DALLAS — Tempe lost its Aaa rating from Moody’s Investors Service Tuesday due to falling revenues and the ongoing economic decline that has forced Arizona state and local governments to cut spending.
The agency announced the downgrade to Aa1 in advance of a $64.5 million bond deal, conferring a stable outlook. The rating affects $478 million of outstanding debt.
“Moody’s expects that Tempe’s financial operations will remain pressured in the near term as the recent utilization of reserves provides reduced financial flexibility in the event of a prolonged economic downturn,” analyst Dan Steed wrote in the rating report.
Standard & Poor’s and Fitch Ratings affirmed their AAA ratings on the city’s GO debt while maintaining a stable outlook.
“We expect that the city will be able to address its capital needs without significantly affecting liquidity levels or debt ratios,” Standard & Poor’s analyst Jennifer Hansen wrote in a report. “We also anticipate that the city will adhere to its fund balance policy. Should the city be unable to bring its budget back into balance, we could take negative rating actions.”
For the fiscal year that ended June 30, the general fund balance fell nearly $20 million, which was well below original projections.
Local sales taxes, the largest operating revenue source, were down nearly 8% from fiscal 2008 totals.
Projections for fiscal 2010 indicate another large drop in reserves with sales tax revenue falling short by 12%, while state shared revenues are expected to total $39.2 million, only narrowly missing the budgeted target of $41 million.
“Despite various cost-cutting measures instituted for fiscal 2010 (e.g. a compensation and benefits freeze, elimination of 49 positions, deferral and elimination of discretionary spending and equipment purchases), the city expects to record a general fund shortfall of roughly $30 million, bringing the unreserved, undesignated fund balance just below the policy floor of 20% of spending,” noted Fitch analyst Steve Murray.
Measures planned for fiscal 2011 include elimination of 125 positions, consolidation of city departments, and fee increases and other revenue. The balanced general fund budget as proposed is $155 million, down from $186 million the previous year, and assumes no use of reserves.
Local sales-tax revenues are forecast at nearly $70 million, which includes a voter-approved 0.2-cent increase in the rate through June 30, 2014.
The Tempe City Council also recently increased its hotel occupancy tax from 3% to 5%.
“Fitch notes that a recent change in post-employment health care benefits also should lessen financial pressure going forward,” Murray wrote. “The city’s transition from a defined benefit program to a defined contribution program has cut the annually required contribution from $40 million to $11 million. Fitch will continue to monitor the city’s budgetary efforts, noting that any further material deterioration in reserves will not be consistent with the 'AAA’ rating and may have negative credit implications.”
With a population 174,833, Tempe covers 40 square miles on the eastern edge of Phoenix and adjoins Scottsdale, Mesa, and Chandler in Maricopa County. Arizona State University, with more than 55,500 students at the flagship campus, is the nation’s largest educational institution and Tempe’s largest employer with 10,336 employees.
