Citing “the city’s rapidly increasing debt burden,” the City of Carmel saw a decrease in one of its bond ratings Nov. 14.
Standard & Poors has downgraded the City of Carmel’s long-term property tax credit rating from AA+ to AA, which is one notch lower, according to a report released Nov. 14.
The news comes as the City of Carmel put $96 million worth of bonds on the market the morning of Nov. 15. These bonds were issued for debt relating to new roundabouts, land purchases and incentives for a proposed luxury hotel near the Carmel City Center.
“The downgrade reflects our view of the city’s rapidly increasing debt burden, with mounting leverage that can pressure flexibility and budgetary performance over time,” states S&P’s report. “Carmel’s log-term debt grew, in real terms, by over $300 million in just three years. The annual debt costs are already high and are estimated to grow 71 percent by 2022. The city is planning to layer in more tax-supported debt in the next two to three years. Thus far the city has been able to afford its debt, paying debt service mostly with tax increment revenues and local income taxes.”
Since 2016, the City of Carmel has added hundreds of millions in new debt to pay for roundabouts, a Monon Trail expansion, an ice skating rink, repaved roads and more. The new investments came after Carmel Mayor Jim Brainard won his sixth term as mayor and several of his frequent opponents lost their seats on the Carmel City Council, resulting in a majority of his preferred candidates serving on the city’s fiscal body.
Brainard has repeatedly said that Carmel’s economic outlook is strong, but S&P said Carmel might be a little too optimistic with its projections.
“While the city’s (Financial Management Assessment) is ‘good,’ we note that there have been discrepancies between projected and actual results in recent years,” states S&P’s report.
Brainard noted that the true impact of the downgrade won’t be understood until bonds are sold on the market and the final price is known. He noted that according to S&P Global Ratings Definitions, the AA rating only differs from the very top ratings by a small degree.
“An AA rating is a very good rating for any city or private business,” Brainard said. “The United States government is only rated one level better. This AA rating will enable us to get an extremely competitive interest rate when the bonds are sold. Over the past few decades, our bond ratings have been up and down a notch. There are so many factors that go into this process.”
The S&P report also cites a 2015 incident when the Carmel City Council did not approve a transfer from the motor vehicle highway fund to cover debt service payments. Three of the seven members of that council were leaving office after opposing Brainard in a recent election and losing. The new council transferred funds after taking office.
“In our view, this demonstrates the risk of high leverage and a heavy dependence on sometimes more-volatile tax increment revenues,” states S&P’s report. “We feel the city’s crowded budget and high fixed costs leave it vulnerable to unanticipated economic or operating swings. In the future, if intended economically sensitive revenues do not perform well, it will be challenging for the city to divert that much operating revenue from the general fund for debt service. Furthermore, the city doesn’t have a high reserve cushion, relative to the size of annual debt service, to carry it through extended stressful periods.”
Brainard said there was adequate revenue but the transfer was because of a failure of the previous council. He said funds had to be temporarily borrowed until the new council took over in 2016 because missing debt payments would have been much worse.
“This is similar to what would happen if a homeowner skipped a mortgage payment even though the money was in another account,” he said. “Such a failure to pay would result in a reduced credit score for the homeowner.”
Brainard also disagreed with criticisms about not having enough money in the city’s reserve account in case of emergencies.
“It’s not good fiscal practice to horde taxpayer money,” he said. “We have adequate balances to carry us through a recession. It would be easy to raise taxes to get a perfect rating. That might make the rating agency happy, but that is not in the best interest of our taxpayers.”
The S&P report questioned Carmel’s strength during a recession.
“We feel the city’s crowded budget and high fixed costs leave it vulnerable to unanticipated economic or operating swings,” it states.
Brainard said the City of Carmel anticipated the new rating might occur when Brainard launched a three-year investment plan to improve local transportation, add more trails and roundabouts, fix the 96th Street and Keystone Parkway intersection and improve other infrastructure.
“Growing cities like ours often take on debt in order to meet the needs of their residents and the daytime workforce that utilizes our streets,” he said.
Not everything was negative in S&P’s report. AA is still the third-highest rating a municipality can have.
“We consider Carmel’s economy very strong,” the report reads.
The report stated that Carmel has very strong liquidity and budget flexibility, strong management and adequate budgetary performance.
A good bond rating is somewhat like a credit rating. It rates the security of a bond and the borrower’s ability to repay it. Good bond ratings can mean more favorable interest rates.
Bond ratings are often slightly upgraded or downgraded based on changing conditions.
In April 2016, the City of Carmel saw $242 million in bonds to fund various infrastructure projects receive a AA+ rating from S&P. In October 2016, Moody’s simultaneously upgraded two bonds and downgraded two bonds. And in April 2014, S&P upgraded the Carmel Redevelopment Authority’s county option income tax bond rating to AA from AA- and re-affirmed the city’s AA+ rating.
