Debt Coverage Ratios, Rating Agency Reports and Debt Management

Debt Coverage Ratios

Click here to view the District’s Debt Coverage Ratios.

What is the Debt Coverage Ratio (DCR)?

The DCR is a contractually-obligated standard of financial measurement applied to the District following the District’s issuance of Certificates of Participation (COPs) debt in 2010. The District is required to achieve each fiscal year a minimum 115% DCR.  This means that the District must manage its operating budget each year to achieve net revenue in amounts at least 115% greater than all of its debt service costs. The DCR is similar to the “pre-qualification” methodology used by real estate professionals.  In these cases, the intent is to determine the excess of monthly income over the monthly mortgage payment.

Expressed mathematically, the DCR is:

                                                      DCR = Net Revenue

                                                                  Debt Service

What is Central Basin’s Responsibility?

When the District issued $37,935,000 in COPs to refinance prior debt and finance capital improvements relating to the recycled water system in May 2010, the Official Statement and Installment Purchase Agreement agreed to by the District obligated it to achieve a DCR of at least 115%.  In this manner, the Installment Purchase Agreement, in the "Amount of Rates and Charges" subsection, declares that:

"...to the fullest extent permitted by law, the District will fix, prescribe and collect rates and charges for the Water Service which will be at least sufficient to yield during each Fiscal Year Net Revenues equal to one hundred fifteen percent (115%) of Debt Service for such Fiscal Year. "

The District’s promise to achieve a DCR is a form of “security” for the borrowing.  The District, unlike a city or county government, does not securitize borrowing with a pledge of taxes.  Lenders relish the safety and security produced by a pledge of taxes.

It may therefore be said that a primary financial objective of the District is to consistently achieve annual “return on investment” (net revenue) in at least 115% proportion to the debt service payments we make each year. 

Rating Agency Reports

Moody’s Credit Rating Agency:  Moody’s current rating of the District’s credit is A1.  The rating was downgraded on October 15, 2015 by one level.  The former rating was Aa3.  The downgrade was primarily driven by Moody’s opinion that future debt coverage ratios will be lower due to water conservation efforts (in response to the California drought) that may create decline in operating revenues, thereby reducing the debt coverage ratio.   

LATE ADDITION: Just released Moody's review published September 25, 2016. To view the copy, click here.

To view the latest copy of Moody's Credit Rating, please click here. 

Standard & Poor’s (S&P):   S&P released a review report on Central Basin on September 29, 2015 that affirmed the District’s ‘A” long-term rating on the 2010 COPs.  At the same time, S&P affirmed the District’s ‘AAA/A-1+ rating on the 2008B refunding COPs.  While District management is encouraged by the affirmation of the prior rating, this optimism is tempered by the fact that S&P had acted to downgrade the District’s ratings in April 2014. 

The S&P outlook is and has been negative.  The negative outlook results from S&P concern over the unpredictability of replenishment water sales revenue and the impact of the California drought on future debt coverage ratios.  It must be noted that S&P also expressed concern with the District’s “governance issues” in its April 2014 review; this is a clear reference to the political and organizational wrongdoings of our recent past. 

To view S&P's April 2014 Report, please click here. 

To view S&P's September Report, please click here.  

Debt Management

Click here to view Central Basin’s Debt Management Policy.

Click here to view the latest Debt Management Report. 

The Government Finance Officers of America (GFOA), in a Best Practice adopted in 2012, recommends that state and local governments adopt comprehensive debt management policies.  These policies should reflect local, state and federal laws and practices, and should be reviewed periodically (and updated if necessary) by elected officials. 

On December 21, 2015, the Central Basin Board of Directors adopted the District’s Debt Management Policy.  The Policy provides guidance on the full range of debt management, including evaluating debt issuance options; maintaining appropriate assets for present and future needs; promoting sound financial management through staff reporting requirements; protection of the District’s credit rating; and adherence to the legal use of District financing authority through internal controls.  In addition, the Policy’s practical, user friendly elements require the continual use of long-range financial projections and obligates District staff to publish a variety of interim reports.