FARGO — For the first time in five years, Fargo’s credit rating has dropped, a
renowned financial analysis institution
said.
Moody’s Ratings downgraded Fargo’s credit score from Aa2 to Aa3, the fourth highest score a city can achieve. The rating was announced Tuesday, Nov. 4, in a Moody’s report obtained Friday by The Forum from the city in an open records request.
The rating means the city’s finances are high quality and present a “very low credit risk,” according to Moody’s ranking chart. However, the rating downgrade suggests the city is facing some financial challenges.
Moody’s cited Fargo’s “narrow available fund balance” and “above-median long-term liabilities and fixed costs” as the reasons for this year’s downgrade.
In 2024, Fargo had an available fund balance ratio, or the funds the city has in its reserves divided by the city’s revenue, was about 9%, the report said.
The available fund balance ratio has dropped from almost 20% in 2021, according to Moody’s.
“While we expect the city to add to reserves in fiscals 2025 and 2026, the fund balance ratio will remain low compared to peers,” Moody’s said.
The city’s long-term liabilities ratio was almost 324%, the report said. Moody’s could upgrade Fargo’s rating if the city brings its available fund balance ratio above 25% and its liabilities ratio closer to 200%, the report said.
Fargo is on track to bring its available fund balance ratio to 12% in fiscal year 2025, the report said
“The city’s available fund balance ratio will likely slowly improve but remain materially below 20% of revenue for at least the next few years,” Moody’s wrote in the report.
Moody’s said it may downgrade the city’s rating again if it doesn’t restore its available fund balance to at least 15% by fiscal year 2027 and its liabilities ratio exceed 400%, according to the report. The liabilities ratio likely will remain less than 400%, the report said.
The report comes more than a year after Moody’s told Fargo that the city’s financial outlook is negative. Moody’s warned Fargo in September 2024 that its credit rating could drop if the city’s reserves “do not materially improve.”
“The outlook reflects the expectation that the city’s financial position will remain limited and ongoing challenges to restoring long-term financial sustainability will persist,” Tuesday’s report said.
This is the first time since 2020 that Moody’s changed Fargo’s credit rating. The city had an Aa1 rating, the second highest score from Moody’s, before 2020.
Fargo’s tight labor market is attracting residents, which is adding to its tax base, the report said. The city’s unemployment rate is low, and Fargo is a regional economic center, Moody’s said.
“The labor force and GDP is outperforming many of its Midwest peers with growth that is keeping pace with the U.S.,” the report said.
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