Gainesville Regional Utilities’ (GRU) financial advisers warned in a memo this week that the fiscal cost of the city’s ballot initiative could total $28 million and would likely be met with immediate action by credit rating agencies.

In a May 29 memo obtained by Mainstreet, the advising firm PFM said credit rating agencies—Fitch Ratings, S&P and Moody’s—and investors are concerned about GRU’s operating environment.

“It is also PFM’s opinion that the passage of the referendum to dissolve the [GRU Authority] and revert back to the historical governance structure would be quickly met with some type of ratings action from the agencies—either a change in outlook or downgrade,” PFM said.

PFM, who also serves as an advisor to Gainesville’s general government, said the fiscal cost of a downgrade, if it comes, could be around $28 million as GRU would be subject to higher borrowing costs.

The Gainesville City Commission finalized its vote on the ballot initiative on May 23, and the GRU Authority responded by calling the initiative illegal at its Wednesday meeting.

In a Thursday email to local media, GRU Authority Chair Ed Bielarski said a local attorney has agreed to sue the city of Gainesville, on behalf of GRU customers outside the city limits, in order to stop the ballot initiative. 

“It’s also my understanding that the Governor’s office is considering legal action in their capacity as an affected party,” Bielarski said.

PFM sent the Wednesday memo after Fitch Ratings finished a routine surveillance of GRU’s situation. Fitch finished the surveillance on May 25. 

“While the rating was affirmed at the “A” level, the tone and content of the discussion about the surveillance process was of concern,” PFM said.

PFM also contacted the other two rating agencies to update them on the resignations of the initial GRU Authority members, the City Commission’s ballot initiative effort, and the installation of the new board members.

“The responses back from the agencies were a bit more concerning than expected, as both asked for follow-up calls with GRU’s finance team to better understand the situation and implications on the credit ratings of GRU,” PFM said.  

In a Thursday interview, Mayor Harvey Ward said any change in governance or disruptions to utility management, like the resignation of the previous GRU Authority, are likely to be scrutinized by rating agencies.

But Ward said he doesn’t see serious risks in returning control of GRU to the City Commission. He said the city knows how to run the utility and pointed out that the governance structure is familiar to rating agencies because most municipal utilities follow the same model.

However, he said the GRU Authority created by the Florida Legislature is a unique structure for everyone involved. 

“If we get [GRU] back, we will make good decisions based on the advice of professional staff and our bond counsel and not based on the whims of anyone,” Ward said. “And if we make bad decisions, we’ll be replaced by the people of Gainesville.”

PFM pointed to a few primary concerns from the Fitch surveillance and ballot measure.

First, Fitch worried about GRU’s ratio of total debt compared with the utility’s funds available to pay off that debt on an annual basis. That ratio stood at 9.5 in 2022 to 11.9 after GRU issued $150 million in new debt. PFM notes that Fitch views a number above 10 as concerning.

General Manager Tony Cunningham addressed this fiscal metric at the GRU Authority meeting Wednesday. He said the utility’s proposed budget and current debt reduction plan will drop the ratio to 8.77 by the end of 2025.

PFM reports that Fitch has looked favorably on the debt reduction plan, primarily created with a lower general fund transfer and rate increases to the electric and wastewater systems through 2027.

Second, the rating agencies worry about actions the City Commission could take with the general services contribution (GSC). The GSC is a money transfer that municipal utilities send to the general government.

At Wednesday’s GRU Authority meeting, Bielarski noted that high GSC transfers from 2018 through 2023 had sent $68 million more to the city’s general government than the utility earned in profit.

PFM said the rating agencies have viewed favorably the City Commission’s recent step to lower the GSC.

However, PFM warned that swift action would come from the credit rating agencies if the ballot measure passes and the City Commission looks to increase the GSC again. The credit rating agencies would also worry about rate affordability if the City Commission increased the GSC again and implemented higher rates to compensate.  

Ward points to the City Commission’s decision to build a formula that establishes the GSC. The formula uses a 5% franchise fee on the electric system along with a property tax type of assessment.  

Ward said the City Commission would have to undo that ordinance to raise the GSC outside of that formula. He said putting those parameters in place should offer strong stability concerning the future of the GSC.  

The current GRU Authority is not bound by that formula and is considering changes to the GSC.  

“In the aggregate, it is PFM’s opinion that GRU will likely be downgraded by Fitch in the coming 12-24 months and potentially Moody’s given the large disparity between the Moody’s rating and the other agencies’ ratings,” the memo says. “It is also PFM’s opinion that the passage of the referendum to dissolve the GRUA and revert back to the historical governance structure would be quickly met with some type of ratings action from the agencies—either a change in outlook or downgrade.”   

PFM also says that GRU’s current rating, designated as investment grade with a stable outlook, is behind other public power issuers.

The memo includes a chart to illustrate the point.