City’s bond rating drops
Clintonville missed payment in spring
By Bert Lehman
Due to a missed payment the bonding rating for the city of Clintonville has dropped from A+ to A.
Clintonville City Administrator Chuck Kell told the Finance Committee at its meeting Monday, Sept. 12 about the rating drop that occurred after a recent rate review with Standard & Poor’s.
Kell said he researched into the matter and found that Depository Trust Company failed to notify the city when a bond payment was due.
He added that the notice used to be sent to Peggy Johnson, clerk-treasurer for the city of Clintonville, but sometime in 2014 the notice started going to the city’s utility accountant.
After having the city’s IT department search the email system, Kell said no one was notified in this particular case.
“What we did receive was a notice six days later that the payment was late,” Kell said.
Johnson told the committee the payment was made the day after receiving the late payment notice because no more wire transfers could be completed the day the notice was received.
In the bond market a missed payment is a big problem, Kell said.
Kell said the rating committee was ready to give the city an A+ rating, the same rating it had been. He added that the city received positive comments about the recently passed financial policies as well as the city’s process for looking at capital improvement projects.
“But all of that kind of gets destroyed when you have a slip up like a missed payment,” Kell said.
After another rating committee meeting, the bond rating was lowered to an A, Kell said.
He said it didn’t matter what the city’s explanation was for the missed payment.
“It doesn’t matter who is supposed to notify who, it’s up to the city to make sure that these payments are made on time,” Kell said.
He added that he did not think it mattered that the payment issue wasn’t brought to the attention of the rating agency until six months later. A missed payment is a recordable event which the city should have entered into the Depository Trust Company’s system.
“Ehlers would have done this for us as our financial advisors, but they weren’t aware of it either,” Kell said. “We’re supposed to record it in this system that Depository manages, that that event happened. It would have been picked up by Standard & Poor’s on the front end then and questions would have been asked.”
Regarding the missed payment, Kell said, “This is a clear example of the city having things going on here and Peggy [Johnson] was not fully aware of what this was all about. She understood that there was a company but she was not aware there was a reportable event that had to be placed as a result of the payment being missed.”
After speaking with Ehlers, Kell said he doesn’t think the rating drop will harm the city too much, if at all, when it issues the $2.75 million general obligation promissory notes that the city council recently approved. If there is an interest increase it would probably be around 0.1 percent.
He said it will probably take until the next debt issue in 2018 to get the rating increased to where it was.
“We have to prove that we have better management and that we’ve done what’s necessary,” Kell said.
Kell said the city immediately implemented an internal system to make sure bond payments are made on time. He said prior to this, the city did not have a debt payment calendar.
“We’re working right now to get the calendar built, with all the payments that are due on all the issues,” Kell said. “The utility accountant, clerk and administrator will have access to that calendar, so there’ll be three staff that will know about it and when the payments are due.”
He added that this step by the city has been reported to Standard & Poor’s, and it has been reflected in the report.
Kell also suggested the city contract with Bond Trust Services, a subsidiary of Ehlers, to monitor the city’s debt and watch for the payment dates. There is a set up fee of $675 which Ehlers said would probably be waived for the city. Yearly cost is $350 per bond issue. The city will have five outstanding bond issues, so the cost would be $2,100 per year.
A one-time fee of $1,700-$2,000 by Quarles and Brady to write the resolution to create the relationship between Bond Trust Services and the city would also have to be paid.
Kell said the internal controls being implemented should guarantee the city doesn’t miss a payment again, but he recommended the city contract with Bond Trust Services for the next three to five years in an effort to better its bond rating in the future.
“We cannot afford to have this ever happen again,” Kell said. “The city of Campbellsport missed two payments and they dropped from the rating you’re at to BBB and they can’t take out any debt. No one will issue them debt anymore. All their borrowing has to go through the state trust fund.”
Finance Committee member Mike Hankins asked how a payment was missed when the city had never missed a payment in the past.
“I don’t know if anything is [different],” Kell said.
Committee Chairman Mark Doornink asked how many times a year payments need to be made.
Kell said twice a year.
Johnson told the committee that she has tried numerous times to have her name added as an email contact with Depository Trust Company, but has been unsuccessful so far.
Johnson also suggested making wire payments the day prior to the due date to avoid problems that may occur on the due date.
“I think the most important lesson here we learned is we have to have our internal controls to do this right,” Doornink said. “We need to know we will get it done. Having another agency remind us to do it, if it’s going to help get that bond rating back is a step we need to do.”
Hankins agreed but asked that the city contact Depository Trust Company to find out why the city did not receive an email about the payment being due. Kell said he would contact the company.
The committee unanimously approved recommending to council to contract with Bond Trust Services.