Fitch Ratings said it downgraded Tacoma, Wash.'s $23.5 million unlimited tax general obligation (ULTGO) bonds to A-plus from AA and $188.2 million limited tax general obligation (LTGO) bonds to A from AA-minus.
In addition, Fitch affirms the A-plus rating on $28.1 million of convention center and parking revenue bonds.
The ratings on the ULTGOs and LTGOs are removed from Rating Watch negative and assigned a negative outlook. The outlook for the revenue bonds is revised to negative from stable.
The ULTGO bonds are secured by an irrevocable pledge of the city's unlimited ad valorem taxing power, and the full faith, credit, and resources of the city.
The LTGO bonds are a general obligation of the city for which the city covenants to levy an ad valorem property tax pledge within limits permitted to cities without a vote, along with other legally available money.
The revenue bonds are secured by a senior lien on three sources: a public facilities district (PFD) contribution; gross parking enforcement revenues; and net operating revenues of the city's parking enterprise. PFD revenues consist of a 0.033% sales and use tax collected within PFD boundaries, as well as an admissions and parking tax on PFD-owned, operated, or financed facilities. PFD revenues are remitted to Tacoma via an interlocal agreement which cannot be rescinded until all bonds are repaid.
The downgrade reflects the city's limited progress in addressing a structural deficit in its general fund resulting in a sharp decline in reserves projected to reach a low 3% of spending in fiscal 2012.
Although management reports $19.8 million in mid-year reductions for the 2011-2012 biennium, an $11.8 million gap remains, and the deficit for the 2012-2013 biennium is estimated at $60 million-$65 million, equivalent to 15% of general fund spending.
The deficit results from widespread revenue shortfalls as well as over-spending in multiple areas.
The negative outlook for general obligation bonds reflects Fitch's concern that actions necessary to restore balance to general fund operations will likely require politically difficult service reductions, use of general fund balance, or both.
The recent reversal in financial position raises concerns about the city's management of its finances and budget monitoring capabilities. Such concerns are reinforced by the recent turnover in key financial management positions that lends further uncertainty as to the prospect for meaningful and achievable budgetary solutions.
Coverage for the revenue bonds remains satisfactory though slightly more pressured given the city's recent debt restructuring, which results in an escalation of annual servicing costs over the next several years.
The outlook revision to negative reflects Fitch's rating ceiling for special tax bonds at the ULTGO rating of the entity.
Net debt levels are moderate, debt amortization is only slightly below average, and the city has achievable plans to fund fully its non-sworn pension system and to improve its other post-employment benefits (OPEB) funding levels.
The economy benefits from the presence of large, stable employers in government, health care, and education, coupled with a strong focus on economic development. However, the unemployment rate remains high, wealth levels are below average, and there has been recent weakness in the tax base somewhat mitigated by ongoing development and the state's tax rate stability mechanism.