Tacoma’s ongoing budget crisis has led a San Francisco rating analyst to downgrade the city’s credit ratings for two tax-backed municipal bonds and place them under a negative outlook.
Fitch Ratings on Thursday downgraded Tacoma’s unlimited tax general obligation (ULTGO) bonds to an AA rating from what had been AA+ rating. Fitch also downgraded the city’s limited tax general obligation (LTGO) bonds to AA- from an AA rating.
The city currently holds $25.1 million in debt in ULTGO bonds and $82.3 million in LTGO bonds. The downgrade doesn’t affect the city’s outstanding convention center and parking revenue bonds.
Stephen Walsh, the primary analyst for the downgrade, said Tacoma’s credit ratings for both bonds remain strong.
“It’s not as if we’re suggesting the city’s bonds are in trouble or anything like that,” Walsh said. “But we do see a material decline in credit ratings.”
City Finance Director Bob Biles said the downgrade “shouldn’t cause any problems.”
“The impact could be if and when we needed to issue future tax-supported bonds, we’d get higher interest rates,” Biles said. “But there are none anticipated (to be issued) at this time.”Fitch had last rated the city bonds in September, based on the Tacoma’s financial statements as of July.
“It’s unusual to come back this soon,” Walsh said. “But we learned later in the fall that the city had a pretty substantial mid-year budget gap that took many people by surprise.”
This swift reversal in the city’s financial projections raises concerns for Fitch about Tacoma’s budget monitoring capabilities.
Another concern is the city has yet to decide how it’s going to address its $31 million general fund shortfall by year’s end, Walsh said. The deficit represents about 15 percent of this year’s budget.
The city has taken some action, but is has postponed the lion’s share of budget cuts – proposed layoffs to more than 100 public safety employees — amid ongoing negotiations with labor unions. The deadline for implementing those layoffs is Feb. 6.
“This deficit is really quite substantial and the city has a limited time to address it,” Walsh said. “They’re more than half way through their budget cycle.”
In addition, the projected gap for the 2013-14 budget has grown to more than $75 million. Consequently, Fitch placed both city bonds under a “Ratings Watch Negative.”
“It’s a signal to investors that we’re monitoring the situation and will come back within the next six months,” Walsh said. “…If the city can’t address the deficit or does it in a way that reduces its financial flexibility — by using up its fund balances — there could be further downgrades.”
Biles noted ratings for a variety of Tacoma’s bonds – including water, power and revenue bonds – weren’t affected.
“Just the ones that have tax support behind them (were impacted),” Biles said. “And they’re still double A, so that’s still a strong rating.”