City government officials and business leaders warn that San Antonio taxpayers would face tax increases and cuts to city services and infrastructure projects if some or all of three propositions on the November ballot are approved.
But how do propositions aimed at referenda rules, city manager salaries, and a firefighter labor contract translate to higher taxes? The answer lies in the City of San Antonio’s bond ratings.
Passage of the charter amendments and the changes they would bring could impact the City’s perceived stability, which could result in credit rating agencies giving the City a lower bond rating. That means the City would pay higher interest rates on money borrowed for infrastructure projects and the City would “pay more for less city services,” officials have said. And if the City wants to maintain the same level of services, taxpayers would fit the bill with increase taxes.
The firefighter union-backed Approved By Citizens group campaigning for passage of the propositions says that scenario is overblown; City Hall would merely have to be more responsive to citizens and more fiscally responsible.
Outside municipal finance experts say it’s unclear what the actual impact to taxpayers would be. Reports from bond rating agencies are troubling, they say, but stop short of explicitly stating the City’s bond rating would be downgraded if the propositions pass.
Why cities need bonds
Cities across the world, especially big ones, borrow money to complete larger projects that their annual budgets can’t cover, such as those for streets, drainage, parks, and libraries. To pay for those projects, cities issue municipal bonds, a debt instrument. For example, the $850 million funding projects in the 2017 bond is borrowed – with interest – from lenders, from investors who hold the bonds. The city has several years, often decades, to pay it back.
“We don’t collect enough on an annual basis to do what we need to do with cash,” said Ben Gorzell, the City’s chief financial officer. “Debt is just a tool.”
When the City puts bonds onto the market, a credit rating is a factor lenders use to judge the level of risk. A high rating – San Antonio’s AAA rating is the highest possible – means the City is likely to pay the loan back and do it on time. In general, the lower the rating, the riskier the investment and the higher the interest rate. Each agency has its own criteria for grading a city’s ability to repay the debt, but generally they measure the city’s economic strength, management, and spending obligations.
“Because we have the highest possible bond rating,” Gorzell told the Rivard Report during an interview last month, “that means we go out into the market and they see [our bonds] as low risk. There’s a lot of confidence in the City.”
But if bond buyers lose confidence in the City’s government, San Antonio would face higher interest rates, potentially resulting in less money for projects like that new library branch in your neighborhood or repairs to that deteriorating street, Gorzell said.
To continue funding projects at the current level “you either pull a project [from a bond or budget] or theoretically you could increase the tax rate.”
Warnings from rating agencies
Proposition A would allow critical City Council decisions such as setting tax and utility rates to be challenged by a voter petition for a public vote and make it easier to get such issues on a ballot by requiring 20,000 signatures instead of about 70,000 and lengthening the time petitioners have to collect those signatures from 40 days to 180 days.
Proposition B would cap future city managers’ pay at 10 times the lowest-paid City employee (which would be roughly $300,000, a little more than half of what the current city manager makes) and tenure at eight years.
Proposition C would allow the firefighters union to call an impasse in contract negotiations and force binding arbitration with the City for a labor contract.
Both sides tend to agree that the propositions have the potential to affect how the City functions financially and that is indeed something that bond rating agencies watch.
“But [the positive or negative impact] is all in some sense based on assumptions about the future,” said Heywood Sanders, interim chair of University of Texas at San Antonio’s College of Public Policy. “A lot of things can happen other than the issue of these particular propositions.”
The three major rating agencies issued outlook reports for San Antonio in July. Fitch and S&P included statements regarding the propositions, Moody’s did not.
“Successful passage of these petitions, particularly those that make any ordinance subject to referendum and allow the firefighters to require binding arbitration, would lead to negative rating pressure should the city be unable to effectuate effective responses,” Fitch stated. “City responses that erode its superior financial resiliency could lead to negative rating pressure.”
S&P says Prop A could be especially damaging: “If voters approve the proposed changes to the city’s charter in the upcoming November 2018 election, we believe the changes to the referendum process in particular could have a material negative impact on the city’s finances, as such initiatives could effectively limit San Antonio’s ability to manage its budget.”
Contrary to what the Approved By Citizens website says, the reports from S&P, Moody’s, and Fitch are readily available to the public on the City’s website. Click here to download the credit rating reports and here for the City’s financial advisor’s letter about them.
