Standard & Poor’s gives city of Kent ‘very strong’ bond rating

The city of Kent’s financial picture looks “very strong,” according to Standard & Poor’s rating services for refunding bonds and general obligation bonds.

Kent received the high rating even with the city’s annual payments of $500,000 to cover operating losses at the city-owned ShoWare Center.

The New York-based agency gave the city an AA bond rating, the second highest rating, meaning the city’s capacity to meet its financial commitment or obligation is very strong, according to the report released on Aug. 7. Lower ratings include B, C and D.

A strong economy helped give Kent a high rating as did the construction of Alpha XR’s new facility scheduled to open next year.

“The city’s economic development policies, geographic position and access to transportation links have helped it develop into a major regional warehousing and manufacturing center, and Alpha XR is building a fulfillment center in the city valued at $100 million,” the report said. “This could generate one-time sales tax revenue for construction as well as ongoing property tax revenue increases and gross receipts tax revenue increases. Management reports that the industrial vacancy rate is at a cyclical low of 4 percent.”

Standard & Poor’s credited city officials for their strong management of funds.

“Highlights include the city’s multiyear track record of conservative revenue and expenditure assumptions that appear reasonable,” the report said. “The city met its multi-pronged reserve policy for the first time in 2014, according to management, including a requirement to maintain the equivalent of 10 percent of expenditures to address cash flow needs. Although we view this result as a positive development, we also view a single year of compliance as representing a tentative record of compliance.”

It’s certainly a much better financial showing for the city compared to four years ago.

“The city’s role in funding the development of an events center and the net financial effects of an annexation contributed to financial stress in 2011 with a negative available reserve balance (negative 0.3 percent),” the report said. “But the city has since achieved its formal goal to rebuild its general fund balance to 10 percent of expenditures four years early in 2014.

“Although the city’s formal budget for 2015 and 2016 suggest modest draws on reserves, the most recent 2015 estimates showing a 5 percent net general fund surplus and conservative assumptions lead us to believe that the city’s reserves could grow through 2016 and that its financial flexibility profile will remain very strong.”

The agency expects the city’s financial picture to remain strong, even with a $500,000 per year contribution to cover operating losses at the ShoWare Center, the 6,200-seat arena that opened in 2009. The $500,000 represents just 0.6 percent of the city’s general fund expenditures.

“The stable outlook reflects our anticipation that the city will continue to comply with its reserve policy, which we view as important in the context of the business risk associated with providing operating support for the events center, even if the city eventually creates an operating reserve for the facility,” the report said. “Significant further strengthening in the city’s reserves and/or what we view as sustainable profitability of the events center that would obviate city support in the long term could lead us to raise the rating.”

But bigger losses at the arena could cause problems.

“We could lower the rating if the city’s financial performance significantly deteriorates, such as could occur if events center net operations  declines, and the city needs to increase its operating support,” the report said.

The city also received good financial news in April when Moody’s Investors Service upgraded the city’s bond rating to A2 from Baa2. An A2 represents the third highest rating group. New York-based Moody’s also revised the city’s rating outlook to positive from stable.