Moody's Downgrades Sierra Madre Water Bonds

Credit rating agency Moody’s Investor Services has downgraded $3.4 million in outstanding debt related to the City of Sierra Madre’s water bonds from "A1" to "A3."

The company issued notice of the downgrade on Sept. 30, citing “debt service coverage which has fallen well below rate covenant for two consecutive years.”

News of the downgrade was first reported in a post on the Sierra Madre Tattler blog late Wednesday.

Despite the city’s efforts to avoid such a downgrade by recently raising municipal water rates, Moody’s nevertheless cut the rating of the city’s Water Enterprise Revenue Bonds following a protracted process that eventually .

Indeed, the language of Moody’s official notice specifically cites the difficulty with which the City Council raised rates as a primary impetus for the downgrade.

“The downgrade reflects debt service coverage levels which were just sum-sufficient in 2010 and 2011, city officials' slow implementation of increased rates in response to weak coverage,” the statement reads.

Moody’s goes on to say that what it calls one of the city’s strengths – an “affluent, stable customer base” – actually contributed to their decision to issue the downgrade. 

Juxtaposing the need for additional revenues for the water department with “the enterprise's strong cash position, and a stable, affluent customer base within the City,” Moody’s appears to take issue primarily with city leadership’s inability to move swiftly with necessary rate increases.

Moody’s wants more

In the section of the report detailing what the city can do in order to regain a higher rating for its water department bonds, Mood’s calls for “increases in debt service coverage achieved and maintained over the long term,” something it says can be achieved through “sustained implementation of regular rate increases” in water rates.

The rate hike approved on Jan. 11 implemented an increase of 7.5 percent per year over the next three years, beginning on July 1, 2011. The fourth year will have a similar increase, though slightly lower than the full 7.5 percent.

The primary reason for the rate hike, according to staff reports and council discussion, is to satisfy a water bond covenant that calls for the water fund reserve to maintain an amount totaling no less than 120 percent of operating expenses.

The new ordinance will satisfy this covenant--with which the city had been out of compliance--within four years of the first rate increase.  The increase is intended to create an increase in the water fund reserves of nearly $500,000 by year four.

Tattler blogger John Crawford has consistently taken issue with this reasoning, arguing that the city obfuscated the actual reason for the rate hike and going so far as to over the increase.

That suit was later resolved after in exchange for the city council’s promise to “provide water customers with a Fact Sheet … as well as information regarding low income discounts,” should they attempt to raise rates in the future.