Pike County lost its credit rating. Now it's 'nearly impossible' to borrow money.

The Pike County courthouse in downtown Pikeville.
The Pike County courthouse in downtown Pikeville.

In response to a scathing report from Kentucky's state auditor, the credit rating agency S&P Global withdrew its rating for the largest local government in Eastern Kentucky, making it "nearly impossible" for Pike County to borrow money.

The audit criticized the county's financial management practices and, in particular, its poor record-keeping processes and insufficient supervision of the county treasurer.

S&P's decision means it offers no assurances to buyers that the county will repay its $9.4 million in general obligation bonds. Though county officials said they have no plans to offer new bonds, not having a credit rating would make it difficult, or at least very expensive, to pursue new debt.

"At some point down the line, they will likely need to borrow money," said Sean Dennis, an assistant auditing professor at UK. "This makes it nearly impossible."

Pike County Deputy Judge-Executive Herbie Deskins said the county could still borrow money if needed, though he acknowledged it would have to pay a much higher interest rate. He criticized S&P for failing to recognize that the county has always paid its bond obligations and has never defaulted on a loan.

Deskins said the agency harped on the decline of the coal industry while failing to mention some of the more promising economic projects in Pike County, including growth of the medical school at the University of Pikeville.

"Those people don’t really care about places like this," Deskins said. "They just wanted to downgrade everybody because the coal industry’s down."

Last month, S&P downgraded the county's credit rating to junk status, citing "very weak" management practices, a high unemployment rate and rising pension costs.

According to S&P's report, Pike County has failed to produce a comprehensive financial strategy despite ongoing economic hurdles, including a declining population and tax revenue.

Then, on Monday, State Auditor Mike Harmon issued a "disclaimer of opinion" in its review of Pike County for the fiscal year ending June 30, 2017.

A disclaimer of opinion, in this case, means officials did not produce records accurate enough for an auditor to determine the county's financial status.

Because of this disclaimer, S&P withdrew its rating of the county completely, rather than downgrading it further.

"A disclaimer is sort of the worst," Dennis said. "It sends such a bad signal."

Daniel Hughes, an analyst with S&P, said credit analysts rely on the quality of financial information that auditors cite in their reports when determining an institution's credit rating.

In Pike County's case, that data was incomplete and inaccurate, according to the audit.

In addition to other findings, the audit showed the Pike County Treasurer Johnda Billiter failed to make bank reconciliations for the fiscal year ending June 30, 2017.

In an audit of the county for the previous fiscal year, Harmon's office recommended that the county implement more stringent supervision of the treasurer to ensure that she keeps up with her official duties.

The fiscal court failed to do so, according to the new audit.

"The big thing is, you’ve just got to have more oversight," Harmon said. "There should have been more than one person who knew they didn’t reconcile the reports."

Deskins said officials are working to address the problems listed in the audit.

"We’ve had a period of some confusion here the last six months," he said. "I hope that gets straightened out in the next five months."

In April, a report from the Appalachian News-Express revealed that Billiter had failed to deposit more than $1 million of checks paid to the county.

Billiter said she was dealing with personal issues that distracted her from her duties, but said she would work to correct the mistake.

Harmon said it is "fairly rare" for his office to issue a disclaimer of opinion for fiscal courts.

Having incomplete bank reconciliations, in addition to causing financial headaches when forming a budget, "creates a higher risk or a potential for fraud," Harmon said.

Will Wright is a corps member with Report for America, an initiative of The GroundTruth Project. Reach him at 859-270-9760, @HLWright

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