Duquesne, PA 2015 GO Bonds Downgraded To 'BB' From 'BBB-' On Eroding Liquidity; Outlook Negative


CHICAGO (S&P Global Ratings) April 17, 2019--S&P Global Ratings lowered its long-term rating two notches to 'BB' from 'BBB-' on the City of Duquesne, Pa.'s series 2015 general obligation (GO) bonds, secured by the city's full faith, credit, and taxing powers. At the same time, S&P Global Ratings removed the bonds from CreditWatch, where they had been placed with negative implications Jan. 17, 2019, based on receipt of the expected 2017 audit and an updated Act 47 recovery and exit plan. The outlook is negative, reflecting our uncertainty of the city's financial direction.
"We base the downgrade and negative outlook on Duquesne's eroding liquidity position," said S&P Global Ratings credit analyst Anna Uboytseva.
At year-end 2017 (the most recently available audited year), the city had only $242,000 in available cash; its water fund had $29,000, a mere 13 days of the fund's operating expenditures. Nominally weak liquidity leaves very little room for error in the budget should revenues, expenditures, or transfer assumptions fall short of projections, or should the utility require capital to perform emergency upgrades on its ageing system.
"The downgrade is also a result of the city's weakened financial management conditions, which we understand may or may not improve because 2018 was a transition year for a new administration," Ms. Uboytseva.
Duquesne's management upgraded its accounting software in 2018 but the implementation did not go smoothly. For various reasons, the general ledger bookkeeping function that tracks and reports city finances was not maintained. City management is planning to rectify this problem as soon as possible. Duquesne will use grant funding to pay an accounting firm to reproduce general ledger transactions for 2018. The city will also hire a full-time employee to assure bookkeeping records are produced on an ongoing basis. Officials also plan to strengthen financial practices and policies.
The city's current financial situation and governance framework exposes Duquesne to adverse conditions, which could lead to inadequate capacity to meet its financial commitment on the debt obligations, although we recognize that many of the city's current financial problems are solvable.
The 'BB' rating reflects the following credit characteristics:
  • Very weak economy;
  • Weak management;
  • Weak budgetary performance;
  • Very weak budgetary flexibility;
  • Very weak liquidity;
  • Weak debt and contingent liability profile; and
  • Strong institutional framework score.
The negative outlook reflects our uncertainty about the city's current financial direction. Through 2017, the city's financial position gradually weakened, although management has indicated the situation is turning around. We can neither ascertain the stabilization or improvements nor assess the degree of further financial deterioration because we do not have reliable 2018 financial reports. The rating could be lowered by one or more notches if the 2018 financial report or audit show significant deterioration. Should the 2018 audit or reliable unaudited financial reports and updated 2019 budget show a normalization of the financial course, we could revise the outlook stable. Overall, the rating upside remains limited.
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