dBusinessnews Austin reports that Houston’s credit outlook has been downgraded:
Fitch assigns an ‘AA-‘ rating to the $63.8 million taxable pension obligation bonds, series 2006A; $23.2 million public improvement refunding bonds, series 2006B; and $3.5 million certificates of obligation, series 2006C, of Houston, Texas. Additionally, Fitch affirms the ‘AA-‘ rating on the city’s $1.8 billion in general obligation bonds, $81.9 million in certificates of obligation, and $2.8 million in tax notes outstanding. The issues are scheduled for a negotiated sale through a group led by Morgan Stanley during the week of March 6. The Rating Outlook is revised to Negative from Stable.
The change in Rating Outlook to Negative reflects increased uncertainty in general fund operations in light of a summary judgment by a district court judge who upheld the enforceability of one of two revenue limitations measure recently approved by voters. Fitch typically views revenue limitations negatively given that they restrict financial maneuverability. The all-encompassing nature of one of the two propositions (Proposition 2) is cause for additional concern, and Fitch considers its possible implementation as a potential challenge to the city’s credit quality, given ongoing and future spending pressures. The city does maintain several options regarding the limitations, and an outcome in the city’s favor could result in a more stable credit profile.
[snip]
The two revenue limitations, also referred to as Proposition 1 and Proposition 2, were approved by voters in November 2004 and are scheduled to take effect in fiscal 2006. Proposition 1 is a city council initiative and targets only ad valorem tax revenue and water and sewer system revenues. Proposition 2, which is a citizen initiative, targets combined revenues of essentially all city operations and has the potential to more severely restrict revenue growth.
[snip]
Despite recently agreed upon program changes and funding commitments that have reduced the $1.8 billion unfunded actuarial accrued liability (UAAL) of the city’s municipal employee pension system by an estimated one-half, that program and the police officers’ and firefighters’ pension plans all face potentially sizeable increases in UAAL over the near term. In addition, Fitch views the city’s debt financing of a portion of the city’s annual contribution to both the municipal and police pension systems as an indication of financial stress.
The White Administration bought itself some time with regard to the unfunded pension liabilities that it inherited, but as this reporting makes clear, the administration (or its eventual successor) still has some work left to do in shoring up those unfunded liabilities. The legacy of Lee Brown continues to affect Houston.
UPDATE: Mayor White took the opportunity to play politics with the downgrade, criticizing Proposition 2 in a press release. He neglected to comment on the unfunded liabilities in the pension funds, however.
BLOGVERSATION: Houblog.
