Tucson officials can relax a bit now that Fitch rating agency didn’t drop the city’s bond rating this year.
But the agency did renew its concerns over ballooning pension costs and the city’s reliance on one-time fixes to close annual budget gaps.
Fitch’s latest report card maintained Tucson’s AA bond rating since the city continued to carry manageable debt levels.
However, it also kept the city’s future outlook as negative, mostly due to the approximately $1 billion in unfunded pension liabilities for its four pension programs.
Even though rating agencies typically lower a city’s credit after two consecutive negative outlooks, Tucson’s Chief Financial Officer Kelly Gottschalk said the city made enough changes to get a one-year reprieve from Fitch on its credit rating.
“The fact that they didn’t downgrade us was a positive,” Gottschalk said.
A lower credit rating can affect the interest rate a city pays on the bonds it sells, raising taxpayer costs.
Gottschalk credited the city’s trimming $30 million from next year’s budget with job cuts and department restructuring and deciding to make next year’s debt payment as the primary reasons Fitch held steady on the credit score.
“They believed we did enough and our economy is gradually improving,” she said.
But plenty of obstacles remain if the city wants to avoid a credit hit next year.
Once again, the city’s biggest problem, cited by Fitch, is its pension funds.
At the top of the rating agency’s concerns are the city’s police and fire pensions, which are both under 50 percent funded. That means for every dollar the city pays police and fire employees in wages, it must pay 50 cents toward the pension.
Next fiscal year alone, the city will pay $46.5 million for the two funds, an increase of $4.5 million from this year.
Just a decade ago, the city paid less than $5 million a year for public-safety pensions.
Overall, the city will pay $83.4 million next fiscal year for its pensions.
While the city has made changes to its non-public-safety plan over the years to keep costs under control, its police and fire pensions are controlled by the state, and it has limited options to corral costs.
Fitch also listed one-time fixes, such as avoiding this year’s debt payment by restructuring $13 million of debt and using a $5 million asbestos settlement to cover budget holes, as practices the city would have to jettison if it wants to maintain a healthy credit score.
“The continued negative outlook is telling us we need to be prudent with debt, don’t dip into our cash reserve and do what we can with pension liability,” Mayor Jonathan Rothschild said.
Rothschild said the city did all of that during this year’s budget process. He said in addition to continuing those practices, the city will have to start making modest deposits into its rainy-day fund to become even stronger financially.
But not every one interpreted the rating as a positive omen. “Increasing employee costs, using one-time fixes and not structurally balancing the budget check all of the rating agencies’ boxes for keeping us negative. We’re just lucky they haven’t lowered that rating yet,” Councilman Steve Kozachik said.