Miami Faces Another Damaging Credit Rating Downgrade

MIAMI (CBSMiami) – The City of Miami may be on the verge of financial disaster.

CBS4 news partner The Miami Herald reports that Moody's, which rates governments and companies by their ability to pay back debt, announced it is reviewing Miami's credit rating. The move comes amid new allegations by the U.S. Securities and Exchange Commission (SEC) that the city misled bond investors.

If the SEC's review proves the City of Miami did mislead investors, the city would join the ranks of infamous companies such as Enron and Lehman Brothers.

Even a minor downgrade in credit rating by Moody's could be traumatic for Miami. The city would likely be forced to pay more to borrow money on Wall Street.

It has happened before: Moody's slightly lowered Miami's credit rating last summer as the city struggled to balance its budget in the face of declining reserves and low tax revenues.

"The reason we want to put them on a watch is we consider this significant and rare enough to notify the market," said Moody's analyst Julie Beglin.

Similar to an individual's credit score, the various credit ratings — from AAA to D, or "junk" — guide investors interested in buying bonds from the borrower. Moody's has rated about $670 million worth of Miami bonds in the A range, which is considered relatively safe but not top-notch.

Miami Mayor Tomás Regalado said he hoped the credit rating agency would look beyond the SEC investigation, and give Miami credit for balancing its books while boosting its reserves.

"They have to understand that these are things of the past," Regalado said of the SEC allegations. "I hope they look at what the city has done with the current budget, and realize that we are trying to fix the problems and move forward."

In announcing the review, Moody's said it would consider how much Miami might have to pay in SEC penalties, and other consequences from the probe.

City officials have until Aug. 6 to respond to the SEC allegations. Regalado would like to see the two sides reach a settlement. The SEC is also considering imposing civil fines on the city or issuing cease-and-desist order.

Regalado said he was not surprised the credit rating agencies were paying attention.

City officials met with Moody's earlier in the year, and the agency "seemed very satisfied" with the city's finances, he said. "But this SEC thing really doesn't help."

The SEC began its probe in 2009 after The Miami Herald discovered city leaders had shifted $26.4 million from the capital budget into the general fund to give the appearance of a balanced budget. The move took place immediately before bond issues that financed repairs to city streets and sidewalks.

The investigation also concluded that former city budget director Michael Boudreaux had played a role in misleading investors, his attorney said Tuesday. The agency sent Boudreaux a letter saying civil charges were likely forthcoming.

It was unclear if any other city officials were being targeted.

Miami is the only U.S. city that has twice faced the threat of SEC sanctions.

In 2001, the agency determined that city officials had moved money earmarked for construction projects into the general fund. The moves made the city's finances seem stronger than they actually were, which in turn, made subsequent bond issues more attractive to investors.

A judge ultimately issued a cease-and-desist order, forbidding Miami from employing the fraudulent budgeting practice in the future.

Miami is also at the center of a third SEC probe into the bonds used to finance the new Marlins Ballpark. That investigation is ongoing.