NORTH MANKATO — North Mankato’s credit rating was downgraded late last week and could drop further with Moody’s Investors Service citing a slumping tax base, waning special assessment revenue, falling state aid and flagging cash liquidity.
Moody’s dropped the rating on the city’s $15 million in outstanding general obligation debt from Aa3 to A3 with that lower rating “placed under review for possible further downgrade, pending receipt of results from fiscal 2012 ...,” according to the firm’s announcement.
“The downgrade of the City of North Mankato’s rating reflects declining tax base; rapidly declining cash reserves which are expected to continue to deteriorate; underperforming special assessment revenues which have required loans from both the general fund and enterprise funds for debt service; very high debt service; very high debt service as a percent of operations; and revenue and expenditure stresses which have pressured general obligations,” Moody’s reported.
North Mankato Mayor Mark Dehen said the challenges facing the city largely resulted from the national economic downturn. The city is in the process of having its debt studied by an outside analyst, and Finance Director Clara Thorn warned the council last fall to that some enterprise funds were spending more than they were bringing in.
“Our new city administrator is working through this with Moody’s,” Dehen said of John Harrenstein, who has been on the job for two weeks, replacing longtime administrator Wendell Sande. “They’ve called attention to some issues we were aware of.”
Dehen said many of the problems cited by Moody’s were repercussions of the nation’s worst recession since the Great Depression. The falling tax base reflects reduced home assessments following the collapse of the housing bubble, and the drop in Local Government Aid from the state left many cities with tight budgets.
The city also provided utilities for new housing developments, with costs to be repaid with assessments when homes were sold, and had to shift funding from other accounts when the housing market collapsed, Dehen said.
The move by Moody’s could mean higher interest rates when the city borrows money in the future. Dehen said the city will need to sell bonds to finance part of a major street reconstruction at Cliff Court and when it buys a variety of vehicles and machinery via equipment certificates.
But Dehen is hopeful the rating can be restored to its previous level in the near future.
“We want to get it improved as quickly as possible,” he said.
Moody’s rating action listed two strengths for North Mankato — the new interchange at Highway 14 and Nicollet County Road 41, which is expected to spur economic growth when it opens in the fall, and the city’s proximity to Mankato, which has an Aa2 rating.
If the city wants to see its rating improved, North Mankato needs to boost its reserves, grow its property-tax base and increase special assessment revenues, according to Moody’s.
In contrast, the rating could fall further if those actions aren’t taken and if general fund transfers continue to be required to cover debt service.