A firm that rates the credit worthiness of bonds needed to finance critical infrastructure such as sewer projects has put Manteca on notice its “AA” credit rating is in jeopardy.
The news Thursday came on the heels of last week’s revelation that the sorting out of issues in the municipal finance department found:
*The sewer enterprise account will have a projected $4.7 million deficit by June 30.
*The water enterprise account will have a projected $16.2 million deficit by June 30.
*A large chunk of those deficits can be tracked to inter-fund loans from other accounts that no effort has been made in recent years to repay that are pegged at $30 million including $20 million from the streets account.
Apparently most of the inter-fund loans were made without the knowledge or approval of elected officials. It is not clear whether previous city managers were ever made aware of the issues.
Fitch has taken no action other than to place Manteca’s $19 million sewer revenue bonds on a Negative Watch. The bonds are special, limited revenue obligations of the Manteca Finance Authority, payable solely from installment payments made by the City of Manteca to the authority. The installment payments made by the city are payable solely from and secured by a senior lien pledge of the net revenues of the sewer system — ratepayers and applicable growth fees and are not subject to annual appropriation.
Fitch is seeking to resolve the Negative Watch within six months. However, if information specific to the system's operations and the city's general fund performance, that’s necessary to complete Fitch's evaluation, is not provided in a timely manner, Fitch could withdraw the rating on the system's bonds.
“The City is aware of the concerns raised by Fitch and we are working diligently to provide the information requested to address their questions,” noted Interim Finance Director Stephanie Beauchaine. “This announcement was anticipated, and as we work through our financial analysis we expect these concerns will be addressed. The City Management Team has been proactive in managing the budget and holding down costs to preserve fund balances, and to protect the financial position of the City and each of its funds. This action coupled with long-term financial planning will return the City to sustainable financial health. ”
Factors Fitch will ultimately weigh that could lead to a negative rating action or a downgrade of the city’s credit rating that in turn would increase the cost of future borrowing include:
*A weakening of the sewer enterprise account’s financial profile.
*A continued delay in financial disclosure that does not adequately resolve the asymmetric risk related to governance.
Basically the city needs to complete and implement a rate study that makes sure the cost of ongoing maintenance and operations are covered going forward that also makes sure the $20.9 million deficits will be paid back to make other accounts whole, and there are adequate reserves in the enterprise account.
Given the sewer system is an entity of Manteca; whatever action takes could impact the credit quality of the water fund and general government operations.
“The City has three bond ratings; Water, Wastewater, and General Government,” Beauchaine noted. “All of them could be potentially affected, and they are rated based on their individual financial positions, and on the City position as a whole. General government is in a stronger position at this time than water and wastewater.”
Beauchaine indicated one of the documents Fitch wants to review — the 2019-2020 fiscal audit — is expected to be completed this summer.
When Beauchaine was hired in August to try and make heads and tails of municipal finance operations as well as put it back on track, work hadn’t even started on the 2018-2019 audit. That was just recently completed and work started on last fiscal year’s audit. Beauchaine expects the audit for the current fiscal year will be done in the prescribed time.
Fitch noted, “historically, the city’s sewer system's 'AA' rating was supported by very low leverage, solid debt service coverage, and strong liquidity. However, no fiscal 2020 audit has been made available and Fitch's ability to assess the current credit quality of the system is diminished. The system will reportedly have a negative fund balance by this summer, and an unwillingness to raise rates is expected to have weakened the system's balance sheet in fiscal 2020 and into the current fiscal year. Additionally, turnover at key management positions in recent years poses asymmetric risk and appears to have contributed to delayed financial disclosure. Management was unavailable to provide an update on general city performance and system specific information that has occurred in more recent months.”
The announcement by Fitch puts further pressure on the council to make sizable increases to both the water and sewer rates that are typically phased in other three to five years.
Sewer and water rates have not been increased 2008. That is despite increased employee salaries and increased costs for everything from equipment and materials to chemicals.
Rate hikes that were scheduled for 2010, 2011, 2012 and 2013 were not implemented due to savings increased efficiencies implemented by municipal staff including 20 percent plus salary cuts instituted during the Great Recession. That decision ignored the fact the rate hikes that weren’t implemented were designed to also accrue funds to pay for capital improvement endeavors to replace aging lines and facilities. The same thing was done with the sewer hikes.
The failure to implement the rates as well as no disclosure from the finance department over the years to the council or public that they were borrowing money from other funds to cover deficits that included capital improvement projects keep making the financial hole the city was digging bigger with each passing year.
Until rate hikes are put in place and adequate funds are raised the city may have to keep borrowing money from other funds after June 30 so the water and sewer accounts can cover operating and maintenance costs.
To contact Dennis Wyatt, email email@example.com