The Gazette covers City Hall, now a flood-damaged icon on May's Island in the Cedar River

Say it ain’t so: City sees bond rating drop from top Aaa; but these are revenue bonds, not GO bonds

In City Hall on July 8, 2009 at 4:13 pm

For more than 30 years, the city of Cedar Rapids has secured the top Aaa bond rating as it has sold bonds to raise money to pay for capital improvement projects.

On Wednesday, though, the city reported that Moody’s Investors Service has given the city of Cedar Rapids a lower bond rating — a rating of Aa3 — as the city prepares to sell $7.9 million in sewer revenue bonds and $8.6 million in water revenue bonds.

At last night’s City Council meeting, though, City Manager Jim Prosser emphasized that revenue bonds are different from general obligation bonds, and he was quick to note that the city retains its Aaa bond rating on the latter.

General obligation bonds, which the city uses for most of its capital improvement projects, have behind them the full assets and taxing authority of the city.

On the other hand, revenue bonds, which the city has typically not used, are backed only by the revenue from user fees raised by a particular entity, the city’s Water Department, for instance. Thus, revenue bonds can present a larger risk to investors.

Jon Burmeister, managing director for PFM Group of Des Moines, told the City Council last night that only 11 cities in the nation had better bond ratings on revenue bonds than Cedar Rapids’ new rating of Aa3.

A lower bond rating typically means that a jurisdiction pays higher interest rates and interest cost on the debt it is assuming as it sells bonds.

Nonetheless, Burmeister called Aa3 rating “still an elite category” of bond ratings. The Aa3 rating is three steps below Aaa in Moody’s 20-step rating system which goes from Aaa to Ca.

Moody’s said the Aa3 for the city’s revenue bonds “reflects the essential nature of the services provided, the utilities’ sizable and stable service area which serves as an economic center in Eastern Iowa, satisfactory legal protections, healthy net working capital, and projected adequate coverage rates, balanced against a likely increasing debt ratio and notable customer concentration.”

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