Prolonged economic turmoil has forced the city into a financially precarious position, including the depletion of the city’s reserve fund and no immediate plans to rebuild it.
According to Fitch’s report, “(The City’s) financial position deteriorated rapidly during the recent recession and has not yet begun to recover… The city – which came into the recession with a slight budget imbalance, but significant reserves – failed to adequately curb spending in fiscal 2009 due in part to obligations under existing labor contracts.”
The downgrade was not unexpected, as city manager Mark Scott said in a statement. “While the City regrets the circumstances leading to the downgrade, we feel encouraged that we are, collectively, on the right course,” said Scott. “With ongoing diligence, we will achieve the sustainable structural balance we have been seeking over the last two, sometimes painful, years.”
It’s a position that Fitch’s report supports. Actions taken by the city since 2009, which weren’t always the popular decisions, have “suggest(ed) a strong willingness to make decisions to restore budgetary balance,” said the report. “Spending dropped a sizeable 15.7% between fiscals 2009 and 2010.”
“The downgrading of the City’s revenue bond debt does not immediately result in additional cost to the City budget,” explained Scott in a statement. “A reduced credit rating would result in higher interest charges on new debt, but the City has no plans at this time to issue revenue bond or general obligation debt. It could affect the issuance of a tax revenue anticipation note (TRANS), which is typically a low cost financial mechanism to smooth a government agency’s cash flows during the course of a fiscal year.”
Fitch found that the debt ratio in the city is manageable, and the pension is well funded even under conservative reviews.
The downgrade only affects revenue bonds that are paid from, or backed by, the City’s general fund and to any general obligation bond issues.