Last week Moody’s credit rating agency issued a negative outlook for the City of Wausau and its water and sewer utilities for their combined projected debt of $220 million, while the city’s overall Aa3 rating remained in place.
The current credit rating, Aa3, still represents low risk, according to Moody’s Investor Service, but is one step lower than the city’s previous Aa2, equivalent to a Standard & Poor AA rating. The earlier rating matched many Wisconsin cities including Oak Creek, La Crosse and Green Bay.
“Concurrently, Moody’s has assigned a Aa3 to the city’s $3.8 million General Obligation Promissory Notes, Series 2022A,” the company’s statement read. “Following the sale, the city will have about $70 million of GOULT debt, $50 million of water revenue debt and $99 million of sewer revenue debt. The outlook is negative.”
According to Nasdaq.com, the “obligations rated Aa3 are judged to be of high quality and are subject to very low credit risk.”
Ehlers Public Finance Advisors, a financial consulting firm hired by Wausau, concluded a bond sale of about $3.9M at 3.8507% with Baird, a firm based in Milwaukee. An Ehlers representative told the City Council on Tuesday that the Baird’s bid was supported by a consortium of 22 other financial institutions.
In April, Wausau Pilot & Review reported that Wausau’s total debt, including water and utility borrowing, soared to $200 million, causing alarm among some elected officials and residents.
Moody’s said the negative outlook reflects weakening liquidity and debt service coverage in the city’s water and sewer enterprises, but added that “rate increases will likely stabilize the financial operations over the next two years,” Water rates require approval from the Wisconsin’s Public Service Commission.
In the wake of Moody’s assessment, which went public on Oct. 18, Wausau leaders and representatives from Ehlers have repeatedly pointed out the affirmation of Aa3 ratings and tried to distinguish between the debt owed by Wausau and those by the water and sewer utilities.
City officials say the ratings will improve once the new rates are allowed to take effect. The city has no control over water rates – only the PSC can determine that – but can set the sewer rate through a recommendation from its water commission and approval by its City Council.
The ratings for the city and the two utilities prominently figured during a discussion on the debts at the City Council meeting on Tuesday. The topic has also appeared in the recent 2023 budget discussions at the Finance Committee meetings.
Philip Cosson, Senior Municipal Government Advisor at Ehlers, said the Aa3 is a “very strong rate” while briefing the City Council on Tuesday about his and the city staff’s discussions with the rating company. Cosson said the Moody’s wanted to have a much broader discussion about the water and sewer utilities and Wausau’s capital outlay and its longer-range capital plan. Although the company expressed concern over the city’s capital expenditure, Cosson added, the city was able to avoid a downgrade.
The Ehlers advisor referred to the city’s strengths – “a large and growing tax base” and “a strong financial reserve and liquidity” as contributing to a healthy general fund.
One challenge Wausau and other communities face is limited revenue flexibility as the levy is determined by the state of Wisconsin, Cosson said, which can impact ratings. Another challenge the city faces is its below average resident income profile and “finally, what is critical here, is the weakening financial operation in the water and sewer enterprises could require temporary general fund support.”
Cosson said that he and the city staff were able to demonstrate to Moody that if there was any shortfall due to cash flow to water and sewer utility – until rates were put in place – the city will be able to handle those costs thanks to its healthy general fund.
Alder from Dist. 7 and Finance Committee Chair Lisa Rasmussen pointed out what she termed as a difficult situation faced by the city and the utilities.
“The situation we find ourselves in is that the water and sewer utility on its financials is showing the full brunt of the borrowing for the new facilities and the upgrades and yet they are not allowed on the other side of the equation to declare asset value of all of the things that have been built because they are not yet basically turned on and placed in service,” she said.
Rasmussen told Wausau Pilot & Review that Wausau’s general obligation debt remains on an aggressive retirement schedule, and 2022 is the second year where Wausau will borrow less for projects than it pays off on its debts.
“It is important to differentiate that the Water & Sewer Utility incurs, carries and pays for its own debts using ratepayer revenue, and they are separate from the general obligation debt of the city itself,” the alder said. She stressed that the utility is nearing completion of “two generational facility projects that occur once every 50+ years.”
At the City Council meeting on Tuesday, Alder Rasmussen said that the Finance Committee approved the water and sewer utilities’ 2023 capital projects expenses for potential ARPA funding at the committee’s meeting earlier that day. “That will stem any additional 2023 borrowing in the utility for capital work,” she said. Those recommendations will now go to the City Council at its next meeting. The Finance Committee also approved supplemental budget requests from various departments.
Mayor Katie Rosenberg also referred to the “decline” in the Wausau’s outstanding general obligation debt, citing assessment from the city’s Finance Director, Maryanne Groat.
“That discussion started in 2019 when the City began discussions about a new drinking water plant and upgrades to the sewer plant to comply with new federal and state mandates in an effort to meet the community’s needs for the next decades,” she told this newspaper. She added the city will continue retiring that debt pursuant to that debt schedule.
At the City Council meeting on Tuesday, Groat said the utilities need financial support from the city.
“Why do we need investments,” Groat asked by way of a rhetorical question. “Because we needed to make investments to meet mandates, to replace obsolete facilities, and that in the long run, it’s going to provide us the ability to provide good service to our utility customers.” She added that the city got the “best interest rates on that water and sewer debt” from the state, noting it was below 2% and the state forgave a portion of the outstanding debt for the city as a grant.
Alder Doug Diny, who had expressed concerns about the rising debts, responded by saying the alders did not require any convincing on the need for the city’s support to the utilities, but added they need to make sure “the public-facing total debt service debt…is not obfuscated.”
When Alder Tom Kilian asked about the city’s overlapping general obligation debt with other entities, Ehlers’ Cosson said the city has proportionate share of the debt with the Marathon County, Wausau School District, DC Everest Area School District and the North Central Health Care is over $113.87 million. The details are on page 24 of the General Obligation Promissory Notes.
Proportionment is common and each municipality shares those obligations, Cosson said.