Moody’s Investors Service has slightly downgraded Oakdale’s Sewer Enterprise Revenue bond rating affecting $1.6 million in debt, citing concerns about the city’s lagging economy and uncertainty of future financial performance.
The bond rating of an A3 rating was dropped to Baa1 on Wednesday, May 23.
According to Moody’s, the action reflects the sewer enterprises financial performance which has performed below expectations. The rating also takes into account state loans which will begin to create pressure on operations and possible customer resistance to another substantial rate increase which may be needed to bolster operations.
“We’re taking this seriously,” said Interim City Manager Greg Wellman. “It’s important to recognize that the overall impact is only $1.6 million of the original $13 million project.
In August 2009, Oakdale entered into a project finance agreement with the California State Water Resource Board, which provided $13 million funding for the upgrade of the city’s wastewater treatment plant.
City officials have already adopted rate increases through 2014, and are currently in the beginning stages of performing another rate study, which would likely substantially increase rates in 2015.
“I’m obligated to report this lower rating to the council and citizens,” said Wellman. “A rating downgrade is not good.”
“Considering everything we’ve uncovered it was inevitable,” said Mayor Pat Paul. “This is going to make it more difficult if we have to borrow money.”
Councilman Tom Dunlop agreed.
“The bottom line is this makes borrowing for the city more expensive,” he said. “People are starting to see California is not kind to bond holders.”
A Baa1 rating means the city has an “adequate capacity” to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
The previous A3 rating defined Oakdale as having a “strong capacity” to meet financial obligations. A bond is considered “investment grade” if its credit rating is Baa3 or higher.
The historical default rate for municipal bonds is lower than that of corporate bonds.
“Anytime a jurisdiction receives a credit downgrade they may have a spillover effect to debt finance,” said Wellman.
“We are planning to present to the council several options for multi-year austerity (hardship).”