Crystal Thomas
The State Journal-Register
Moody’s Investors Service issued a report Thursday maintaining the city of Springfield’s and City Water, Light and Power’s water fund’s downgraded credit ratings, though the agency revised both of the ratings’ outlooks from stable to negative.
“The outlook means we believe that if the city keeps going in the same direction, it will get downgraded,” said Moody’s spokesman David Jacobson. A negative outlook could mean a downgrade within 12 months to two years, according to the report.
Citing growing pension liabilities, Moody’s downgraded Springfield’s credit rating two notches (from A1 to A3) and the water fund’s rating (from Aa2 to A1) in October 2016. An A3 rating ranks seventh on a scale of 21 possible ratings, Jacobson said, indicating Springfield can pay its debts. A better credit rating leads to lower costs when borrowing.
Three main factors contributed to the city staying at A3, but having a negative outlook: a growing unfunded pension liability, high retiree benefit burdens and weak revenue growth.
In its report, Moody’s acknowledged Springfield put a high percentage of its budget toward annual pension payments. Last budget year, 19 percent of the city’s budget went to pension payments. Moody’s predicts the city will have to pay 25 percent of its operating budget in the current fiscal year, which ends Feb. 28.
“It’s our opinion that (Springfield) is not keeping pace with the growth of their unfunded pensions liabilities,” Jacobson said. “They are not contributing enough.”
The report points to some factors that could lead to an upgrade: revenue growth aimed at chipping away at pension obligations and retiree healthcare costs, changes to the city’s budget that allows for bigger pension contributions and better reserves.
How to deal with the city’s unfunded pension liability has been a constant discussion among Springfield aldermen. This year, for the first time, Springfield’s property tax revenue will be $600,000 less than the city’s pension payment, according to budget director Bill McCarty. In previous years, property taxes were solely used to cover pension payments.
With a looming $11.5 million revenue shortfall, the city has chosen to make, not exceed, statutorily required pension payments. If the city were to chip in more for pensions, it would either need to cut services, increase taxes or spend down its fund balance, or reserves, McCarty said.
When Mayor Jim Langfelder proposed that generated revenue from a sales tax increase would go solely toward pension payments last year, aldermen voted down the idea, he said.
Instead of raising money for the general fund, the city chose to spend down its fund balance, which Moody’s took note of, McCarty said. Currently, the city’s fund balance is projected to be 11.9 percent this year, McCarty said. Best practice has reserves between 12 and 15 percent. Last week, aldermen codified an internal policy to vote if the city were to dip below 8 percent of operating expenses.
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Joe McMenamin for Ward 7 