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Posted on: August 27, 2019

Moody's reaffirms City's investment grade status

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Moody’s Investors Service recently reaffirmed the City of Taylor’s investment grade at “Baa2 stable.”

Often referred to as simply Moody's, the organization is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides international financial research on bonds issued by commercial and government entities. It analyzes and grades the City’s investment outlook each year.

The City’s Baa2 stable rating is considered “investment bond status.” Bonds with a rating of BBB- (on the Standard & Poor's and Fitch scale) or Baa3 (on Moody's) or better are considered "investment-grade." Bonds with lower ratings are considered "speculative" and often referred to as "high-yield" or "junk" bonds.

Read Moody’s entire credit opinion
Read Moody’s rating action

Prior to Mayor Rick Sollars taking office in November 2013, Taylor’s bond ratings hoovered in the junk bond status. Since that point in time, the financial picture of the City has improved dramatically, and with it, its investment ratings.

In its credit analysis, Moody’s noted Taylor’s “significant long-term liability burden and corresponding high annual fixed costs will continue to weigh heavily against its credit profile. The city's other post-employment healthcare benefit (OPEB) plan will require major increases in annual contributions to reach funding targets absent material changes to benefits.”

It continued: “Conversely, the city has made significant strides in rebuilding its once decimated fund balance and liquidity, primarily through budgetary reductions as the city is constricted in its revenue raising authority due to property tax limitations imposed by the State of Michigan (Aa1 stable). Our credit view also reflects the city's recovering tax base and below average socioeconomic characteristics.”

Strengths noted in the Moody’s research included:

  • Sizable, recovering tax base, within the Detroit (Ba3 stable) metro area
  • Significant strengthening of operating fund balance and liquidity
  • Moderate direct debt burden.

Credit challenges included:

  • Below-average wealth and income
  • Property tax caps cause revenue loss during time of tax base decline and slow recovery of revenue as valuation increase
  • Very high leverage due to unfunded status of pension and OPEB plans.

OPEB burdens are the significant factor holding back the City from even a better credit rating. OPEB represents post-employment benefits other than pensions, that a state or local government employee receives as part of their package of retirement benefits. Recent Government Accounting Standards Board (GASB) principles have placed a bigger focus on long-term legacy liability. As of June 2018, those unfunded OPEB costs were approximately $293M, significantly down from the previous year, but nevertheless huge hill to climb.

As a result, Taylor has established an OPEB corrective plan and OPEB trust, and began actually pre-funding the debt this year, allocating an initial $3M. Along with that commitment, Taylor has make major shifts in its spending practices. Some examples include the fact that new hires in police and fire are not eligible for retiree’s health care insurance, and instead have a health savings account in which the City contributes 2% of their annual income. In fact, all defined benefit pensions, for contracts after certain dates in 2016, have been closed.

The City’s internal financial audits, performed by Plant Moran each year, have improved year-over-year every period of the Sollars’ Administration, where Taylor has gone from a $5M structural deficit to a $7.8M unassigned fund balance (or surplus) during the last audit cycle.

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