Virginia City reviews debt strategy after S&P downgrade and launches long-term planning

Virginia City council members spent much of Tuesday's meeting probing how the city's borrowing decisions and bond portfolio affect its credit rating and borrowing costs.

Steve Scharf of Baker Tilly, the city's municipal advisor, told the council his firm acts as a fiduciary "to the city," advising on debt issuance, debt management and post-issuance compliance. Scharf explained there are multiple types of municipal obligations'including general obligation bonds and revenue-secured bonds (utilities, sales tax, tax increment)'and described how those repayment sources interact with any general obligation pledge.

George Eilertson of Northland Securities described the underwriter's role: buying municipal debt and selling it into the market. He said underwriters and municipal advisors typically coordinate pricing and structuring, and noted local placements have been used in the past for smaller or short-term financings.

The conversation centered on a recent Standard & Poor's surveillance action described in the council packet. Councilor Buck Schneider read S&P's assessment that Virginia exhibited "structural imbalance" and cited four consecutive general-fund deficits. Schneider said the packet recommends a credible, long-term plan to restore balance if the city hopes to revise the outlook to stable.

Council members pressed the advisors on notification procedures when rating agencies act. Scharf said advisers typically contact city staff immediately and agreed to work with staff on a better mechanism to alert the mayor and council about upgrades or downgrades.

Scharf also previewed Baker Tilly's work on a long-range financial planning model, a multi-year tool that will test policy changes and produce options for council consideration. "We're kind of leaving no stone unturned," he said, and expects more detailed recommendations in the coming weeks.

Why it matters: bond ratings affect who buys the city's debt and the interest rate the city pays. Council members expressed concern that continued high debt and repeated short-term fixes could increase borrowing costs and squeeze the general fund, and they asked staff and advisors to propose concrete steps to rebuild reserves and reduce structural imbalance.

Next steps: Baker Tilly will continue to refine the multi-year model with staff and present solutions; advisers agreed to improve communication about rating actions.

Quoted: "We are a fiduciary to the city," Scharf said as he described the municipal advisor's role. Councilor Paulson urged a procedural fix: "We need a mechanism to alert the council and mayor regarding that downgrade," referencing how rating surveillance has been handled.