For the second time in six months, a San Francisco rating analyst has downgraded Tacoma’s credit ratings for two taxpayer-backed municipal bonds.
Fitch Ratings on Monday downgraded the city’s unlimited tax general obligation bonds to an A+ rating from what had been AA rating. Fitch also downgraded the city’s limited tax general obligation 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.
Fitch also placed the bonds on a long-term negative outlook.
A Fitch analyst cited the city’s financial management as the primary reason for the downgrade.
The downgrades won’t cost taxpayers more money, but they could mean higher interest rates on any tax-backed bonds the city might issue in the near term.
In all, the two city bonds have fallen three notches in six months – what a ratings analyst on Monday called “an exceptional event.”
“To be dropped three notches in six months is not unprecedented,” said Stephen Walsh, the primary Fitch analyst behind the downgrade. “But it’s certainly not typical, either.”
Walsh noted that the new ratings for the two general obligation bonds remain “high investment quality.”
Also Monday, Fitch affirmed an A+ rating on $28.1 million of convention center and parking revenue bonds, noting that three different revenue streams satisfactorily cover that debt.
In a news release Monday afternoon, Tacoma 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 that the “economy is not the main driver” for Monday’s downgrades.
The downgrades were spurred by the city’s persistent general fund budget problems and what the ratings analyst views as a slow response to deal with them, Walsh said.
Based on a review of Tacoma’s latest financial statements, Fitch found “limited progress” in the city’s response to structural deficits that have led to spending down the city’s reserves, Walsh said.
Tacoma’s general fund has experienced four straight years of operating deficits, and the city still faces part of a lingering $11.8 million shortfall this year. City budget officials forecast a $60 million to $65 million shortfall in 2013-14.
Yet how the city plans to deal with its debt remains unclear, Walsh added.
“It really comes down to the city has a very large structural gap in its general fund,” he said. “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.”
Both types of general obligation bonds downgraded Monday are secured by the city’s taxing powers, as well as its credit and resources.
“It doesn’t cost the city any more,” Wolfgang Opitz, assistant Washington state treasurer, said of the downgrades. “There is no additional capital outlay or cost to the taxpayers for downgrading existing bond debt.”
But it could mean the city’s future bond sales could come at a lower rating, he added. Opitz also noted that every bond sale is rated separately.
The city’s general obligation bonds remain at high credit ratings, but the downgrades and the longer-term “negative outlook” flag signals they may be susceptible to further downgrades over the next few years, Walsh said.
“The message we are sending to the market is that there has been a deterioration in a fairly short period of time,” Walsh said.
Tacoma City Manager T.C. Broadnax notified council members of the downgrades by email Monday. He briefly discussed it with some council members at a meeting Monday, and the city issued a news release that included statements from Strickland and Broadnax.
“The city is working to address its current structural deficit in the 2013-14 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 shortfall, instead waiting for the outcome on two federal grant applications seeking funding for police and fire personnel.
The city recently won both grants, averting 55 public safety layoffs. But they won’t cover the full $11.8 million gap in 2012. City officials have yet to say how much of a shortfall remains – or how the city will deal with it.
Meantime, the city is now in the midst of a series of public meetings intended to help Broadnax plan a budget for the next firstname.lastname@example.org