DALLAS - Citing revenue shortfalls and growing financial pressure, Fitch Ratings has lowered Tucson's water system revenue bonds one notch to A-minus ahead of a $38.4 million deal.
The downgrade affects $378.3 million of outstanding debt.
"The downgrade to AA-minus from AA reflects the system's increased pressure on financial operations stemming from operating revenue shortfalls and large cash-funded capital outlays," analysts Gabriela Gutierrez and Doug Scott wrote in their report.
"These pressures are evidenced by a sharp decline in liquidity and working capital and recent downward trend in coverage of debt service requirements."
The downgrade comes a month after Standard & Poor's lowered the city's general obligation rating to AA-minus from AA.
The agency also downgraded Tucson's certificates of participation to A-plus from AA-minus.
"Tucson has seen a recent downturn in sales taxes, a significant revenue source, and the city projects they will fall further in fiscal 2010," said credit analyst Matthew Reining.
"Moreover, the city is experiencing structural financial pressure, with a city-estimated $25.8 million general fund difference between revenues and expenditures in fiscal 2009, as well as another budget gap to be addressed in fiscal 2010."
On May 18, Moody's Investors Service placed its A1 rating on Tucson's COPs on negative outlook. Moody's rates Tucson's GO bonds Aa3.
As Arizona's second-largest city, Tucson is in danger of further tightening if state lawmakers decide to withhold shared revenue in order to close an estimated $4 billion state budget gap.
If the cities lose their share of the revenue from sales taxes, licensing fees or other taxes, they will have to readjust budgets that have already been cut to the bone.
Local sales tax revenue is a major revenue source for Tucson, making up 42% of the fiscal 2008 general fund revenue.
Softer retail sales led to a 3.1% decline in the city's sales tax revenue in fiscal 2008. Its local sales tax estimates for fiscal 2009, based on nine months of actual data, show a more significant 13% decrease, or $25.6 million.
Tucson, with a population of 544,000, is the seat of Pima County.