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Fitch Ratings downgrades Wilmington’s municipal bonds

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A prominent financial research firm downshifted the credit rating for Wilmington’s municipal bonds, citing a new evaluation method and the cost of debt service compared to public spending. (Courtesy Port City Daily)

WILMINGTON — A prominent financial research firm downshifted the credit rating for Wilmington’s municipal bonds, citing a new evaluation method and the cost of debt service compared to public spending.

READ MORE: City council budget musters past first reading, questions remain on several line items

ALSO: City considers 2.5-cent tax increase, as Skyline Center makes up 10% of budget

Fitch Ratings downgraded Wilmington’s Issuer Default Rating — an assessment of how likely an issuer is to default on their financial obligations — from AAA to AA+ in a report last Thursday. AAA is Fitch’s highest rating and signifies the lowest expectation of default risk, followed by AA+, which denotes a slightly higher risk.

The firm lowered the city’s outstanding rated general obligation bonds (GO) — which are backed by the general revenue of a municipality — from AA+ to AA. It also lowered the city’s outstanding rated limited obligation bonds (LOBs) from AAA to AA+. LOBs are a type of bond that allows municipalities to raise property taxes to pay off debt.

Evette Caze — Fitch’s regional manager of Mid-Atlantic local government credit ratings — told PCD the updated ratings are influenced by the firm’s new evaluation method.

Fitch previously used independent metrics to rank local governments’ credit, but its new method compares local governments in its portfolio. She said the change has caused a mix in credit upgrades and downgrades rather than a general trend.

Wilmington communications director Jerod Patterson told PCD he would reach out to the city’s finance department for input on the rating change. This article will be updated upon response.

The city ranked high on several metrics, including economic diversification and population size. Its financial resilience score remains AAA, as Fitch found Wilmington has “ample” budgetary flexibility and high control over its revenue and spending. 

The firm ranked Wilmington “midrange” for revenue volatility, citing its weakest three-year revenue performance since 2005. Demographic ratings were also midrange due to very high education levels and average unemployment.

Wilmington’s long term liability burden — focused on the historical trend of debt — also graded midrange in the 48th percentile. 

The weakest aspect of the score was “carrying cost to government expenditure,” which was in the 24th percentile in comparison to other local governments. It measures debt service costs and pensions divided by government spending; Caze described it “essentially as the cost of debt.”

Caze said Wilmington’s $70 million bond issuance used for purchase of the Thermo Fisher building — now called the Skyline Center — was a factor in the new rating. 

“That particular metric is below mid-range, so it’s on the weaker end,” Caze said.

State Treasurer Dale Folwell told PCD he believed the city should have put more consideration into how the purchase of the Thermo Fisher building could potentially impact credit ratings; he was the sole member of the Local Government Commission to vote against the debt issuance.

“It’s the same consequences as when you have a downgrade on sanitation grade,” Folwell said. “It’s a sign of quality, and in this case, it means higher borrowing costs. But the people who are laughing all the way to the bank, they’ve made their money. They don’t care about downgrades or property rate increases.”

He argued the city overpaid for the 929 N Front Street property, citing recent Wall Street Journal reporting on volatility in the commercial real estate market. Around $24 million of the LOB bonds used to purchase the building have a “variable interest rate,” which increase overtime and incentivize swift repayment.

Wilmington’s proposed 2024-2025 budget includes a 7% property tax increase. Staff maintains it is not related to debt service for the new Skyline Center and will be used for capital improvements and infrastructure. 

Alternatively, council member Kevin Spears has spoken against the proposal and views it as related to the purchase. In February, he said the tax hike looked “shady” since the city previously agreed not to raise taxes for the purchase.

Council member David Joyner raised similar concerns in a statement rejecting the proposed budget earlier this month.

“I cannot vote for this budget and thereby absolve the previous city council of the purchase of the Skyline Center, which had virtually no buy-in from the public,” he said. 

Fitch’s report stated Wilmington could receive a rating upgrade through a sustained, 26% decrease in its liability burden in comparison to government resources and personal income. Higher median household income and lower unemployment rates are other factors that could bump up the city’s credit score.


Tips or comments? Email journalist Peter Castagno at peter@localdailymedia.com.

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