Fitch Ratings, one of the nation’s three major credit rating agencies, has downgraded the City of San Antonio’s bond rating, City officials said Wednesday, ending a nine-year streak of gold star ratings from all three agencies.
In its rating report, Fitch stated the sole reason for the one-notch downgrade from “AAA” to “AA+” was the voter-approved city charter amendment that allows the firefighters union to call for binding arbitration in labor contract negotiations with the City. If the union chose to exercise that right, a panel of three arbitrators would decide the wage increases and benefit packages for firefighters, potentially affecting the City’s budget.
“[The downgrade] reflects the city’s diminished expenditure flexibility,” according to Fitch’s report.
The better the bond rating, the lower the interest rates the City has to pay on debt.
Meanwhile, Moody’s and Standard & Poor’s maintained the City’s AAA rating.
“While it will be challenging, we are committed to the fiscal stewardship that will be required to regain our perfect bond rating,” Mayor Ron Nirenberg said via text message. “I am confident in our ability to successfully address this situation.”
City Manager Sheryl Sculley and Chief Financial Officer Ben Gorzell met with representatives from each agency earlier this month to discuss San Antonio’s bond rating in light of the City’s efforts to refinance a U.S. Department of Housing and Urban Development loan.
“The anticipated impact of the split rating (two rating agencies at ‘AAA’ and one rating agency at ‘AA+’) on the pricing for this specific transaction is expected to be minimal, if any,” according to a memo sent by Sculley and Gorzell to City Council.
The agency warned of a potential downgrade in November after two of three union-backed propositions were approved. Proposition C gave the firefighters union the ability to declare an impasse and seek arbitration, and Proposition B set a term limit for future city managers and caps their annual pay at 10 times the lowest-paid, full-time city employee.
“The City’s current outstanding debt under [the impacted City corporations] structures is fixed and will not be impacted by the downgrade,” the memo stated. “However, as the City issues future debt under these bond structures, including issuances for the 2017 bond program, the City’s costs would be impacted by the downgrade. The downgrade will also impact the City’s outstanding debt trading on the secondary market.”
During an interview last month, Jose Acosta, a senior director at Fitch, said Prop B was also cause for concern “about the City’s ability to hire the most qualified person to run such a large city on that salary.”
Sculley, who has held that position for 13 years, will retire at the end of June.
“Fitch is clearly out of step with the other ratings agencies, who reaffirmed our AAA status as stable,” said Councilman Greg Brockhouse (D6), who used to work for the police and fire unions and may run for mayor next year. “None of our financial fundamentals have changed, and San Antonio will continue to meet its responsibilities.
“Binding arbitration wouldn’t matter and this downgrade would be a non-issue if we would have finalized public safety contracts.”
Brockhouse blames Nirenberg and Sculley for the City’s failed negotiation attempts with the union, which has refused to start talks. Nearly three weeks ago, the City dropped the lawsuit that the union claimed was the sole reason for not negotiating.
On Wednesday, Nirenberg took issue with Brockhouse’s comments about the downgrade. Brockhouse was the lone council member to support the fire union-backed charter amendments.
“Councilman Brockhouse’s effort to shift responsibility for the downgrade is laughable,” Nirenberg said. “Everyone, including the agencies themselves, told us in advance this would happen. Councilman Brockhouse said it was just a scare tactic. Now voters know who was lying. ”
In the run-up to the November election, some fire union representatives and pro-proposition campaign officials said the City’s financial experts were overstating the risk to the bond rating.
“I hate to be the I-told-you-so guy, but it’s hard to look at this not be disappointed,” Councilman Manny Pelaez (D8) said. “We kept hearing that our warnings of a downgrade were nothing more than cynical scare tactics. Today we learn that our warnings about the economic consequences were well-founded.
“City leadership is going to have to deal with this mess now. I hope we can clean it up before it gets much worse. Thankfully, it seems we have the right team at the helm to face this challenge. ”
A copy of each agency report is available on the City’s website here.