The City of Des Moines' general obligation (GO) debt rating has been downgraded to Aa2 from Aa1, according Moody's Investors Services, the New York-based ratings agency.
The downgrade is the result of narrow operating reserves, below average income indicators and an elevated debt burden, due in part to retirement pensions for full-time firefighters and police officers. Moody's claims Des Moines has a "moderately elevated exposure to two statewide cost-sharing pension plans."
The downgrade applies to $437 million of outstanding general obligation debt. Moody's review was initiated January 15, 2014 and incorporated new methodology for assessing the security of local government debt.
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The press release also noted that the outlook for Des Moines' credit profile is stable.
Moody's new methodology for rating local municipalities puts an increased weight on pension obligations. Despite the downgrade, Moody's stable outlook for Des Moines implies the confidence the ratings agency has in the city's capacity to adequately address its pension obligations. Des Moines benefits from a large and stable tax base, its role as the state of Iowa's capital and the primary economic and population center, and a recent history of running surpluses.
In order for Des Moines to reclaim its Aa1 status, the city's tax base will have to grow, operating reserves will have to improve, an material declines in debt burdens will have to be reached. Deterioration in these areas could further negatively affect the city's bond rating. Moody's issues ratings from Aaa to C.
The Des Moines Register quoted City Council member Christine Hensley as saying that "there's no question in my mind that had the formula stayed the same, Des Moines would not have had a downgrade."
That the methodology takes pension obligation into greater consideration suggests other local municipalities may be due for ratings downgrades. Several other Iowa cities saw their rating slip a notch.
Des Moines has a pension liability of $397 million when averaged over the past three years. Last year the city paid $5.6 million to the Iowa Public Employees Retirement System and $11.8 million to the Municipal Fire and Police retirement System. Des Moines general operating budget is around $538 million.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
