Tucson's credit rating was downgraded by Fitch Ratings due to the city's persistent budget deficit and its failure to use anything but one-time fixes to combat shortfalls.
Fitch downgraded both the city's general-obligation and certificates-of-participation ratings. Another firm, Standard and Poor's, which downgraded the city last year, gave them the same rating this year, but reduced Tucson's future outlook to negative.
Fitch assigned a negative outlook to the city's water bonds as well.
The downgrade could lead to higher interest rates for taxpayers on $66 million in bonds the city will sell in early June. City finance officials said Tucson could be looking at further downgrades if a November sales tax fails at the polls.
The reports also could mean higher interest payments for a proposed new convention center hotel that some people see as not financially viable already.
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Besides the downgrade, Fitch kept the city outlook negative, which city officials said is both unusual and a bad sign.
"Normally when you get downgraded you're back at stable (outlook), but they're saying we need to change some things or we could get downgraded again," said Deputy Finance Director Silvia Amparano.
Rio Nuevo board member Alan Willenbrock, a vice president and financial adviser for Morgan Stanley Smith Barney in Tucson, said the downgrade hurts the hotel because the city's credit profile is being used to finance the $192 million hotel.
"If the city's rating falls, then the hotel's rating would fall as well," Willenbrock said. "It hurts the ability to do a hotel, it makes it more expensive."
Because of a "realignment" of municipal credit ratings to more closely match the ratings for corporate debt, the city's credit rating was downgraded even though its letter rating is the same.
"I'd like to say we're the same rating as before, but the rating doesn't mean the same as it used to," said Finance Director Kelly Gottschalk said.
Gottschalk said it's possible the bond markets won't penalize the city with higher interest because they aren't used to the new credit ratings, since they've been realigned. But she acknowledged that more astute institutional bond buyers are likely to be aware.
The city is still waiting for its new rating from Moody's Investor Service, which Gottschalk said is critical because it is more prestigious than Fitch.
For its general-obligation bonds, Fitch rated the city at AA. Its certificates of participation - which are bonds that don't have to be approved by voters and have an asset attached to them as collateral - Fitch rated the city at AA-.
Fitch cited the city's low rainy-day fund, weak cash liquidity for the general fund and its one-time fixes for the budget that don't make it structurally balanced for the downgrade. S&P's negative outlook also referenced the structural imbalance in the city's budget.
"We keep using one-time fixes and that's not what they want to see," Gottschalk said.
A failure of a proposed half-cent city-sales-tax hike in November would lead to the city being downgraded again, she said, because the hike has been pitched to the agencies as something the city is doing to shore up its structural deficit, in order to avoid an even more negative rating.
Contact reporter Rob O'Dell at 573-4346 or rodell@azstarnet.com.
