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Tacoma: Amid ongoing budget crisis, Fitch downgrades two city bonds yet again

Post by Lewis Kamb / The News Tribune on July 9, 2012 at 3:55 pm |
July 9, 2012 6:05 pm

For the second time in six months, a San Francisco rating analyst has downgraded the city’s ratings for two taxpayer-backed municipal bonds and placed them on a long-term negative outlook.

Fitch Ratings on Monday downgraded Tacoma’s unlimited tax general obligation (ULTGO) bonds to an A+ rating from what had been AA rating. Fitch also downgraded the city’s limited tax general obligation (LTGO) bonds to A from an AA- rating. The city currently holds $23.8 million in debt in ULTGO bonds and $82.3 million in LTGO bonds. 

The impact of  Fitch’s downgrade won’t cost taxpayers more money, but it could mean the city likely would  get higher interest rates on any tax-backed bonds it issued in the near term.

In all, the two city bonds have been downgraded three notches in 6 months — what a ratings analyst on Monday called  ”an exceptional event.”

“To be dropped three notches in 6 months is not unprecedented,” said Stephen Walsh, the primary Fitch analyst behind the downgraded ratings. “But it’s certainly not typical, either.”

Walsh noted the new ratings for the two general obligation bonds remain “high investment quality.”

In a press release issued Monday afternoon, Mayor Marilyn Strickland said the city “is not in a unique position.”

“The economic recovery is slow and this has affected all levels of government across the country,” the mayor’s statement said. “We remain focused on providing core services to our residents and we will continue to look for ways to reduce expenses.”

But Walsh noted the “economy is not the main driver” for Monday’s downgrades; it’s the city’s financial management.

Walsh said the downgrades were spurred by the city’s persistent general fund budget problems and what Fitch views as the city’s slow response to deal with them.

Based on a review of the city’s latest public financial statements, Fitch found ”limited progress” in the city’s response to structural deficits that has led to spending down the city’s reserves. Tacoma, which still faces part of a lingering $11.8 million shortfall this year, forecasts a $60 million -$65 million shortfall in 2013-14.  How the city plans to deal with that debt still remains unclear, Walsh added.

“It really comes down to the city has a very large structural gap in its general fund,”  he added.  ”That’s a significant gap, no question about it. And it’s very difficult to turn around a gap like that in a short period of time.”

Tacoma City Manager T.C. Broadnax notified council members of the downgrades by email today.  He discussed it briefly with some council members Monday afternoon. The city also issued the press release, which included statements from Strickland and Broadnax.

“The City is working to address its current structural deficit in the 2013-2014 Proposed Biennial Budget through a variety of fiscal measures that may impact the future borrowing or refinancing of our bonds,” Broadnax’s statement said.

For the past several months, the city has opted to hold off on dealing with this year’s remaining general fund shortfall, instead waiting for the outcome on two federal grant applications seeking funding for police and fire personnel.

The city won both grants — averting 55 public safety layoffs — but the grants won’t cover the full amount of the $11.8  million shortfall.  City officials have yet to say how much of a gap remains — or how it will deal with it.

Meantime, Broadnax has taken a community-oriented approach in putting together a budget plan for the next biennium.  The city is now in the midst of a series of public budget meetings.

Also Monday, Fitch affirmed an A+ rating on $28.1 million of convention center and parking revenue bonds, noting three different revenue streams satisfactorily cover that debt.

Both types of general obligation bonds downgraded Monday are secured by the city’s taxing powers, as well as the its credit and resources.

“It doesn’t cost the city any more,” assistant Washington State Treasurer Wolfgang Opitz, said of Monday’s downgrades. ” There is no additional capital outlay or cost to the taxpayers for downgrading existing bond debt.”

But, it could mean that the city’s future bond sales could come at a lower rating, he added. Opitz also noted every bond sale is rated separately.

Even under the current downgrades, the city’s bonds remain at high credit ratings, Walsh said.  However, the lower ratings and the longer-term “negative outlook” flag placed upon them signals that Tacoma’s bonds may be susceptible to further downgrades in the future, he said.

“They’re still investment quality ratings,” Walsh said.  ”But the message we are sending to the market though is that there has been a deterioration in a fairly short period of time.”

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