To be fair, Sanders said, the agencies included just a couple of paragraphs about the propositions in lengthy reports that address other issues such as health care costs, pay plans, and budget reserve policies. The reports use the word “could,” he said.
“Could it have an impact? Sure,” Sanders said. “Is it certain it will have an impact? Not at all.”
But Gorzell maintains it is extremely rare for agencies to comment on ballot initiatives, and the statements by Fitch and S&P amount to a warning. “It would just be a matter of time – we will be downgraded,” he said. “It’s a question of how far.”
Marc Joffee, a senior policy analyst for the libertarian think tank Reason Foundation, also was surprised the rating agencies would mention the ballot initiatives.
That makes him more “pessimistic” about the city’s future bond rating, he said, adding that a downgrade would depend on how the citizens and City react to the election. “It wouldn’t happen right away,” he said.
Speaking at a recent debate about the propositions hosted by the League of Women’s Voters, Councilman Greg Brockhouse (D6) said it’s up to the City to make its case to voters for utility rate hikes and projects with big price tags.
Fitch basically said that if “the City doesn’t handle it, there could be issues,” he said. “Folks, that’s leadership.”
Bond ratings aren’t the only factors that go into setting the interest rate cities pay, Sanders said. “When a city, including ours, puts bonds on the market, it’s what that market chooses that ultimately sets the interest rate. … Just like a car loan or mortgage, the interest rate the city gets is a function of the economy.”
San Antonio has enjoyed strong economic growth for the past several years, with its gross regional product increasing by more than 30 percent from 2011-2016. But an economic impact study commissioned by the City predicted passage of the propositions could change that.
Before the City places charter amendments on a ballot, state law requires an economic impact report. Steve Nivin, director of the SABÉR Research Institute and an associate economics professor at St. Mary’s University who has conducted such studies for the City and other local institutions, completed the report that was presented to City Council in August.
His report stated the amendments could cost the City between $382.3 million and $4.2 billion over 20 years, according to the report, because of slower economic growth caused by uncertainty in the business sector, a lower bond rating, and other factors.
“Recessions [would be] more severe, [and the initiatives would] inhibit our ability to recover from them,” Nivin stated. These impacts combined could dampen San Antonio’s ability to attract, retain, and expand businesses and potentially increase the City’s interest expenses.
If San Antonio wants to continue issuing bonds on the scale it has recently – about $2.5 billion over 20 years – and its bond ratings drop, Nivin said, lending costs alone could increase anywhere from $17.5 million to $132.5 million.
The Nivin report, Sanders noted, is based on several assumptions, including that the City will continue to issue large bond packages over the next decades.
Click here to download Nivin’s report.
San Antonio didn’t always issue such large bond programs, Sanders said. “For most of our history, we didn’t have a AAA bond rating.”
City Manager Sheryl Sculley was hired in 2005 and San Antonio received its first AAA general obligation bond ratings from all three major agencies in 2008. The City has maintained it ever since.
San Antonio is the only city with more than 1 million people to receive a AAA rating. Austin, with a population of just under 1 million, according to the U.S. Census Bureau, also has a AAA rating
It has a lower threshold of signatures for a referendum than San Antonio does now, but a small window in which to submit them. The required number of signatures for a referendum in Austin is 20,000 signatures, but petitions must be submitted prior to the effective date of the ordinance that’s being challenged. “Typically, the effective date of most ordinances is 10 business days following adoption,” according to the City of Austin’s website.
Such rules make it difficult – but not impossible – to challenge City Council. Uber and Lyft successfully placed rideshare rules up for a public vote, but that ballot initiative attempt failed last year. About 56 percent of Austinites rejected the measure that would have overturned rules approved by City Council.
The Go Vote No camp says Proposition A would open up San Antonio ballots to special interests that could simply hire a firm to collect signatures and throw the city into chaos. The San Antonio First camp, which also goes by Approved By Citizens, says it will make it easier for citizens to hold City Council accountable.
Both scenarios are possible, said Francine Romero, associate dean for the College of Public Policy at UTSA.
“The voter empowerment argument can be made on both sides,” Romero added. On one hand, voters might be able to vote on more things, but on the other it could “take away the power you have given with your vote for your Council member.”