BRADENTON, Fla. — Standard & Poor’s Wednesday dropped Miami’s general obligation bond rating to A-minus from A-plus. The agency also downgraded debt backed by the city’s covenant to budget and appropriate to BBB-plus from A.
Analyts said the city’s rating outlook is negative.
The two-notch downgrade affects approximately $34 million of outstanding GO bonds and $243 million of limited-tax GOs.
Citing worsening finances and stalled negotiations with unions over pension benefits, Standard & Poor’s became the first rating agency this year to downgrade Miami. The agency also noted that the city is the subject of an ongoing Securities and Exchange Commission inquiry.
City officials could not be reached for comment.
Miami’s financial flexibility has been greatly reduced by growing fixed costs, much of which is related to pension benefits, and limited tax-raising flexibility as well as the unwillingness of city commissioners to raise taxes, said a report by Standard & Poor’s analyst John Sugden.
The city has experienced multi-year operative deficits with another projected at the end of fiscal 2010. Officials have dipped into reserves to cover deficits and reserves now are at levels that violate financial policies.
Based on year-to-date actual performance through April and year-end projections, Sugden said management expects to close fiscal 2010 with a $19.7 million shortfall underpinned by revenues $14.5 million below budget and expenditures $5.2 million over budget.
In the current fiscal year, pension funding is 17% of total general fund expenditures and pension costs are expected to increase to 21% and 22% of budget in fiscal years 2011 and 2012, respectively.
Because of budget transfers and overspending, as well as declining revenue, Miami’s total general fund balance declined from $93.57 million to $39.97 million in fiscal 2009. The unreserved fund balance was $24.85 million, or 4.7% of expenditures. The city closed out fiscal 2009 with a $53.6 million deficit, which was covered by reserves.
Miami and its population of nearly 500,000 have experienced a significant downturn due to the recession and severely weakened housing market. Unemployment is 12%.
But an ongoing problem is increasing pension costs as a result of generous benefits, which led the city recently to invoke a Florida law enabling it to reopen negotiations with unions. Those talks have not gone smoothly.
“Pension costs increased by 36% to $90 million in fiscal 2010 and continue to be one of the main sources of expenditure pressures,” Sugden said.
The city’s unfunded accrued pension liability is $556 million and its unfunded liability for other post-employment benefits is $480.3 million, his report noted.
The city’s growing deficit got the attention of the SEC last fall, which opened an investigation to determine if Miami properly disclosed its financial condition to investors in bond documents.
That inquiry is still under way and is reminiscent of the city’s financial meltdown in the 1990’s that resulted in state oversight for a number of years. It also led the SEC in 2003 to find that Miami violated federal securities laws when it hid financial problems from investors in the early 1990s. The city was ordered not to violate disclosure laws again.
Moody’s Investors Service and Fitch Ratings also have negative outlooks on Miami’s credit.
However, the city benefitted from their recent rating recalibrations. Fitch boosted Miami’s GO rating to AA-minus from A while Moody’s upgraded it to Aa3 from A2.