Two rating agencies cut Hazelwood, Mo.’s ratings this month as the city remains locked in a battle with a fire protection district over the cost of services that city officials say , could lead to Chapter 9 bankruptcy.
Tax troubles that city leaders attribute to the dispute with the Robertson Fire Protection District came to a head in June when Mayor Matthew Robinson posted a letter on the city’s website to residents warning that ” A Chapter 9 bankruptcy of Missouri’s 26th-largest city and the seventh-largest city in St. Louis County may be unavoidable” if fire district payments are not reduced.
Missouri allows local governments to file Chapter 9. The city’s fire and ambulance costs, including charges for two fire districts, make up 42 percent of general fund expenses. The town of 25,000 people is about 20 miles northwest of St. Louis.
S&P Global Ratings put the city’s ratings on CreditWatch on June 30 in response to the letter, which was also leaked in a folder July 13 on the Municipal Securities Regulatory Board’s EMMA website which provides a link to the mayor’s statement, which was not working on Thursday.
S&P resolved CreditWatch last week by downgrading the rating two notches to A-plus AA and assigning a negative outlook. Participation certificates were reduced to A from AA-minus and credit obligations were lowered to A-minus from A-plus.
“The downgrade reflects elevated governance risk,” S&P analyst Scott Nees said. “In particular, we see the risks associated with the city’s risk management, culture and oversight, as evidenced by what we see as an emerging structural fiscal imbalance that could lead to large and unsustainable reserve drawdowns. as of the next fiscal year, otherwise addressed.”
On August 2, Moody’s Investors Service downgraded the city’s general bond rating on $4.9 million of bonds by one notch to A2 from A1 and assigned a negative outlook.
“The downgrade to A2 on the General Duty Unlimited Tax Ratings reflects budgetary pressures on the General Fund with respect to a contract with a fire department,” Moody’s said. “City governance is a key driver of this rating action as, in response to budget management challenges posed by fire department contract fees and the ongoing lawsuit, senior leaders have said they will consider bankruptcy.”
Hazelwood annexed land in 1995, which led to its contractual relationship with the district.
The city council voted to terminate the contract in 2018, which led to a lawsuit by the district, resulting in several years of court-ordered mediation with no resolution yet in sight. The city continues to purchase fire protection services at a reduced rate of $4.5 million per year under an interim agreement. The case is pending in the St. Louis County Circuit Court.
Insolvency is not imminent, as federal pandemic assistance helped support the city’s $30.5 million budget for fiscal year 2023, leaving a structural gap to close in 2024. The city has strong reserves equivalent to 45% of expenditures, but using them could trigger further downgrades and would only provide temporary relief.
S&P caps ratings when an entity’s operations are structurally unbalanced at BBB-plus and BBB-minus when a government is actively considering bankruptcy.
“They’re not actually following the steps to file for Chapter 9, so we don’t believe after talking to the city that they’re actively considering bankruptcy,” Nees said in an interview.
The fire district said in a statement it was ready, willing and able to work with the city on a solution and noted that the city had rejected the district’s offer to merge with the Hazelwood Fire Department to to save money. The district also noted that the city has long threatened bankruptcy and calls it a bargaining ploy.
Deputy City Manager David Leezer said the city expected downgrades after the mayor’s letter was released.
“Nobody likes to be downgraded, but we don’t expect any debt, so it won’t affect us in the short term,” Leezer said. “Bankruptcy is not imminent but it is not a rattle on the part of the mayor. It could happen, but it is in two to five years” in the future.
The city has cut services and staff and doesn’t want to ask taxpayers for more help because of its already high sales and property taxes, Leezer said. A recall election for district council members could benefit the city’s position, Leezer said.
While market participants are used to talking about potential bankruptcy, especially when it’s part of trading positioning, such a warning from a Missouri-based borrower hits harder, said Matt Fabian, partner at Municipal Market Analytics.
“Missouri has the second most general government of any state after California which is in our ‘distress’ database, “so you have to take it more seriously,” Fabian said.
A failure by several Missouri municipalities to honor credit-backed credits is also heightening concerns. “The threats of a general government in Missouri are more credible than they would be elsewhere.”
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