improvement in budgetary performance that leads to stronger budgetary flexibility, coupled with enhanced financial management practices, could boost the potential for a higher rating, all other metrics remaining stable.”
- Moody’s: “-Established trend of structurally balanced operations. -Rebuilding of reserves to adequate levels. –Substantial tax base growth. -Significant improvement in socioeconomic indices.”
In summary, what is needed in the short term is a city budget right sized to match current revenue expectations. That probably means cutting some nice-to-have things in order to protect the must-have things. In the long term, it means stronger economic growth, and there the opportunities are abundant. But that is the subject of another commentary. Stay tuned.