When does a city trumpet a credit ratings downgrade? After digging itself out of a $63 million budget hole, that’s when. The City of Tacoma recently received word from two credit ratings agencies about new ratings it had sought before refinancing bond debt taken out to build the convention center nine years ago.
Standard & Poor’s reaffirmed an AA rating for the bonds, while Moody’s Investors Services downgraded them by one notch — from an Aa2 rating to an Aa3.
When rating agencies downgrade bond credit ratings, it means they think there’s more risk in an investment than initially recognized.
Yet the big picture didn’t stop the city from seeing a silver lining in the new ratings. At the last City Council meeting, City Manager T.C. Broadnax cautiously touted the new ratings as a positive sign that Tacoma’s recent belt-tightening is working.
The city also issued a press release Tuesday with glowing comments from Broadnax and Mayor Marilyn Strickland.
“These ratings are encouraging,” the press release quotes Strickland as saying. “They reflect that the City of Tacoma has made some tough decisions and is now on a more sustainable financial path.”
Steve Call, the city’s interim finance director, said Thursday that the reason for the city’s rosy perspective on the downgraded ratings is simple.
“To be honest, I was very pleased,” Call said. “I thought there was a risk the city could be downgraded further.”
That’s because since the last time S&P and Moody’s rated the bonds two years ago, rampant city budget problems have emerged, drawing negative attention to the city’s finances.
But with the latest ratings, Call noted, Moody’s “acknowledged the city has addressed its financial issues and turned the corner.”
Indeed, along with Moody’s downgraded rating, analysts changed a financial outlook from “negative” to “stable.” S&P also gave the bonds a “stable” outlook.
Moody’s ratings report noted its overall downgrade reflects “below average reserve levels attributable to a four-year trend of operating deficits, as well as an average burden debt.”
But the report also said the “stable outlook reflects recently stabilized financial operations and indications the city’s new management team will slowly improve reserve levels over the medium term.”
And that, Call said, is “a real pat on the back.”
Under Broadnax’s direction to “reset” the city’s budget. Tacoma closed a projected $63 million shortfall and balanced its general fund for the next two years through a combination of across-the-board department cuts and new revenues to be generated by imposing a new vehicle license tab fee and ending tax breaks for nonprofit hospitals.
Part of the city’s budget strategy also included refinancing nearly $43 million in debt from bonds issued in 2004 to build the Greater Tacoma Convention and Trade Center. The bond debt is supported by the city’s lodging tax, not its general fund.
Refinancing the debt won’t increase the city’s annual debt service payments or extend its 2034 retirement date, Call said.
“We’re just simply taking advantage of the much lower (interest) rate,” he added. “It doesn’t materially change anything.” The re-fi will garner the city an estimated 9.5 percent in savings, generating about $3.1 million, Call said. Those savings will be set aside into budget reserves, he said.
A reassessment of bond ratings is typical in a refinancing.
David Jacobson, an assistant vice president for New-York based Moody’s, said his company’s latest rating downgraded the city’s convention center bonds “from the third highest rating to the fourth highest.”
Overall, the bonds are “judged to be of high quality and subject to very low credit risk,” Jacobson added.
But despite the new “stable” forecast assigned to the rating, “the outlook doesn’t really affect the rating,” Jacobson noted.
A negative outlook simply means analysts predict more downgrades may be coming in the future, while a stable outlook means analysts don’t foresee any in the short-term.
“The bottom line is, an Aa2 with a negative outlook is still higher than an Aa3 with a stable outlook,” Jacobson said. “While it looks like things have stabilized (in Tacoma) a bit, it’s still a downgrade.”
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