The agency said this morning that there’s a “heightened probability of a downgrade over the next few months” because too much of the county’s cash is tied up in longterm investments.
“The Negative Watch reflects the county’s substantially reduced cash flow margin due to increased investments in long-term securities,” Fitch said in a news release. “The shortfalls developed with a deviation from past investment practices by the current and past county treasurers.”
The agency added that although “the county has taken swift corrective action, Fitch is assessing the county’s cash management practices’ impact on the overall credit profile. ”
Bernalillo County’s general-obligation bonds now have an incredibly strong “AAA” rating, which helps reduce borrowing costs.
The county’s investment portfolio has been a source of tension between the County Commission and Treasurer Manny Ortiz for months. The commission approved a unanimous vote of “no confidence” in him last year.
Ortiz has sold bonds at a loss, and he now faces a recall effort.
The full news release is posted below. I will, of course, have more in tomorrow’s paper.
Fitch Places Bernalillo County, NM Bonds on Rating Watch Negative Ratings Endorsement Policy
18 Feb 2014 4:48 PM (EST)
Fitch Ratings-Austin-18 February 2014: Fitch Ratings has placed the following Bernalillo County, NM bonds on Rating Watch Negative:
–$120.5 million general obligation (GO) bonds currently rated ‘AAA’;
–$135.7 million gross receipts tax (GRT) revenue bonds currently rated ‘AA+’.
The GO bonds are secured by an unlimited annual property tax levy on all taxable property within the county. The GRT bonds are secured by the county’s 1st 1/8th GRT for general purposes and the county’s 2nd 1/8th GRT for general purposes, excepting $1 million annually (at the rate of $83,333 per month) for indigent care.
KEY RATING DRIVERS
INVESTMENT PRACTICES IMPACT LIQUIDITY: The Negative Watch reflects the county’s substantially reduced cash flow margin due to increased investments in long-term securities. The shortfalls developed with a deviation from past investment practices by the current and past county treasurers. The county’s investments were technically compliant with its policy which was silent on maximum maturity for short-term investments.
CASH FLOWS THINNING: The county’s current year cash flows show positive but thin cash balances for the remaining five months of fiscal 2014. In order to bolster current year cash flows, the county sold a portion of its investments before maturity, resulting in modest losses.
STATE AUDIT UNDERWAY: A special audit of the county treasurer’s office has been ordered by the New Mexico state auditor. The special audit, to be conducted by an independent audit firm, will make recommendations to improve the county treasurer’s internal controls and management related to investment transactions.
PORTFOLIO AND MANAGEMENT RESTRUCTURING: The county commission has selected a third-party independent investment advisor to help the county restructure its investment portfolio in a manner that is better aligned with its cash flow needs. A new investment policy was also recently adopted which imposes tighter restrictions on investment durations. The policy also increases the required qualifications of the presently vacant county investment officer which manages and monitors the county’s portfolio of assets in cooperation with the elected county treasurer.
OTHER CREDIT FACTORS STABLE: The county maintains moderate debt levels with rapid amortization and a broad economy centered around the city of Albuquerque. The county’s operating performance remains strong, reflected in the maintenance of high, albeit illiquid, unrestricted fund balances. The fiscal 2012 unrestricted general fund balance totaled 87% of spending. The current year budget is balanced and based on conservative revenue projections.
The Negative Rating Watch reflects a heightened probability of a downgrade over the next few months. While it appears the county has taken swift corrective action, Fitch is assessing the county’s cash management practices’ impact on the overall credit profile.