New Haven, Conn., received its third downgrade in two months as Fitch Ratings lowered the city's general obligation bond rating to A-minus from A. The move affects $500 million in debt.
Standard & Poor's last week dropped New Haven to BBB-plus from A-minus, and Moody's Investors Service cut it to A2 in June.
Fitch, which also downgraded the city from A-plus in April, cited the city's "weakened financial flexibility" in a statement late Monday, saying dependence on state aid, exposure to school deficits and negative balances in special revenue and internal service funds further depleted reserves.
"The reset to A-minus is disappointing as the city has diligently worked to reduce costs by resetting pension and medical care costs for city employees, growing the city's tax base and adopted a budget for fiscal year 2014 that included no one-time revenues," New Haven budget director Joe Clerkin said in a statement.
"However, the action is understandable due to the city's fund balance deterioration and, of course, is in line with the financial pressures currently being felt by many jurisdictions."
New Haven, home to Yale University and Yale-New Haven Hospital, is Connecticut's second-largest city with a 130,000 population. Fitch assigned it a negative outlook, saying unsettled labor contracts and rising pension costs could leave the city with budget gaps and force it to further deplete reserves.
"Although the fiscal 2014 budget is balanced without use of one-time revenues, past deficits and structural imbalance have eroded unassigned general fund balances to less than 1% of expenses," said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.
Continued imbalance in both city and school operations could force further downgrades, according to Fitch.
The rating company said New Haven's pension funded levels are low, despite the city continuing to fund 100% of its annual required contribution. The most recent actuarial valuation as of June 30, 2012, showed a $541 million unfunded liability. Funded levels for the two single-employer defined benefit plans were 43% for general employees and 48% for police and fire, using the plans' 8.25% assumed investment return rate.
Fitch, adjusting to its more conservative 7% discount rate, calculated the funding levels at 37% and 42%, respectively.
"As we move ahead, the city will continue to ensure that we enter into labor agreements that the taxpayers can afford, that are fair to employees and that are mindful of current market conditions while continuing to develop our sizeable education, research, bio and life science economy," Clerkin said.
Fitch noted that Yale University and Yale-New Haven Hospital continue to attract biotechnology and pharmaceutical investment. "Significant new developments have contributed to the city's tax base growth," Fitch said.