BRADENTON, Fla. — Moody’s Investors Service expanded its review of Miami’s debt ratings on Wednesday citing “fundamental financial issues” that are unlikely to be resolved because of future pension and health care costs.
Moody’s also added $71.6 million of off-street parking bonds to its review of various city issues that it may downgrade, affecting $740.4 million of outstanding bonds.
The rating agency had already put the city on watch for possible downgrade after the city received a so-called Wells notice from the Securities and Exchange Commission on July 23.
Miami is in the process of declaring “financial urgency,” which is a legal mechanism in Florida that allows municipalities to reopen negotiations with unions and impose contract adjustments. For fiscal 2013, the city is attempting to close a $40 million budget gap by cutting union benefits.
The financial urgency declaration has been legally challenged in court by a union. A judge ruled that Miami improperly declared the intervention by having the city manager invoke it, instead of the City Council. The city has appealed the ruling.
Even if Miami is successful in court, and ultimately balances its fiscal 2013 budget, Moody’s analyst John Incorvaia said that pension and health care costs are slated to increase to 28.5% of its budget by 2017 unless additional measures are taken annually or permanent changes are implemented.
“Moody’s believes these issues will impose annual recurring challenges that will be difficult to resolve given expected limited revenue growth,” he said.
The review was initially prompted by the SEC revealing that it would recommend sanctions against the city for alleged securities violations.
The violations are believed to be the result of Miami’s failure to properly disclose its budget problems in bond documents for three offerings that were sold between 2007 and 2009. Those problems included using capital funds for operations to close a budget imbalance. The capital funds were later returned.
It is believed to be the first time an issuer has twice been the target of SEC enforcement actions.
In 2003, Miami signed a cease-and-desist order with the SEC promising not to commit future violations of the antifraud provisions of the federal securities laws. That order came about as a result of similar budget problems that the city failed to disclose in the 1990s when it nearly ended up in bankruptcy.
Earlier this month, the city’s outside counsel, Morgan, Lewis & Bockius LLP, outlined a potential settlement agreement in a letter to the SEC’s Miami office designed to avoid sanctions.
Attorneys suggested that the commission issue an investigative Section 21(a) report, which the SEC uses to lay out problems without attaching fines. In return, Miami said it would improve budget and disclosure practices, including restructuring the city’s finance department, as well as create procedures to document, substantiate and analyze budget procedures, including proposed interfund transfers and other budget amendments.
The city would also consider restructuring its auditing committee, creating a disclosure committee, and hiring disclosure counsel.