The Standard and Poor (S&P) credit ratings agency dropped Manassas Park’s credit rating five notches from AA+/Stable to BBB, Joe Mason, the city’s financial adviser and vice president of Davenport and Company told the Manassas Park City Council Tuesday night.
AA-, as classified by S&P, identifies a government as having, “very strong capacity to meet financial commitments,” according to the credit agency’s website. BBB/negative, is five tiers below rating and indicates “adequate capacity to meet financial commitments, but more subject to adverse conditions," according to the website.
The "/negative" portion of the rating reflects that S&P expects to downgrade the rating in the future if Manassas Park's financial situation doesn't improve.
In a report on its website, S&P cited the following factors for the downgrade:
- The large decline in the city's tax base, which has led to large property tax revenue reductions;
- Declines in other economically sensitive revenues; and
- The city's high overall debt burden with elevated debt service levels, which Standard & Poor's considers somewhat mitigated by limited future capital needs.
“We were advised by Standard and Poor that they were going to be monitoring our rating and reconsidering (their) rating of us and everybody else,” city manager Jim Zumwalt told the council. “In June, they said they wanted to conduct a monitoring exercise.”
Zumwalt told the council in June that he expected the city’s bond rating to drop a notch, and that he and another city employee had spent an hour and a half speaking with analysts from S&P.
“Their focus right now is that you don’t have an unreserved fund balance and that your liquidity is tight,” Mason said.
To fix the rating, Mason recommended that the city take visible and active steps showing fiscal responsibility, including inviting S&P analysts to check its finances midway through the year.
“The key to the strategy of getting a rating agency’s confidence back is communicating directly with them,” Mason said. “Whether you’ve got good news or you’ve got bad news, they abhor surprises.”
Last night, the council, at Zumwalt and Mason’s recommendation, adopted a resolution that stopped city treasurer Winnie O'Neal from making expenditures from the School Debt Service fund until the city’s unreserved fund balance was raised to 15 percent of general revenue.
The resolution was originally designed to show S&P that the city was trying to take steps to pay off its debt.
The debt service, a section of the school budget designed to pay debt, would be held from payments by Manassas Park’s treasurer until the city government collected 15 percent of general revenue that, because it is unreserved, would be spent to help reduce the city’s debt.
All present council members voted to adopt except for William "Bill" J. Treuting, who pointed out that all the other necessary measures were in place and he didn’t see a need to adopt the resolution besides appeasing S&P.
Mason told city council that he thought the worst judgments were past.
“I think Standard and Poor’s has probably overreacted,” Mason said.
Mason attributed the decision to pressure from regulations and criticism for not being able to predict the recession, and said one of the main problems the firm saw with Manassas Park was its overall level of debt.
“They measure it against your assessed valuation,” Mason said. “Because you’ve had such a dramatic drop-off in assessed valuation, that amount of debt that you have looks higher.”
Mason also said S&P overlooked the fact the most of Manassas Park’s major investments were in the past, including construction of public schools and a community center, and told the council he thought Manassas Park would recover quickly from its problems.
“You’ve got a balanced budget for 2012 that doesn’t use any fund balance, which is the first step on the road to recovery,” Mason said. “You’ve got assessed valuation, which has finally turned the corner, which is up by over five percent ... I think if we can put together a multi-year plan that gives a little more certainty as to the actions this governing body can take to restore that fund balance ... I think we can pretty quickly get this turned around.”