Downgrades certificates of participation to Ba1and Ba2; outlook for all ratings is negative
New York, June 20, 2012 -- Moody's Investors Service has downgraded the City of Burlington's (VT)
general obligation to Baa3 from A3, affecting $73.2
million in long-term debt. The bonds are secured by an unlimited
tax pledge. Concurrently, Moody's has downgraded $3.6
million of certificates of participation, Series 2000 and 2002 (Police
Facility) to Ba1 from Baa1and $8.5 million of certificates
of participation, Series 1999A, 1999B, and 2007 (Parking)
to Ba2 from Baa2. The outlook on the general obligation debt and
the certificates of participation has been revised to negative and is
taken off review.
SUMMARY RATINGS RATIONALE
The downgrade of Burlington's general obligation rating to Baa3
from A3 reflects the additional strains on the city's pooled cash
from non-self-supporting enterprise funds, compounding
the prior year draws used for the expansion of Burlington Telecom (BT).
These draws greatly reduced the city's liquidity to narrow levels,
resulting in a high reliance on cash flow borrowing to maintain financial
operations and continue to meet debt service obligations. The city's
cash balance at the end of fiscal 2011, net of cash flow borrowing,
is significantly negative.
The general obligation rating also factors in the city's strength as the
economic center of Vermont (G.O. rated Aaa/stable outlook),
as well as its manageable debt profile. The Ba1 and Ba2 ratings
on the COPs reflect the city's general credit profile while incorporating
appropriation and essentiality risks of the projects.
The negative outlook reflects the potential for additional liquidity strain
given the uncertainty surrounding the outcome of the recent lawsuit regarding
the BT lease and the potential repayment of an interfund loan to BT.
On September 2, 2011, Citibank filed a lawsuit against the
city following the non-appropriation and subsequent termination
of the BT lease. While the impact of this lawsuit on the city's
General Fund is unclear, given the current regulatory environment
and city charter provisions, Moody's expects that any obligation
borne by the General Fund may adversely affect the city's credit profile.
Additionally, the lawsuit is likely to hamper any plans by the city
to formulate a viable long-term solution for the telecommunications
and the repayment of funds owed to its pooled cash account. The
outlook also reflects significant challenges as the city attempts to reduce
the reliance of its other enterprise funds on pooled cash and return to
self-supporting operations.
STRENGTHS
- Stable underlying economy and tax base serving as the economic
center of the state
- Manageable debt profile
CHALLENGES
- Potential exposure of the General Fund to any judgment or settlement
resulting from the recent lawsuit
- Long-term viability of BT which would ultimately result
in the repayment of funds
- Operating deficits in the city's Water and Wastewater Funds
resulting on additional drains on pooled cash
Outlook
The negative outlook reflects the city's considerable reliance on cash
flow borrowing, ongoing strain related to its various enterprise
funds, and the potential negative effect on the city's financial
position from the Citibank lawsuit. Moody's will continue to monitor
the city's cash position, its ability to address weakened positions
of its enterprise funds, and its ability to meet day-to-day
operating requirements and General Fund debt service payments.
In addition, Moody's will continue to monitor the city's
status of pooled cash and ability to manage its array of short-term
debt instruments to meet near-term liquidity.
WHAT WOULD MAKE THE RATING GO UP
-Reduction or elimination of the amount due from BT to the pooled
cash account
-City prevailing in the lawsuit
-Significant reduction of enterprise fund exposure to the General
Fund and reduced reliance on pooled cash
-Reduced reliance on short-term cash flow instruments
WHAT WOULD MAKE THE RATING GO DOWN
- Increased exposure of the General Fund to BT losses and obligations
stemming from the lawsuit for changes in the statutory environment
- Inability to make meaningful progress towards repayment of the
interfund loan
- Lack of a viable plan to place the telecommunications system
on a more sustainable path
- Growth of the negative net asset position of the Telecom Fund
- Lack of, or challenges attaining, market access to
fund operations via renewals on its lines of credit
- Structurally imbalanced General or School Fund operations,
reducing the city's financial flexibility
- Increased exposure to losses the city's various enterprises
PRINCIPAL METHODOLOGIES USED
The principal methodologies used in this rating were General Obligation
Bonds Issued by U.S. Local Governments published in October
2009, and The Fundamentals of Credit Analysis for Lease-Backed
Municipal Obligations published in December 2011. Please see the
Credit Policy page on www.moodys.com for a copy of this
methodology.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
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Dora Lee
Associate Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
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GEORDIE THOMPSON
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Moody's downgrades City of Burlington's (VT) general obligation rating to Baa3 from A3
