ATLANTA -- Birmingham, Ala., announced last week the establishment of a special $87.6 million trust fund created from the sale of its water works.

City officials said they hope that the advent of the Birmingham Fund, which can only be tapped in an emergency, will lead to an upgrade of the city's general obligation debt rating. Moody's Investors Service rates the city's approximately $400 million of GO debt A1; Standard & Poor's Corp. rates it AA.

"Birmingham is one of the few cities that has ever taken the position that a one-time pot of money be set aside for an endowment," Hoyt Y. Bedingfield Jr., the city's finance director, said in an interview. "We feel this should provide some impetus to consider us for an upgrade, particularly at Moody's."

The fund was made possible by the monies received in January from the city's sale of its Industrial Water Board to the Birmingham Water Works and Sewer Board.

Bedingfield said the under a city ordinance passed April 19 permitting establishment of the fund, its principal can be appropriated only after a recommendation of the mayor and a two-thirds vote of the city council.

In addition, he said, one-half of the interest income from the fund must be plowed back into the fund to cover inflation. He said that the remaining interest income -- which he estimates at about $2.5 million a year at current rates -- is available for appropriation.

The finance director said that the establishment of the fund coincides with a time of unprecedented financial health for Birmingham. The city began the current fiscal year last July 1 with a $13.9 million undesignated general fund balance, and expects to add to its general fund surplus in fiscal 1994. Bedingfield noted that the city's yearend general fund balance has been increasing since fiscal 1992. In that year, slower-than-anticipated growth resulted in a $1.9 million net deficit, he said.

The city's proposed fiscal 1995 budget is $204.5 million, just slightly larger than the $202.0 million appropriated in fiscal 1994, he said.

"With the establishment of the fund, the city is in the strongest financial position in its history." said Bedingfield, who is planning to retire this summer after 36 years in the finance department

Robert Durante, an associate director at Standard & Poor's Corp., praised Birmingham for setting up the fund. Durante said it adds to an already strong "comfort level" the rating agency has with the city, which benefits from a healthy economy and a sinking fund of approximately $75 million.

"The restrictions on the ability to use the fund are an important plus," he said. "But I really don't see an upgrade at this time because the AA [rating] has already incorporated the city's diversified economic base and sound financial management."

For the city to be considered for a triple A, Durante said, resident's income levels must rise. "This is the one kink in the rating, and it would probably take a significant addition to the economic base to change," he said.

At Moody's Investors Service, Gary Mescher, a senior analyst, also commended the city. "Birmingham came out of this quite well, which reflects well on its management."

But Mescher said he could not now predict whether the new fund will prompt Moody's to bolster its rating of the city's GO debt above A1.

"What I can say is that we will be conducting a thorough review of the entire package -- the overall economy as well as socioeconomic factors such as wealth levels," he said. Mescher said the review would be completed after a meeting with city officials in June.

Bedingfield said the city has authorized about $26 million in appropriations from the fund to cover a $15 million radio system and other expenditures. But, he said, the city later arranged to get the money from other sources, so that the fund's initial principal remains intact. He said the city currently plans to reimburse the expenditures through a variable-rate financing that could be sold within the next several months.

"I am pleased that the city council has adopted an ordinance authorizing the creation of a permanent fund of the city of Birmingham," said Mayor Richard Arrington Jr. in a statement.

Arrington said that when this amount is added to other city funds, Birmingham will have about $187 million in savings accounts or endowment funds.

"I know of no other city in the country that maintains reserves as substantial in relation to its size," Arrington said. "I believe these reserves will be important in assuring the long-term viability of the city as a leading center of trade, education, research, commerce, and manufacturing in the southeastern United States."

Birmingham, Alabama's largest city, has a population of about 270,000 and is located in the center of the state.

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