DATE: Friday, April 11, 1997                TAG: 9704110593

SECTION: LOCAL                   PAGE: B5   EDITION: FINAL 

SOURCE: BY JON GLASS, STAFF WRITER 

DATELINE: NORFOLK                           LENGTH:   78 lines

NORFOLK'S AA BOND RATING DOWN A NOTCH TO A1 CITY'S SLOW GROWTH AND RISING DEBT PROMPTED THE WALL STREET ACTION.

Citing concern over slow growth and the city's rising debt, a Wall Street bond rating firm on Thursday downgraded Norfolk's AA bond rating.

Moody's lowered the city's general obligation bond rating a notch to A1 as Norfolk prepares to go to market later this month with $48.1 million in bonds to finance a range of projects that include Granby High School and the redevelopment of East Ocean View.

``The rating change is based on the city's continuing trend of slow economic and revenue growth which has contributed to tightened financial operations and weaker liquidity,'' Moody's News reported Thursday. ``Debt position remains manageable, although debt levels have been increasing and are above average.''

While city and financial observers say it's too early to predict the impact, the downgrade could make it more expensive for the city to finance the projects and also could give potential investors pause.

The full faith and credit of the city's taxpayers are backing the bonds.

Moody's action is a signal that city officials may have to clamp down on the debt it takes on in the future, observers said. That could affect the city's decisions on the timing of everything from new school construction to street and other infrastructure improvements.

``It's a sign that they'll probably have to tighten their belts a little bit,'' said Peter Shea, executive vice president of Craigie Inc. in Richmond, an investment banking firm that specializes in municipal bonds.

City officials, saying they were surprised and disappointed, nonetheless maintained a positive outlook. They noted that days earlier one of the country's other major bond rating firms, Standard & Poor's, reaffirmed Norfolk's AA rating.

``It does say that other people see things in a more positive view,'' Deputy City Manager Darlene Burcham said. ``I'm not convinced that it will make any difference (in cost to the city) at this point, because we traditionally have been trading better than our rating.''

The two firms' split rating might soften the impact. Shea said the difference in a AA and A1 rating could increase the interest paid to investors by as little as 0.05 percent, raising the rate from say 6.25 percent to 6.30 percent.

``It's as small a downgrade as you can get,'' City Manager James B. Oliver Jr. said. Still, this is the first time that Moody's has downgraded Norfolk's AA rating during Oliver's decade as manager, he said.

In its news release about the downgrade, Moody's qualified its change in rating throughout, noting, for example, that Norfolk ``maintains good budgetary control over finances'' and that the city ``remains an important regional economic center for Hampton Roads.''

Moody's also noted the city's ``major initiative'' to strengthen its financial standing by redeveloping downtown with the $300 million MacArthur Center mall, which is backed by $200 million in private investment.

Wall Street reacted bullishly when the city went to market several weeks ago with about $54 million in revenue bonds to finance parking for the mall. The city sold the bonds for an effective interest rate of under 6 percent, a rate viewed as highly favorable by financial observers.

But Moody's also voiced concerns.

``Finances are supported by a slowly growing tax base and large portion of intergovernmental aid for schools,'' Moody's News stated. ``Operating flexibility is hampered by comparative high property tax rates and small increases in assessed valuation.''

Moody's noted that the city had achieved savings by reducing its work force by 17 percent, but added: ``. . . because of the city's increased needs for schools, public safety, economic and community development, further operating efficiencies will be difficult to achieve.''

The city's declining population also was viewed negatively.

Moody's said that the city's outstanding bond debt would be $556.6 million after the $48.1 million bond sale. Moody's specifically mentioned the $50-million plus debt on the Nauticus maritime attraction, noting that it has not been self-supporting.

Norfolk remains safely within its legal debt limit set by Virginia law, city officials say. The legal debt limit in Norfolk this fiscal year is $737.3 million, or 10 percent of the city's total assessed value of taxable real property, which is $7.3 billion. KEYWORDS: BOND RATING NORFOLK

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