S&P and Moody's Assign Ratings to UG General Obligation Bonds

Published on February 09, 2023

Moody's Investors Service has assigned an A1 rating to the Unified Government of Wyandotte County/Kansas City, KS' (UG) $42.3 million General Obligation Improvement Bonds, Series 2023-A and MIG 1 ratings to the $44.8 million Municipal Temporary Notes, Series 2023-I and $6.5 million Municipal Temporary Notes, Series 2023-II. 

Moody's has affirmed the following ratings:

• A1 issuer rating;
• A1 rating on the outstanding general obligation unlimited tax (GOULT) bonds;
• A1 rating on the outstanding revenue bonds issued by the Unified Government of Wyandotte County/Kansas City Public Building Commission, KS (PBC) for which the UG is the obligor;
• A3 rating on the outstanding Taxable Special Obligation Annual Appropriation Refunding Bonds, Series 2020-D;
• MIG 1 on the outstanding temporary notes.

The UG will have $1.3 billion in total debt post-sale. The outlook is stable.

S&P Global Ratings assigned its "AA" long-term rating to the Unified Government proposed $42.3 million series 2023-A general obligation (GO) improvement bonds and assigned its "SP-1+" short-term rating to the UG's proposed $44.8 million series 2023-I and $6.5 million series 2023-II municipal temporary notes. At the same time, S&P Global Ratings affirmed its "AA" long-term and underlying ratings on the UG's GO and GO-equivalent debt, affirmed its "AA-" long-term rating on the UG's appropriation debt, and affirmed its "SP-1+" short-term rating on the UG's temporary notes outstanding. The outlook, where applicable, is stable.

Read the Full S&P Global Ratings Report

"This is great news for the Unified Government," said Debt Program Coordinator A. Villarreal. "The affirmation of our credit ratings are a high priority for the Unified Government because it ensures our continued ability to affordably access the capital markets in order to finance our capital improvement needs."

Moody's Ratings Rationale

According to Moody's, the A1 issuer rating reflects a large and growing economy favorably located near employment centers in Johnson County, KS (AAA stable) and Kansas City, MO (AA3 stable), modestly growing population, and below median resident income. The rating also incorporates satisfactory financial performance but reserves are below median for the rating category. The rating further reflects the UG's elevated long-term liabilities and fixed costs ratios that will continue to grow because of a growing pension burden and significant future debt plans. The A1 rating on the GOULT bonds is at the same level as the issuer rating. The GOULT bonds are backed by the UG's full faith and credit pledge, and are paid from a dedicated property tax that is not limited by rate or amount and is levied on all taxable property within the UG, excluding certain incorporated and unincorporated areas. The A1 rating on the outstanding revenue bonds issued by the PBC is the same level as the issuer rating and reflects the more essential nature of the financed projects and the strength of legal provisions including the lack of annual appropriation, early cancellation, or termination risk. The A3 rating on the outstanding Series 2020-D bonds reflects a two notch distinction from the issuer rating and incorporates the annual risk of non-appropriation and the less essential purpose of the original financing (construction of a surface parking lot). The MIG 1 rating reflects the underlying long-term credit quality of the UG reflected in its issuer rating, history of consistent market access and satisfactory cash position at the time of issuance.

MOODY's Rating Outlook

The stable outlook reflects the expectation that continued economic expansion, utility rate increases, and bolstered financial policies will enable the UG to maintain balanced operations over the near term and will help to provide the necessary revenue to afford increasing debt service.

Factors that could lead to an upgrade of the ratings:

• Strengthening of full value per capita and resident income
• Material, sustained improvement in fund balance and liquidity
• Significant decline in long-term liabilities ratio
• Not applicable (short-term notes)

Factors that could lead to a downgrade of the ratings

• Weakened economic metrics
• Trend of operational imbalance and/or decline in reserves
• Material increase in long-term liabilities or associated fixed costs
• Downgrade of the UG's issuer rating (short-term notes)
• Significant decline in liquidity (short-term notes)

Read the full February 2023 statement from Moody's.

Press Release from Moody's

S&P Credit Overview

The S&P Global Rating reflects the strength of the UG's management team, which demonstrated a history of conservative budgeting practices, leading to actual results outperforming budgeted assumptions. Recent operating surpluses, including a sizable surplus in fiscal 2021, have increased the city's available reserves to levels well above the city's policy requirement of at least 17% of general fund expenditures. However, following a 2-mill reduction in the UG's property tax levy, in fiscal 2023, the UG's financial forecast shows a general fund budget gap going forward. We do not view this as an immediate credit pressure, as the UG's very strong available reserves provide, in our view, flexibility and time to solve the budget gap, and we generally expect the UG will outperform its budgetary assumptions given its strong track record. However, if this budget gap persists, with reserves falling below the UG's policy level and are not replenished within a reasonable timeframe, there could be downward pressure on the rating.

Although we consider the UG's economy to be weak relative to that of peers because of its lower-than-average wealth and income indicators, there has been steady growth and expansion of the tax base in recent years, which is likely to continue as a variety of economic development projects and redevelopment initiatives are underway. While we expect the U.S. economy will fall into recession within the next year (see, "Economic Outlook U.S. Q1 2023: Tipping Toward Recession," published Nov. 28, 2022, on RatingsDirect), we expect the UG's assessed value (AV) will continue to grow over the outlook period given the UG's ongoing development and the lagging nature of AV.

In our view, while not an immediate credit pressure, we believe the UG's very weak debt profile and large pension and other postemployment benefits (OPEB) liability will remain limiting credit factors for the foreseeable future. We understand officials plan to issue $16 million-$18 million in GO debt annually to address capital needs. As a result, we expect the debt profile will remain very weak for the next few years but it will not materially worsen, given the UG's above-average amortization rate. The UG's 2019-C GO bonds are privately placed, but we do not view this obligation as a contingent liquidity risk. The rating also reflects our view of the UG's:

• Participation in the broad-and-diverse Kansas City metropolitan statistical area (MSA), with a diverse mix of economic development and redevelopment. However, property wealth and income metrics remain below-average relative to those of peers;
• Very strong financial management policies and practices, highlighted by regular budget and investment monitoring, investment and debt management policies, long-term financial and capital planning, and general fund balance policy to maintain at least 17% of general fund expenditures in available reserves. The institutional framework score is strong;
• History of better-than-budgeted operating results, supporting very strong available reserves and liquidity; and
• Very weak debt burden with an above-average amortization rate and modest additional debt plans. Pension and OPEB contributions are not an immediate credit pressure, but we do view the UG's large pension and OPEB liability as a credit weakness.