February 21, 2013

City of Ithaca Maintains Credit Rating

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The City of Ithaca has retained its credit rating of AA, despite earlier facing a $3 million budget deficit.

Mayor Svante Myrick ’09 announced the news on his Facebook page Feb. 15, saying, “thanks to the hard work of our staff and the difficult decisions we made … we’ve just learned that we were able to maintain our credit rating at AA.”

The rating will allow Ithaca residents to secure low interest rates on long-term borrowing, Myrick wrote.

Moody’s, a credit rating agency, assigned Ithaca the Aa2 credit rating — the third higest credit ranking that Moody’s awards.

“The city’s credit rating is a pulse of how overall city finances are,” said Steven Thayer, city controller. “The rating covers all aspects of city activity … so for the city’s rating to stay strong at an Aa2, the community, including Cornell and Ithaca College, have an impact on the overall economic climate in Ithaca.”

Credit ratings are determined by credit agencies that evaluate the likelihood that a borrower will be able to repay a loan.

“Lenders rely on credit ratings to determine whether they are comfortable with the level of risk of the lender, and if so, at what interest rate they are willing to lend,” said Prof. Yaniv Grinstein, management, finance.

A poor credit rating indicates that the borrower has a high risk of defaulting. Several factors which influence a credit rating include budget deficits, loans that a city maintains and tax revenues, according to Grinstein.

“If the city has more outstanding debt, then it means that it needs to repay more in the future, and it therefore means that the likelihood that it might not have enough cash to repay [the loan] is larger,” he said.

Tax revenue and the stability of governance in a city also impact its credit rating, according to Grinstein.

“Tax money is the main source of income to a city and its main source to repay loans. If, for example, the city faces high unemployment, the level of anticipated taxes is going to go down, and there will be less money in the future to repay the loan,” he said.

Stability of governance affects credit ratings because the “history of deficits in previous years and the ability of the mayor to pass changes in the budget or changes in taxes” are all examined upon determining a city’s financial rating, according to Grin­stein.

The stable credit rating is especially significant because this year, development in Ithaca will be more active than in previous years, according to Thayer.

“As far as projects, the city has a large Commons reconstruction project starting in April, and also the Water Treatment Plant Reconstruction project which will start later this year,” Thayer said. “In addition, there are several private development projects occurring during the year.  Many housing and apartment buildings will be under construction over the next two years.”

Though the city’s stable credit rating will enable it to pursue multiple economic development projects, the future still holds many challenges, Thayer said.

“This is a difficult period for the city financially, so maintaining the Aa2 bond rating will continue to be challenging for us,” Thayer said. “Many issues face the city including high debt load, lower fund balance and reserves, higher pension costs, higher labor costs, higher health insurance costs, higher insurance liability costs and level or decreasing revenues.”

For now, the city will likely invest in restoration projects, according to Grinstein.

“When the city of Ithaca has a high credit rating, it means that it can borrow at a low interest rate,” he said. “This source of funding is useful should the city decide to invest in new projects or even in case it faces an unforeseen need for cash.”

Original Author: Rebekah Foster