City’s debt could affect bond rating

Lawrence is built on debt.

More than $100 million worth is outstanding right now, with more than $70 million of that in general obligation bonds backed only by the city’s tax base.

That debt financed a new fire station in east Lawrence, recreation facilities, stormwater projects and dozens of roads.

With interest rates at all-time lows, cities across the United States are taking advantage by funding projects based on municipal bonds.

Those projects might be getting more expensive for Lawrence and its taxpayers.

“We’ve sort of been put on notice by Moody’s,” said Finance Director Ed Mullins. “If we drop much below our fund balance at the end of this year, we could see a reduction in our bond rating.”

Lawrence’s municipal bonds are IOUs to investors. Investors loan the city money for a specified period of time and the city pays it back, with interest. Because the city has never defaulted on a loan and has a strong tax base, its bond rating is good.

Bond ratings are comparable to credit scores. Major rating firms, such as Moody’s and Standard & Poor, look at a city’s overall financial picture and then issue a rating to show how much confidence to put in a city’s bonds. The highest Moody’s rating is AAA; Lawrence’s rating is AA2, for now.

Budget woes have forced the city to dip into its general fund balance, which is the money the city is allowed to carry over into the next year as a financial cushion.

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“It’s one of the largest drawdowns we’ve ever had,” Mullins said.

Lawrence financial consultant Dan Gaumer said a rating drop was a danger sign.

“That’s how the investor measures the safety of the investment,” Gaumer said of the ratings. “With the AA2 rating and the possibility of a downgrade, I wouldn’t favorably” rate the bonds.

Still, Gaumer said the safety of municipal bonds and the purpose for them made them attractive to some investors, even with the possibility of a downgrade.

“They’re used to build schools, roads, hospitals,” Gaumer said. “Some investors look at them as a way to give back to the community.”

It’s not just investors who would suffer if the bond rating dropped. Lower-rated bonds demand higher interest rates to compensate for the increased risk. To pay higher interest rates, the city has to raise property taxes.

Mullins said the proposed 2004 budget should maintain Lawrence’s good credit, barring any unforeseen circumstances.

But with the 2005 budget shaping up to be as ugly as 2004’s, the threat of a bond downgrade isn’t likely to go away.