Two rating agencies cut Hazelwood, Missouri’s ratings this month as the city remains locked in a battle with a fire protection district over the cost for services that city officials have warned could lead to Chapter 9 bankruptcy.

Fiscal problems city leaders blame on the dispute with the Robertson Fire Protection District came to a head in June when Mayor Matthew Robinson published a letter on the city’s website to residents warning that “a Chapter 9 bankruptcy of Missouri’s 26th-largest city and the seventh-largest city in St. Louis County may be inevitable” if fire district payments are not reduced.  

Missouri allows local governments to file Chapter 9. The city’s fire and ambulance costs, including fees to two fire districts, account for 42% of general fund expenditures. The city of 25,000 is about 20 miles northwest of St. Louis.

S&P Global Ratings put the city’s ratings on CreditWatch June 30 in response to the letter, which was also disclosed in a filing July 13 on the Municipal Securities Rulemaking Board’s EMMA website that provides a link to the mayor’s statement, which wasn’t working on Thursday.

S&P resolved the CreditWatch last week cutting the rating two notches to A-plus from AA and assigning a negative outlook. Certificates of participation were cut to A from AA-minus and appropriation bonds were lowered to A-minus from A-plus.  

“The downgrade reflects elevated governance risk,” said S&P analyst Scott Nees. “In particular, we see risks associated with the city’s risk management, culture, and oversight, as evident in what we view as an emerging structural budgetary imbalance that could lead to large and unsustainable reserve draws by as early as next fiscal year, if not addressed.”

Moody’s Investors Service Aug. 2 cut the city’s general obligation rating on $4.9 million of bonds one notch to A2 from A1 and assigned a negative outlook.

“The downgrade to A2 on the general obligation unlimited tax ratings reflect the budgetary pressures on the general fund with regards to a contract with a fire department,” Moody’s said. “The city’s governance is a key driver of this rating action because, in response to the budget management challenges posed by the fire service contract fees and pending lawsuit, senior leaders have stated that they would consider bankruptcy.”

Hazelwood annexed land in 1995 that led to its contractual relationship with the district.

The city council voted to terminate the contract in 2018 which led to a lawsuit filed by the district resulting in several years of court-ordered mediation with no resolution yet in sight. The city continues to purchase fire protection service at a reduced rate of $4.5 million annually under an interim agreement. The case is pending in St. Louis County Circuit Court.

Insolvency is not imminent as federal pandemic relief has helped prop up the city’s $30.5 million fiscal 2023 budget leaving a structural gap to address in 2024. The city enjoys strong reserves that equal 45% of expenses but their use could trigger further downgrades and would provide only temporary relief.

S&P caps ratings when an entity’s operations are structurally imbalanced at BBB-plus and at BBB-minus when a government is actively considering bankruptcy.

“They are not actually going through the steps to file for Chapter 9 so we do not believe after talking to the city that they are actively considering bankruptcy,” Nees said in an interview.

The fire district said in a statement that it stands ready, willing, and able to work with the city on a solution and noted that the city rejected the district’s offer to merge with the Hazelwood Fire Department to save money. The district also noted that the city has long threatened bankruptcy and calls it a bargaining ploy.

Assistant City Manager David Leezer said the city expected downgrades could occur after release of the mayor’s letter.

“Nobody likes to get downgraded but we are not planning any debt so it’s not going to impact us in the short term,” Leezer said. “Bankruptcy is not imminent but it is not saber-rattling on the mayor’s part. It could happen, but it’s two to five years” into the future.

The city has cut services and staff and doesn’t want to hit taxpayers up for more help due to its already high sales and property taxes, Leezer said. A recall election of district board members could benefit the city’s position, Leezer said.

While market participants are used to talk of a potential bankruptcy especially when it’s part of bargaining positioning, such a warning coming from a Missouri-based borrowers hits harder, said Matt Fabian, a partner at Municipal Market Analytics.

“Missouri has the second most general governments of any state after California that are in our database” for distress, “so you have to take it more seriously,” Fabian said.

A failure by several Missouri municipalities to honor appropriation-backed credits also heightens concerns. “Threats by a general government in Missouri are more credible than they would be elsewhere.”

Moberly reneged in on its appropriation pledge in 2011 for a failed artificial sugar manufacturing plant while Platte County in 2018 refused to make up shortfalls in pledged revenues on $32 million of defaulted industrial development authority bonds for a shopping center.