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Updated: September 18, 2024

The city of Portland will see lower debt service costs, thanks to Moody's upgrade

Portlan Harbor at sunset . Photo / Renee Cordes Moody's Ratings said its upgraded issuer rating for Portland reflects the city's simplification of its debt structure.
By Renee Cordes

With plans to borrow $30 million to $40 million in early 2025, the city of Portland expects to pay less to service that debt following an upgrade from Moody’s Ratings and as interest rates decline.

On Sept. 9, the bond rating service raised its credit evaluation of Portland’s general obligation debt from “Aa1” to the highest rating of “Aaa.”

Moody’s said the upgrade reflects the city’s simplification of its debt structure as its variable rate pension obligations bonds are set to mature in June 2026.

Portland’s upgrade came in Moody's annual review, not in relation to a specific debt offering. Moody’s also upgraded the Portland Water District’s credit rating, which is generally aligned with the city’s rating.

In addition, Moody’s revised its outlook on Portland from positive to stable, reflecting an expectation that the city will either maintain or improve fund balance levels while prudently managing its municipal debt.

As of June 30, Portland had around $366 million in outstanding debt on its books, of which $44 million is due to be repaid during the fiscal year, according to Brendan T. O’Connell, the city’s finance director.

The city said it now holds the highly coveted “Aaa” rating with both major credit rating agencies, Moody's and Standard & Poor's. The high ratings should mean further reductions in debt service costs and additional demand for the city’s bonds. 

“We are thrilled with the recognition from Moody’s on the growth of our tax base and regional economy, progress we have made with reduction of our variable rate debt, and strong fiscal management,” O’Connell said in a Sept. 13 news release.

Dollars and cents

On Tuesday, O'Connell told Mainebiz that he expects the Moody’s upgrade to reduce borrowing costs by $3,000 to $5,000 per $1 million of future debt issued.

“We typically set the annual size of the capital improvement plan to an amount that will offset debt service coming off the books each year, so as not to trigger property tax rate increases” related to the capital improvement plan, he explained.

For example, if the $44 million in debt coming off the books in fiscal year 2025 was issued at 3% interest, the city knows it could issue an additional $44 million that same year at 3% and not trigger a property tax rate increase — the new debt and debt service would exactly offset the old debt, he said.  

“But due to the upgrade, that debt will now be issued at a 3 to 5 basis-point lower interest rate vs. before the upgrade, so the amount of debt we can issue will be a little larger without increasing debt service costs within the budget from year to year,” he said. A basis point equals one-hundredth of a percentage point.

O'Connell also noted that "a decreasing interest rate environment also has a significant impact on this calculation, and I expect to issue at well below 3% the next time we go to market.” 

On Wednesday, the U.S. Federal Reserve cut its main interest rate by 50 basis points, in the first reduction since the pandemic rattled the economy in 2020.

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