SALISBURY — In a rare move, Moody’s has downgraded the city of Salisbury’s bond rating due to debt and risk associated with Fibrant, the city’s high-speed broadband utility.
Fibrant has underperformed since its launch in 2010, said David Jacobson, a spokesman for Moody’s Investors Service.
“It finally got to a point where we felt like grading action needed to be taken,” he said.
Fibrant lost $4.1 million last year and has borrowed $7.6 million from the city’s water and sewer capital reserve fund since 2011, which the city says Fibrant will pay back at 1 percent interest. So far, Fibrant has started paying back interest but no principal on the internal loans.
Moody’s decision took the city by surprise. Officials expect Fibrant to break even this year without another internal loan, and Standard & Poor’s, a competing bond rating firm, upgraded the city’s bond rating twice last year, saying Salisbury’s overall budgetary performance has been strong.
A bond rating helps to measure a city’s financial health and can influence how much it costs for a city to borrow money. Moody’s downgrade could mean a higher interest rate if the city tries to borrow money, but City Manager Doug Paris said he has no plans to take out debt and the Moody’s downgrade will not cost the city anything.
“We don’t have any plans currently to borrow any funds, and we don’t foresee any impact,” Paris said.
Moody’s said Fibrant is not living up to expectations to be self-supporting and will have a hard time meeting subscriber and revenue projections. The city plans a rate increase that has not yet been adopted, according to the Moody’s news release.
Downgrading a city’s bond rating is “quite uncommon,” Jacobson said.
“By and large, most municipalities are fairly stable enterprises,” he said. “Not too many cities engage in this type of enterprise risk, which is getting financially involved in some sort of endeavor that is … non-essential.”
Moody’s downgraded the city’s certificates of participation rating five notches to the firm’s lowest investment grade rating.
The city’s other bond ratings were downgraded three and four notches. In all, Moody’s downgraded more than $68 million of the city’s debt.
Moody’s periodically reconsiders the bond ratings of cities and has been analyzing Fibrant on an ongoing basis, Jacobson said.
Paris said the city was caught off guard by Moody’s downgrade.
“We wholeheartedly disagree with the decision,” he said. “Where we came from is not where we are going.”
Paris said he is confident the city will outperform Moody’s projections and pointed out that the firm did not take into account the city’s current year finances, which cannot be assessed until the end of the fiscal year on June 30.
Fibrant will break even this year with no loan, Paris said. Ending the internal loans to Fibrant was one of City Council’s top priorities.
Moody’s said the city has no plan for paying back principal to the water and sewer reserve fund and does not include repayment of the internal loans in the Fibrant budget.
Paris acknowledged that so far, Fibrant has paid back only interest.
“We have to walk before we can run,” he said.
Paris said when the city meets some of the expectations set out by Moody’s for an upgrade, Salisbury can request another look by the firm. Moody’s would have to agree to reconsider Salisbury’s bond rating.
City Councilman Brian Miller, who works as a market executive for BB&T, said he was surprised by the downgrade.
“From a financial perspective, there is no question that the city’s financial picture has improved over the prior audit period Moody’s examined,” Miller said. “Our fund balance doubled, and all our enterprise funds were self-supporting.  
“We fully expect this trend to continue through this current fiscal year, and I fully expect Moody’s rating to reflect this for future periods.”
Moody’s downgraded the city’s general obligation bond rating to A3 from Aa2, affecting $3.3 million in debt.
Additionally, Moody’s downgraded to Baa3 from A1 the city’s certificates of participation, affecting $18.4 million in debt. The city has an additional $17 million in bank certificate obligations that Moody’s downgraded to Baa3 from A1.
Lastly, Moody’s downgraded to A3 from Aa3 the rating on the city’s combined enterprise system revenue bonds, affecting $30.5 million in debt.
Moody’s considered Salisbury’s stable, slightly concentrated tax base, healthy general fund reserve and modestly elevated direct debt burden when assessing the bond rating.
The negative outlook reflects the city’s lack of budgeting for certificates of participation, or COP, and bank certificate debt service from its general fund, Moody’s said.
In 2008, Salisbury issued COP and privately placed bank certificates to construct Fibrant, a $33 million fiber-to-the-home network.
Moody’s listed the city’s strengths as:
• Stable tax base with slight concentration
• Oversight by the state’s Local Government Commission
• Stable water and sewer operations
Challenges were listed as:
• Significant operating pressure from Fibrant risk
• Limited enterprise cash
• Fibrant is over-leveraged and non-essential
Moody’s said it could remove the negative outlook and upgrade the bond rating if Fibrant shows “sustained stabilization” and pays back the debt owed to the city’s water and sewer reserve fund.
The rating could be further downgraded if the city’s general fund reserves deteriorate, the water and sewer reserve continues to deteriorate or Fibrant continues to rely on other city funds to cover operations, Moody’s said.
Revenues from Fibrant, which has nearly 3,000 subscribers and about 26 percent market share, have failed to support the utility’s operations and debt service requirements since its inception, Moody’s said.
The network’s liabilities exceeded its assets by $12.5 million at the close of fiscal year 2013.
In an attempt to balance network operations, the city has taken several steps to reduce expenses, including renegotiating vendor contracts and merging Fibrant staff with other city operations. However, Fibrant’s continued reliance on other city funds to support operations and debt service requirements could impose a significant burden on the city’s overall financial stability, Moody’s said.
Given Fibrant’s inability to make enough money to support operations and debt service payments, Moody’s said it is concerned about the “likelihood” that Fibrant will continue to borrow money from the water and sewer reserve or from the city’s general fund.
The city could raise property taxes to cover the debt service payments, but Salisbury historically has been reluctant to do that, Moody’s said. With continued loans to Fibrant, the water and sewer reserve fund runs the risk of falling to levels well below industry standards, according to the firm.
Contact reporter Emily Ford at eford@salisburypost.com.