Last week Moody’s Investors Service affirmed the Aa3 rating of the City of Modesto Water Enterprise’s Water Refunding COPs and the associated bank bond rating. A negative outlook was assigned. The city’s water enterprise has $178.7 million in outstanding debt, of which $45.5 million is rated by Moody’s.
The negative outlook assigned reflects a decline in debt service coverage from FY 2013 to FY 2015. Emergency drought regulations adopted by the state require the city to reduce water consumption by 36%. A water rate study is underway to determine the need for a water rate increase to address the loss of revenue due to conservation.
The city is budgeting for further revenue declines in FY 2016, with debt service coverage projected to narrow to 1.30 times, based on the city meeting its state-mandated 36% conservation level, below the City Council’s policy of 1.50 coverage. The city estimates that for each 1% reduction in water consumption, revenue will drop by about $260,000. While the city has initiated a water rate and fee study, increases will not be likely implemented until the last third in the fiscal year.
The Aa3 rating speaks to the City’s strong water conservation efforts in the midst of the current drought. The Water Fund continues its effort to closely monitor debt coverage ratios. Stage II Drought enforcement will continue through spring of 2016, which is expected to perpetuate the drop in revenue to the later part of the fiscal year. To increase the rating, management of resources and costs assigned would need to change in the way of rate increases or a shift to sustaining debt service coverage levels consistent with a higher rating level. To decrease the rating, the debt service coverage would have to continue to decrease or reserves would need to decline further.