Citing the city’s “political instability and staff turnover in recent years” and a “weakened budgetary performance,” S&P Global lowered its ratings on Menahga’s general obligation debts. The credit rating fell from an “A” to “BBB+.”

“The outlook remains negative,” says the report, which was provided to the Menahga City Council at Tuesday’s meeting.

“In 2018 and 2017, the city’s general fund finished with deficits equal to 5 percent and 6.4 percent of expenditures, respectively, and we expect similar operating results will likely continue in the near term. The current management does not have insight into what is causing the deteriorating operating performance or how the fiscal 2019 is projected to finish,” the report states. “The recent wave of resignations occurred after new council members took office on Jan. 1, 2019. Recent council meeting minutes reflect city council members questioning each other’s actions and leadership styles. This apparent difficulty between council members supports our view that staff turnover may persist.”

Weak economy

S&P Global also considers Menahga’s economy “very weak,” with a per capita market value of $46,318 and projected income per capita at 65.5 percent of the national level.” They note that the unemployment rate for Wadena County was 5.2 percent in 2018.

While the local school district is making capital improvements to its facilities, which draws residents to the community, S&P Global says the city’s economy is “relatively limited with low income levels, aging demographics and very limited access to large metropolitan areas for job opportunities. Given its limited nature, we expect overall economic indicators to remain very weak over the near to medium term.”

Weak management

The report states that frequent management turnover is “inhibiting current understanding of the city’s financial position.”

“While our discussions with the new administrator have been positive, and there appears to be a genuine effort to make improvements, it will be some time until the new management has a command over the city’s financial situation, in our opinion,” says the report, adding that there have been conflicts between council members over the past 18 months, the council sought help from the League of Minnesota Cities Insurance Trust and has met with legal counsel “regularly for assistance in remedying these conflicts.”

S&P Global notes that the city also lacks long-term financial and capital plans, a debt management policy, an investment policy and a fund balance policy.

Positives

S&P Global describes Menahga’s budgetary flexibility as “very strong,” with an available fund balance in fiscal year 2018 of 54 percent of operating expenditures, or $552,000.

They also deemed Menahga liquidity as “very strong,” with $3.2 million in total governmental cash and investments equal to 2.3 times total governmental fund expenditures and 9.1 times governmental debt service in 2018.

Greenwood Connections has had no issues making its 2019 debt service payments, the report continues, but if nursing home revenue is not sufficient, the city’s general operations would have to cover the debt and the city’s credit profile would be “negatively pressured.”

In conclusion, the report says, “If conflicts recent and Menahga is able to show progress toward sustained budgetary performance improvements, we likely would revise the outlook back to ‘stable.’”