FLORENCE, S.C. – The city of Florence’s water and sewer system recently received a favorable rating from two credit rating agencies.
City finance director Thomas Chandler spoke Monday to the Florence City Council regarding the issuance of an additional $10 million bonds to fund the conversion of the city’s meter reading system to an automated system. As part of that bond issue, the city’s water and sewer was required to undergo an analysis by two credit rating agencies, Moody’s and Standard and Poor’s.
The credit rating agencies issue a credit rating that rates the ability of the issuer to pay back its debts.
As explained in the meeting by Florence Mayor Stephen J. Wukela, the higher the city's credit rating is, the lower the rate of interest the city must pay on the bonds it issues, because the likelihood of failing to pay back the bonds, also called default, is lessened. By having a lower rate of interest, the city is able to save money on its projects which provides a cost savings to the taxpayers.
A lower credit rating, however, means the likelihood of default is higher, which means the city would have to pay more in interest, raising the burden upon the taxpayers.
Chandler said the credit rating for the water and sewer system had been affirmed at AA- by Standard and Poor’s and Aa2 by Moody’s.
A slide Chandler presented to the council indicated that the city’s credit strengths were a demonstrated history of phasing in rate increases, ample system capacity and a very strong financial risk profile. Among the challenges listed were an above-average debt burden, a debt service coverage below similarly rated utilities, a “somewhat elevated” poverty rating and a lack of growth in median family income in the city of Florence.
According to a chart Chandler also presented the city council Monday afternoon, both credit rating agencies classify Florence’s water and sewer bonds as high grade. The Moody’s rating of Aa2 is one level higher than the Standard and Poor’s rating.
The high-grade classification is one level below the highest grade of prime.
Chandler later said the city had been upgraded to its current level in 2016.
“For a city of our size, that is a very strong bit of news,” Chandler said. “You ladies and gentlemen can be very proud of that.”
Wukela said the people who to be congratulated were Chandler, City Manager Drew Griffin, the city’s financial advisor and bond attorney. Wukela later added Michael Hemingway, city utility director, to the list of those deserving credit.
Wukela added that the ratings were about as good as the city could get considering its size.
Larger cities and companies are usually considered lower risks because their size prevents one issue from affecting them as much. i.e., a major business leaving affects Florence more than say, New York City or Los Angeles.
Griffin said the city — when it took over the Timmonsville water system — did so with the idea of continuing to maintain the city’s credit rating. He said he took the news of the credit rating as evidence the city was doing so.
The bond issue also calls for the refinancing of 2010 bonds for the city to get a lower rate of interest.
In addition to being affected by the credit rating of the issuer, bond interest rates are also affected by the federal funds rate — the rate banks charge each other to deposit money overnight — which is set by the Federal Reserve System.
The rates set by the Federal Reserve are lower now than they were in 2010, when the bonds were issued. The rates were lowered in 2010 to combat the Great Recession.
The Federal Reserve is tasked with maintaining high employment numbers and low inflation numbers. In order to do this, the Federal Reserve will “tighten” by raising rates in times of economic prosperity to prevent a bubble from forming in the market. In times of economic crisis, the Federal Reserve lowers rates to make it very unprofitable for banks to have their money deposited with other banks, thus making them lend more money, which stimulates economic activity.
The city council approved the second and final reading of the bond issue unanimously.