Coralville; ailing finances, or healthy debt?
Since the mid-2000s, the City of Coralville has been engaged in significant economic development projects that have been both hailed as visionary and necessary for the community’s growth, and criticized as unfair and irresponsible to taxpayers. In more recent years, the city has fallen under scrutiny for its TIF practices and continued participation in providing financial incentives to private enterprise. This is the first of a three-part series examining the city’s current fiscal status, its economic decision making and the concerns of area citizens who question both.
By Lori Lindner
North Liberty Leader
CORALVILLE– Coralville’s financial position just took another public hit, with a June 7 downgrading of the city’s bond rating.
It is the second time this year that Moody’s Investor Services has lowered Coralville’s rating, and it’s one more validation for members of a citizens’ group who believe the city is on a slippery fiscal slope.
Moody’s is a bond credit rating corporation that researches and ranks the borrowing risk of commercial and government entities, assigning them a rating on their creditworthiness, from Aaa (the highest) to C.
Coralville’s long-term and short-term ratings fell in Moody’s April 2012 report, based on the underperforming Marriott Hotel in the Iowa River Landing, the city’s reliance on the highly-leveraged Tax Increment Financing (TIF) on Coral Ridge Mall, and its markedly elevated debt burden.
The company’s June opinion lowered the city’s long-term General Obligation Unlimited Tax (GOULT) rating from A3 to Baa2, its annual appropriations rating from Baa2 to B1, and its short-term Bond Anticipation Note (BAN) rating from MIG2 to MIG3.
It’s a lot of letters and numbers that essentially indicate the city’s financial outlook remains negative in Moody’s opinion, and it can translate to a higher interest rate when the city does have to borrow money for large projects. Lenders look to companies like Moody’s to determine their risk in loaning funds to municipalities.
Over time, the City of Coralville has accumulated more debt than some area business people and Coralville citizens find comfortable. A group of them organized into the Citizens for Responsible Growth and Taxation (CFRG&T) after Coralville entered into a development agreement to bring a new Von Maur to the city-owned Iowa River Landing (IRL) area, relocating the department store from Iowa City’s south side and promising extensive incentives funded by Tax Increment Financing dollars (TIF).
CFRG&T members banded together to file a legal petition trying to stop the deal and help stanch the funneling of taxpayer dollars away from services than benefit Coralville residents, the county and local school districts.
The City of Coralville responded by restructuring the Von Maur deal, but filed a counter-lawsuit of its own. Meanwhile, the case garnered so much public attention that the state legislature became involved, and legislative subcommittees began to work on TIF reform measures, some of which passed in the 2012 session.
In February of this year, both Coralville and the CFRG&T members dropped their lawsuits. Iowa City businessman Tom Bender said much of what the citizens’ group had hoped to accomplish had been achieved.
“One thing that brought this group together was the Von Maur deal. We decided as a group that litigation was not something we wanted to do. The purpose (of the lawsuit) was really to focus public attention on (TIF practices), and we think that’s what happened. When we realized we had accomplished that mission, we decided it wasn’t productive for us to go on,” Bender said.
But CFRG&T continues to convene as its members grow increasingly concerned about Coralville’s debt level and ongoing subsidizing of private enterprise– the same factors Moody’s cites in its recent downgrade reports.
Moody’s recent opinion does note that Coralville enjoys a stable economy by virtue of being located near the University of Iowa college and hospital campuses. But the inclusion of a “negative outlook” also reflects the company’s expectation that “the city will continue to issue debt for economic development projects of a non-essential nature,” and concern that the narrow liquidity of those enterprises will “limit the city’s ability to respond to unforeseen stressors.”
Coralville Director of Finance Tony Roetlin said city officials do take Moody’s opinion and comments seriously; when the downgrade was reported, he set up a conference call so lenders and investors could ask specific questions about Coralville’s financial position, and get answers directly from city officials.
