FARGO — Moody’s Investors Service downgraded the city of Fargo’s rating for its general obligation debt but also nudged up the bond rating outlook from negative to stable.
The assessment, made last month, came as the city was preparing to go to the bond market as it does regularly to borrow for ongoing infrastructure and other capital projects.
Moody’s downgrade from Aa1 to Aa2 for Fargo’s general obligation debt “primarily reflects an elevated debt burden, which is expected to further increase following upcoming borrowings,” the bond rating service said. “The rating also incorporates high fixed costs relative to operating revenue,” the Moody’s analysts wrote.
But the advisory to investors added: “These challenges are balanced against attributes that include Fargo’s growing economy, healthy operating reserves and moderate post-retirement liabilities."
In July 2018 Moody’s assigned a AA1 rating with a negative outlook to the city of Fargo’s general obligation debt, which the most recent rating action revised to stable.
A rating of Aa1 is one notch below Moody’s highest bond rating of AAA.
The downgrade reflects a tapering of unusually robust construction activity, and the resulting downgrade was expected, city officials said.
“Recent economic conditions have been marginally impacted by a 25% decline in construction activity in 2019 and continued use of debt financing for large projects,” Kent Costin, the city’s finance director, said in a statement.
“The City and its financial advisers anticipated this likely outcome as it monitored local economic metrics on a continual basis,” Costin said. “Several once-in-a-generation, large construction projects contributed to a flourishing boom; this is a return to a normal, yet healthy growth trajectory.”
The downgrade was foretold by the earlier negative outlook, he added.
In fact, the downgraded rating for Fargo’s general obligation debt has returned it to the level before the construction boom, Jenica Flanagan, the city’s accounting manager, said Thursday, Feb. 13.
Before the building boom took off in 2011, Moody’s gave the city of Fargo’s general obligation debt a rating of Aa2, she said.
“Now it’s kind of returned to a more normal construction level, but still healthy growth,” Flanagan added.
The city also has what is called annual appropriations bonding debt, which Moody’s in 2018 assigned a rating of Aa3. Moody's warned that a downgrade could result following a "final determination of local share of financing" for the $2.75 billion diversion, which is backed by local sales taxes expected to generate more than $1 billion, as well as state and federal support.
Fargo carries $450.5 million in appropriations bonding debt, mostly for infrastructure projects such as streets and sewers, that is repaid by special assessments, Flanagan said.
The city of Fargo also assumed debt of $50 million in short-term debt to help finance the $2.75 billion flood diversion project, but the Metro Area Diversion Authority will repay that debt, Flanagan said.
Ultimately, officials expect much of the local debt to finance the diversion to be covered by a federal low-interest loan program that will enable borrowing of about $510 million. Local officials are in the process of applying for that loan, she said.
"This hugely important loan will reduce the tax burden of the diversion project and give assurances to taxpayers, state legislators and the private market that the project is affordable and moving forward," Gov. Doug Burgum said when the project was invited to apply for the program in October 2019.
“Fargo’s bond rating remains higher than its peers in the metro and once again has a stable outlook,” Mayor Tim Mahoney said. “As the regional leader, Fargo has chosen to invest in proactive projects to maintain our assets, bolster our infrastructure and support our growth potential.”