Moody's clips Des Moines' Aaa rating, citing budget woes.

CHICAGO -- Moody's Investors Service on Friday lowered the general obligation bond rating of Des Moines to Aa from Aaa, citing increasing financial concerns due to continued budget problems.

The rating action affects $154.5 million of outstanding GO debt.

Moody's downgraded the debt in conjunction with an upcoming $17.75 million GO issue for general capital projects, scheduled to be sold today.

Standard & Poor's Corp. last week affirmed Des Moines' AA-plus debt rating with a stable outlook, according to Robert Durante, an associate director at the rating agency.

Thomas O'Donnell, an assistant vice president at Moody's, said that the rating agency downgraded the city's debt rating because an Aaa rating was "inconsistent" with the city's ongoing budget imbalance and operating budget that continue to depend on "one-shot" funding sources.

The city's general fund balance has been maintained through the continued use of one-time budget adjustments, such as asset sales, hiring delays in the city's police and fire departments, staff cuts, and capital outlay deferments, Moody's said in a press release.

Martin Frederickson, Des Moines' finance director, said that the city has been a victim of state-mandated property tax limitations that have placed pressure on its finances in recent years. The limitations include a two-year property tax freeze that expires on June 30, the end of fiscal 1994, he said.

O'Donnell agreed that the property tax limitations have contributed to problems in the city's fiscal 1994 and 1995 budgets. However, he said that the Moody's downgrade can be attributed to "long-term" structural problems with the city's finances.

O'Donnell said that Des Moines officials have not addressed the city's financial problems, which he said stem from a lack of revenue diversity, moderate tax-base growth, and the lack of a general fund tax-rate margin. He said that for the last few years the city has levied its statutory maximum of $8.10 per $1,000 assessed valuation.

"They have no margin to work with," O'Donnell said.

Moody's said that Des Moines' attempts to diversify its revenue base by scheduling a local option sales tax referendum have been postponed repeatedly. Other proposed revenue enhancements, such as a fee for storm water system improvements have not been aggressively pursued by the city council, the rating agency said.

In addition, Moody's said that though the city anticipates issuing a substantial amount of debt in the future, "quick payout and continued support from non-property tax sources," such as hotel taxes, should "mitigate the future debt's impact on the property tax levy."

O'Donnell said that Des Moines' five-year capital improvement plan includes the issuance of $68 million of GO bonds and $13 million of tax increment financing revenue bonds.

Frederickson said he expects the city's finances to recover in the near future, partly because of the expiration of the two-year property tax freeze. In addition, Frederickson said he believes the city council will renew efforts to diversify the city's revenue base by placing a one cent local option sales tax referendum on a future ballot.

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