Fitch Ratings on Friday lowered the rating on Hollywood, Fla.’s general obligation bonds to A from A-plus, citing a structural budget imbalance and “consistently optimistic revenue projections.”
The action affects $50.5 million of outstanding debt. The outlook is negative.
“The negative outlook reflects the significant challenges the city faces in closing the structural imbalance for fiscal 2012 and beyond,” analyst Ginny Glenn said. “While management has shown a willingness to implement difficult spending cuts, the weakened housing market and related revenue collections, increasingly contentious labor environment, and high and growing fixed-cost burden will continue to strain finances over the near term.”
Glenn also said “liberal” budgeting practices have resulted in repeated, sizeable negative budget variances requiring draws on already-diminished reserves for the last two fiscal years. Fund balance reserves are now below the city’s minimum policy levels.
The city raised the tax rate in fiscal 2011, though it was not enough to offset the effect of declining assessed value and property tax collection rates.
Moody’s Investors Service in August downgraded the city’s GO rating to A1 from Aa2 citing similar reasons. Analyst Valentina Clark noted Monday that a recent referendum in Hollywood was a positive credit factor because voters reduced pension benefits for city workers, police officers and firefighters as part of a plan to balance the fiscal 2012 budget.
Though Florida law allows local governments to declare a financial urgency to reopen union contract negotiations and impose changes, Hollywood’s charter requires a citywide vote to authorize pension changes that are not approved through collective bargaining.
The city faced a $38 million budget deficit and a 27% property tax hike. Because of the vote, changes to the pension plans will save $8.5 million and lower the tax increase to 11%.
City officials also plan to impose additional pay cuts and freeze vacant positions as well as forgo raises and certain unpaid holidays.
While other communities may not require voters to approve changes to union contracts, Clark said some municipalities viewed the Hollywood referendum as a unique opportunity to gauge public sentiment on government pensions.
“South Florida has been hit particularly hard by the economic downturn, as many local governments have seen consecutive years of double-digit property value declines,” Clark said. “Passage of the Hollywood referendum may encourage officials in other municipalities to seek deeper benefit cuts in lieu of larger tax increases when faced with budget gaps.”