Moody's downgrades Manhattan, Kansas, over fiscal strain, late audit

Moody’s Ratings downgraded Manhattan, Kansas, bonds to A1 from Aa3 in the wake of a tardy audit and deteriorating finances.

A tardy annual audit and deteriorating finances led Moody’s Ratings to downgrade the issuer and general obligation rating for Manhattan, Kansas, to A1 from Aa3 and warn the rating could be lowered further or even withdrawn.

The rating agency took the action on Friday after placing the city under review Oct. 2 for “lack of sufficient information.” At that time, the city had yet to file its fiscal 2022 audited financial report, which was subsequently posted Oct. 9 on the Municipal Securities Rulemaking Board’s EMMA website, nearly 650 days after the fiscal year ended on Dec. 31, 2022.

“The downgrade is largely due to the city’s contracting financial position coupled with weaker governance stemming from its recent struggles to produce timely audited financial information,” Moody’s said in a report.

It added that the rating will be withdrawn if Manhattan fails to release substantially completed financial statements for fiscal 2023 by the end of January.

Manhattan City Manager Danielle Dulin said Monday the city intends to meet that deadline.

“The city of Manhattan is committed to maintaining a strong financial position and is actively addressing the challenges reflected in the recent downgrade of the bond rating to A1 from Aa3,” Dulin said in a statement. “We recognize that while an A1 rating still represents a high-quality bond, it reflects areas of concern that must be addressed.”

A report this year from the University of Illinois-Chicago and Merritt Research Services found the median timing for the completion of municipal bond issuer financial audits increased 10.5% to 168 days for fiscal 2022 from 152 days for fiscal 2011. For cities, the median rose to 182 days from 173 days.

Moody’s, which placed Manhattan’s A1 rating under review for a possible additional downgrade, said the city ended fiscal 2022 with an available fund balance ratio of about 13.3%, “but anticipated general fund deficits in fiscal 2023 and 2024 are likely to reduce available operating reserves to well below 10% of revenue.”

“Should the fiscal 2023 audited results or fiscal 2024 unaudited performance be weaker than anticipated, downward action is likely,” the report said.

The city of 53,682 has about $290 million of outstanding debt, according to Moody’s.

The city last sold debt in the municipal market earlier this year with a $53.4 million general obligation and temporary note deal priced by Piper Sandler.

The debt was rated AA by S&P Global Ratings based on Build America Mutual Assurance Company insurance.

The official statement dated May 16 said completion of the city’s fiscal 2022 audited financial statements was delayed due to “city and external auditor staff shortages.”