S&P lowers Edmonds bond rating from AAA to AA-, citing deficits, low reserves

Published 6:30 am Thursday, July 23, 2026

EVERETT — One bond rating for the city of Edmonds has been lowered three notches, from AAA to AA-, S&P’s Global Ratings announced July 16.

On Tuesday, the city’s finance committee discussed the rating drop. Malinda Okerlund, a financial advisor for the city, said it’s a “significant change.”

The city has outstanding debt from four limited-tax obligation bonds, which are bonds paid through the general fund that don’t require voter approval. Every one or two years, S&P Global, a credit rating agency, looks at the city’s finances and reaches out if something “raises a flag,” Okerlund said.

“In this case, there were multiple things that were flagged in their review, and so they reached out and did a full questionnaire,” she said.

The full report cites the city’s “sustained operational deficits” in the past three fiscal years as the main reason for the rating change. The deficits have “materially eroded (the city’s) reserve and liquidity position, leaving it with limited budgetary flexibility,” the report read. Other factors included delays in implementing corrective adjustments, not following internal policies and delays in financial reporting.

The analysts also gave Edmonds a “negative outlook,” meaning there’s a 1 in 3 chance S&P could lower the rating in the next two years. Edmonds had held a AAA rating with S&P since 2019.

The rating change does not immediately impact the city, Okerlund said, but the city could face cost increases of about 0.2% to 0.3% the next time it chooses to go out for a bond. The rating does immediately impact existing bondholders, who will see a decrease in value, she said.

In 2023, the city declared a fiscal emergency after spending $8 million from its reserves and spending $12.5 million in one-time funds for recurring expenses. The declaration came after months of debate between former Mayor Mike Nelson and the council at the time.

“We did sound the alarm by saying we have a fiscal emergency,” Okerlund said. “They claim that it was a little bit slow.”

In 2024, the city took out a $6 million loan from its utility fund to help bridge the gap, a move that the report criticized.

“We view this reliance as evidence of constrained financial flexibility rather than routine cash-flow management,” it read.

The city expects to pay off the loan by the end of 2027, the report said.

In November 2025, voters rejected one of the city’s main strategies to bridge its deficit, a $14.7 million property tax levy lid lift. But the report recognized other actions the city has taken, including making $8.7 million in cuts, eliminating full time positions, approving a public safety sales tax, shifting fire service costs to South County Fire through annexation, approving a temporary utility tax increase and placing restrictions on contracted expenses.

Now, while the city’s budget is balanced for 2026, it has less than one month of operating expenses in its reserves, far below its two-month policy. In March, Mayor Mike Rosen said that if the city doesn’t make any changes, it could face a nearly $9 million gap by 2031.

The report said the city’s deficit is largely caused by the state’s 1% property tax cap, rising operating costs and a “largely built-out” tax base, meaning a lack of new construction has limited the city’s property tax revenue.

“This imbalance has materially eroded its available reserves and liquidity to levels that are no longer comparable to its peers at the ‘AAA’ rating,” the report read.

Woodway is now the only municipality in Snohomish County with a AAA rating from S&P, according to the company’s website. As of April, besides Edmonds, just 11 other municipalities in Washington had an AAA rating from S&P, including Bellevue, Seattle and Redmond.

The report also said the city’s operating cash and reserve balances “overstate its underlying financial position” because they are partly supported by the interfund loan and receivables.

Part of the downgrade was because of the city’s delayed financial reporting, particularly its 2024 audit from the state auditor’s office. The city has an audit conference scheduled for 9 a.m. Friday. Okerlund said delayed audits have been an issue with many cities across the state.

While the limited-tax obligation bond rating saw a decrease, S&P announced July 10 that the city’s water and sewer revenue bond rating has remained at AA.

“Generally speaking, revenue debt is notched lower than the general obligation debt,” Okerlund said. “That’s great news, it shows you have a really strong utility.”

In the next two years, S&P could lower the city’s limited-tax obligation bond rating if the 2026 fund balance ends up being lower than projected or if audits continue to be delayed, according to the report.

For the city to move from a negative to stable outlook, S&P said it would need to see “a record of structurally balanced operations,” an end of reliance on interfund loans, rebuilt reserves and timely audited financial reporting.

“Moving the rating up is going to require sustained, prolonged improvement to your financial metrics,” financial advisor Scott Bauer said at the Tuesday meeting.

Jenna Peterson: 425-339-3486; jenna.peterson@heraldnet.com; X: @jennarpetersonn.