Rating Action: Moody's downgrades Bandon, OR's issuer and Full Faith & Credit ratings to Baa1; stable outlook
Global Credit Research - 28 Jul 2020
New York, July 28, 2020 -- Moody's Investors Service has downgraded the City of Bandon, Oregon's issuer rating to Baa1 from A2. Concurrently, we downgraded the city's Full Faith and Credit Obligations, Series 2012 (Urban Renewal Area #1 Project) to Baa1 from A2. The action affects approximately $1.6 million in debt outstanding. The outlook is stable.
The downgrade to Baa1 on the city's issuer rating reflects historically weak governance as well as the city's substantial reliance on utilities, which while solid, are largely restricted from raising rates without voter support. Favorably, new management hired at the beginning of 2020 is working to materially improve financial controls. Additionally constraining the rating is the small size of operations, a limited economy based on tourism, and weak demographics which include above-average median age, low income measures and a high poverty rate. Finances weakened substantially in 2019, due in part to improved accounting, cost allocations and financial controls under the new management as prior reporting may not have been accurate. Favorably, across both governmental and enterprise operations, the city has sufficient reserves to support on-going operations.
We expect city finances to weaken further in fiscal 2020, though the size of fund balance decline is uncertain. City leaders are working to develop revenue raising options and have identified expenditure cuts needed if reserves weaken further due to the loss of transient occupancy taxes (TOTs), which comprise 17% of budgeted 2021 general fund revenue. Local officials report a summer tourism season that is only moderately below prior years, though the fragile state of recovery and rising coronavirus case and death count nationally may yet reduce travel further during peak season in late summer. We regard the coronavirus pandemic as a social risk under our ESG framework and the city's exposure is substantially greater than the average local government, due to the significant economic concentration in tourism as well as the resident population's above-average median age.
The Baa1 ratings on the city's full faith and credit (FF&C) obligations reflects the general credit characteristics of the city as well as the legal security of the bonds, which carry the city's full faith and credit pledge. The absence of a rating distinction between the issuer rating and the FF&C ratings reflects our view of the strength of the full faith and credit pledge in Oregon, which we typically rate at the same level as the GOULT or issuer rating.
The stable outlook reflects our expectation that the city will continue to see narrow general fund reserves, though new management should stabilize the weakening finances. The effect of the coronavirus pandemic is already factored into the rating, so we would not expect further deterioration in the city's credit quality unless the pandemic severely worsens and the city is unable or unwilling to make expenditure reductions as revenue (particularly TOTs) underperforms expectations.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- Substantial and sustained improvement in reserves across government operations and particularly in the general fund
- Legal change that allows for regular rate increases for the enterprise funds, which support the city's general operations
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- Further declines in fund balance in the city's general, utility, or operating funds
- Failure to raise utility rates to compensate for increasing expenses
- Lack of improvement in financial controls
The Full Faith and Credit Obligations are secured by the city's full faith and credit pledge, and an absolute and unconditional obligation to make payment from all legally available funds, not subject to appropriation.
Bandon is located in Coos County (A1) along Oregon's southern coast. The small city of about 3,100 residents (as of the 2018 American Community Survey) provides basic services across 2.8 square miles of land. General city services include police, courts, planning, streets, parks, libraries and administration; the city also provides water, sewer and electric services to city residents through enterprise funds.
The principal methodology used in these ratings was US Local Government General Obligation Debt published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1191097. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Samuel Feldman-Crough Lead Analyst Regional PFG West Moody's Investors Service, Inc. One Front Street Suite 1900 San Francisco 94111 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Orlie Prince Additional Contact Regional PFG Northeast JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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