Moody’s downgrade Tucson G.O. Bonds to Aa3 stable from Aa2 negative
On Friday, Moody's Investors Service assigned an Aa3 rating to the City of Tucson, Arizona's, General Obligation Bonds Tax-Exempt Series 2012-A (2013) and General Obligation Refunding Bonds Federally Taxable/State of Arizona Tax-Exempt Series 2013-B — used to finance road projects and other essential city projects. At this time, Moody's downgrades to Aa3 the rating on the city's $185.3 million in outstanding parity General Obligation Bonds. Moody's also downgrades to A1 from Aa3 the city's Certificates of Participation outstanding in the amount of $252.8 million.
Moody's also downgraded to A1 from Aa3 the Rio Nuevo Multipurpose Facilities District Certificates, Series 2009 ($12.56 million outstanding) that reflects the city's moral obligation pledge to cure a deficiency in pledged revenues to make debt service payments for bonds issued by the Rio Nuevo MFD. The Civano Phase 1, Neighborhood 1, District Special Assessment Improvement Bonds ($1.12 million outstanding) also downgraded to A1 from Aa3.
The downgrade to Aa3 reflects a still relatively weak financial position compared to Aa-rated cities nationally featuring chronically low general fund cash and reserve levels and above average levels of debt. The Aa3 rating also takes into account the city's large and diverse economy that is in the beginning stages of recovery. The revision of the outlook to stable from negative reflects our view the City will continue its efforts to improve cash and reserve levels albeit at a slow pace. The outlook also takes into account that the city will continue to be challenged to improve its overall financial position given a trend of growing pension and OPEB costs and increased mass transit subsidies.
Moody’s said challenges the city faces is its low reserve levels combined with a high exposure to economically sensitive revenues and the trend of increased mass transit subisies and costs associated with employee benefits.
Fitch also downgraded the city’s rating on general obligation bonds — used to finance road projects and other essential city projects — to AA-minus. And it gave the city’s Certificates of Participation — a lease-purchase type of financing — an A+, down from AA-minus.
The downgrades come just as Tucson is about to issue its next $20 million installment on the $100 million in voter-approved bonds issued for repair and resurfacing main streets citywide. The city will sell those bonds and another set of bonds to refinance some existing debt next week, said city finance director Silvia Amparano was quoted in the Arizona Daily Star.
Although the lower ratings could bring higher interest rates, Amparano said for now, interest rates are still at all-time lows, and the investment bonds are still good grade.
Fitch cited “a persistent structural budgetary imbalance,” ballooning pension costs, lower-than-forecast revenues, continued depletion of the “rainy day” fund and use of one-time money to close budget gaps for the downgrade.
The city needs to show “meaningful progress” on cutting spending and increasing revenue “to prevent further negative rating action,” Fitch warned.
The rating agency had issued similar warnings to the city in previous ratings reports.
“We continue to drain our rainy day fund to balance our budget, we continue to use one-time fixes, and we had been warned, so we shouldn’t be surprised,” said City Council Member Steve Kozachik, also quoted in the Arizona Daily Star.
Currently the City Charter caps the city sales tax at 2%. Voters will be asked in November to raise this cap for more spending. Only voters can change the City Charter to allow the cap change as well as any new sales tax changes.