Local Government and Politics, News

Lynn Water and Sewer Commission’s bond rating could be lowered because of city’s financial state

LYNN — The Lynn Water & Sewer Commission has been put on notice that its bond rating will likely be downgraded because of the city’s financial difficulties.

Although the Lynn Water & Sewer Commission (LWSC) is a quasi-public authority created by the commonwealth of Massachusetts, it is being tied into the city of Lynn because of a legal ruling in Puerto Rico regarding its inability to pay back debt service incurred by one of its entities.

David Travers, LWSC head of finance, said the commission is in pretty good shape financially. It carries an A1 bond rating with Moody’s Investors Service, but because of Lynn’s financial situation, the city carries a Baa1 rating with a negative outlook.

“So, Moody’s is viewing the disparity between our bond rating and the city’s as a negative and they’re looking to downgrade the bond rating of the Lynn Water & Sewer Commission,” Travers told water and sewer commissioners on Monday night.

“We have a rating call at the end of this month and we’re going to defend the commission’s position as best as we can, but we just wanted to put the commission on notice that odds are good we’re getting a downgrade on our bond rating because of what’s going on in the city of Lynn.”

Daniel O’Neill, LWSC executive director, said the impact of a potentially downgraded bond rating would be felt if the commission needed to go out to the general bond market in the future.

According to a Moody’s Investors Service press release, the ratings of seven water/sewer utilities, including the LWSC, and one special assessment district have been placed under review.

The decision is driven by those entities having a three or four notch difference in its bond rating from its associated “parent” local government, according to Moody’s.

Water and Sewer commissioner Vincent Lozzi Jr. said it wasn’t fair that the commission’s good bond rating was getting spoiled by the city having a bad one.

Commissioner David Ellis said the LWSC is a totally separate entity from the city of Lynn by law. “I hope (our) law firm can explain to Moody’s that we’re not the city of Lynn,” he said.

“We will defend that position, but I think they view the taxpayers of Lynn are under some stress because of what’s going on,” Travers said. “The taxpayers are ultimately the ratepayers also, so if they’re stressed on one arm, they’re going to be stressed on the other. I think that’s their view.”

The decision is related to legal developments in Puerto Rico’s bankruptcy proceeding. The commonwealth of Puerto Rico was financially strained even before it was devastated by Hurricane Maria in September 2017.

In April, the U.S. Court of Appeals for the 1st Circuit ruled that the commonwealth of Puerto Rico is not required to pay “special revenue” debt service on Puerto Rico Highway and Transportation Authority bonds during the bankruptcy proceeding. The ruling affects states that are in the first district, which includes Massachusetts, according to Moody’s.

“The uncertainty regarding the interpretation of ‘special revenue’ resulting from the federal appeals court ruling underscores the importance of the linkage between a local government’s general credit quality and that of its enterprises,” reads the Moody’s press release.

Sam Vitali, legal counsel for the LWSC, said the ruling was related to Puerto Rico’s inability to pay back certain municipal bonds due to its financial state.

Vitali said the commission intends to make its case that since it’s a separate entity, it shouldn’t be lumped together with the city’s financial situation and low bond rating. But he said Moody’s view is that the city’s finances affects not only its businesses and residents, but also its institutions.

“Through no fault of our own, we may get a downgrade in our bond rating,” Vitali said. “It will not affect the debt we have (now, but it) might affect our debt in the future. We probably lack standing to challenge it.”

The potential downgrade comes as the LWSC is planning to begin construction on a 13-year, $200 million combined sewer outflows (CSO) project in June 2020, which is meant to bring the city into compliance with a 2001 consent decree filed by the U.S. Environmental Agency, which called for cleaning up West Lynn and the downtown.

The CSO project is being financed through the State Revolving Fund Loan Program offered by the Massachusetts Department of Environmental Protection.

“The real crux of the matter will come if and when we need to get financing beyond the state revolving fund,” Vitali said.

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