Downgraded Des Moines feels the cost of public pensions

Some of the damage of public pensions — what Warren Buffet once called “a gigantic financial tapeworm” — is being visited upon Des Moines.

Moody’s Investors Service announced Wednesday it lowered the city’s bond rating rating from Aa1 to Aa2. One of the main reasons for the downgrade is Des Moines’ average net pension liability of $397.1 million over the past three fiscal years, something the ratings agency took into account for the first time because of recent changes to how ratings are calculated.

DES MOINES GET DOWNGRADED: Using new a method that gives greater weight to pensions and other debt, Moody’s has downgraded Des Moines bond rating.

“This is a real milestone,” Gretchen Tegeler, executive director of the Taxpayers Association of Central Iowa, told Iowa Watchdog. “This is the first time that a more reasonable estimate of pension debt has been used as part of a rating.”

Last year, Des Moines paid nearly $5.6 million to the Iowa Public Employees Retirement System and $11.8 million to the Municipal Fire and Police Retirement System of Iowa. That amount was equivalent to almost 12 percent of the city’s $150.4 million general fund.

“We’ve already seen cutbacks in public services because of pension pressures. Now it will be effecting the city’s borrowing costs as well. That could potentially be significant,” Tegeler said.

Cities like Des Moines borrow money by issuing bonds, and potential lenders look to bond ratings done by companies like Moody’s to determine how much interest to charge.

“In general, a lowered rating means a city will have to pay higher interest on bonds it issues in the future,” Moody’s spokesman David Jacobson told Iowa Watchdog.

Moody’s new calculation gave greater weight to the city’s outstanding debt and pension obligations. Otherwise, Moody’s considers Des Moines’ economy to be stable.

Not surprisingly, Scott Sanders, director of the city’s finance department, had a more upbeat assessment. Sanders told the Des Moines Register he doesn’t believe the downgrade will necessarily lead to higher interest rates.

Sanders said he believes “sophisticated lenders” who do their own analyses may not be swayed by Moody’s.

“Those doing their own analysis will still give us what they see as their own credit rating,” Sanders told the Register.

Contact Paul Brennan at pbrennan@watchdog.org. This story originally appeared on Watchdog.org.