Fargo finance committee hears Moody's downgrade, staff outlines fund-balance roadmap to blunt negative outlook

At a Fargo finance committee meeting, staff and the city's municipal advisor outlined why Moody's Investor Services downgraded the city's credit from Aa2 to Aa3 and placed it on negative outlook, and presented options to improve fund-balance ratios and reduce the chance of additional negative rating actions.

Steve Scharf, director at Baker Tilly's municipal advisory practice, told the committee Moody's has revised its methodology to take a more holistic view of issuers and now factors enterprise and utility funds more directly into credit assessments. "The city did receive a downgrade from Moody's investor services," Scharf said, and he stressed Moody's focus on fund-balance ratios and leverage as primary drivers of rating action.

That change means the city's investments in utilities and regional services are considered alongside general-fund metrics. Mayor Mahoney asked why Moody's appeared not to fully credit Fargo's significant investments in regional water and wastewater infrastructure. "We upgraded our water plant and our wastewater plant, put significant capital into it," Mahoney said, asking how Moody's balances long-term strategic investments with ratio-based measures. Scharf responded that Moody's does recognize growth and investment but applies consistent ratio metrics across issuers; restricted reserves and the composition of fund balance limit what the rating agency counts.

Susan Thompson, who led the staff presentation, reviewed fund-balance definitions, historical numbers and a projection roadmap. She showed available fund balance of about 19.6% in 2021 that dipped under 5% in 2022 after accounting changes tied to the airport becoming a component unit and the winding down of COVID-related receipts. Thompson said the city is targeting increases over the next five years and discussed milestones that were used in Moody's —analysis. "We need $36,000,000 of cash to get to 20% and we need $63,000,000 to get to 25%," she said when describing different reserve scenarios and the trade-offs involved.

Staff and the advisor flagged the practical levers available to the commission: asset sales, tighter spending discipline, modest increases in enterprise rates, and accounting adjustments where appropriate. Thompson said some of the increase could come from one-time items (land sale proceeds) and from multi-year accumulation inside enterprise funds. "We would need to do a rate bump," she said when discussing how enterprise funds could help rebuild reserves, adding that even with modest increases Fargo's rates would remain low compared with regional peers.

The committee also discussed the airport; staff explained a Governmental Accounting Standards Board (GASB) reclassification changed the airport's accounting relationship with the city, so the airport's reserves no longer appear on the city's year-end financial statements. "It's actually not Moody's," Thompson said. "It has to do with the Governmental Accounting Standards Board." Commissioners asked staff to ask the city attorney to study whether contractual or organizational changes could alter that accounting relationship.

No formal vote was taken on policy changes. Staff committed to circulating a draft fund-balance policy with definitions, implementation tools and monitoring steps and to vet it with the cabinet before returning to the committee. Steve Scharf and Moody's staff have offered to meet with Fargo to walk through assumptions and modeling.

The committee recessed that discussion to allow staff time to model scenarios and bring formal policy language and recommendations to a future meeting.