“One fundamental of capital markets is transparency. More transparency means less risk and less risk means greater access to capital at reasonable rates,” said Roetlin.
But he is also careful to note that Moody’s is just one rating agency, and credit ratings are just a single piece of the city’s overall debt picture.
“Moody’s is certainly one constituency, but one with a relatively narrow focus whose opinion impacts cities. They look at things from a very narrow perspective: their ratings are about risk, and that’s about it,” said Roetlin. “Think of them as a short, common language that financial market participants can utilize to communicate very efficiently. It’s a tremendous amount of condensation of a big, complex picture to a set of no more than four letters and digits.”
And even in the description of Moody’s rating, a rating of Baa2 indicates the city has adequate debt repayment capacity, he added.
“I’m not saying striving to be adequate is the goal, but sometimes people only look at part of the spectrum,” said Roetlin. Standard & Poor is an agency similar in function, and its bond rating for Coralville is six points higher than Moody’s, he pointed out. It would not necessarily be the right thing for the city to make quick adjustments in its financial plan simply to increase Moody’s bond rating, he said
“The city takes it seriously, but recognizes it is not the only facet of a complex picture, and wants to arrive at a process by which we make careful decisions about how to manage the city’s finances that take into account the whole picture, and not just a snap reaction to get the short-term benefit of changing the credit rating,” Roetlin said.
Further, he said, Moody’s concern for the city’s ability to respond to “unforeseen stressors” is actually more about several financial stressors happening all at once, along with a concurrent inability for the city to raise revenues.
That is not the case in Coralville, Roetlin said.
For one thing, the city’s water and wastewater utility funds, both of which also received bond rating downgrades from Moody’s, each have strong cash reserves as well as healthy reserves set aside for future capital improvements and reserves to repay their debt service. Second, cities do have unlimited taxing authority with general obligations, should an emergency arise. “A careful reading of that portion of the report acknowledges the flexibility cities have to deal with some of those unforeseen things,” Roetlin said.
Coralville City Administrator Kelly Hayworth said the financial markets themselves are another indicator of how others view Coralville’s level of risk.
“We’ve had conversations with some of the investors in our bonds, and one of them responded, after the Moody’s downgrading, that some of our hotel revenue bonds sold at 102 percent of par. So they said ‘the market obviously doesn’t feel you are not going to repay, or they wouldn’t be paying that high rate.’ In that instance, obviously the market feels a little differently than Moody’s,” said Hayworth said.
Kevin O’Brien, owner of several regional McDonald’s restaurants, is one member of CFRG&T who believes the city’s insouciance about Moody’s opinion is inappropriate.
“The fact of the matter is, for most of the city’s consultants– the people who do their bonds– the more money Coralville spends, the more money they make. So there is no incentive to keep costs down because they will continue to benefit from the city doing what they are doing,” said O’Brien. “When we present numbers from entities like Moody’s, the response of the city is ‘we don’t agree with them.’ Moody’s is the most respected bond appraiser in the country, and they don’t agree with them. When we present facts rather than conjecture, and city officials continue to turn a blind eye to it, it’s very concerning.”
It’s concerning, Tom Bender noted, because the risk creditors see when lending money to the city leads to higher interest rates creates a ripple effect that trickles down to taxpayers; even tenants of rental properties..
“I run apartments. People who rent apartments think they don’t pay property taxes, but they do; it’s built in as part of their rent. There is a big body of misunderstanding about (property taxes), and we are searching for an easy way to describe it,” said Bender.
And commercial property owners, whose properties have historically been taxed at 100 percent of assessed taxable valuation instead of enjoying a rollback like residential properties, are hit even harder.
“We’re not against TIF,” said O’Brien. “We are not against economic development. But it’s a question of degree, and how the money is being used. My sense is, the (Coralville) city council is acting like a Mississippi river boat gambler and it is so out of proportion of what we believe is the role of municipal government.”