Phoenix Credit Downgrade

Phoenix’s perfect credit rating was downgraded Friday, a blow to city leaders who had pointed to the top rating as evidence of its sound fiscal management compared with other large U.S. cities.

Standard and Poor’s, one of the world’s largest credit-rating agencies, changed Phoenix’s general obligation bonds rating from AAA to AA+, citing concerns about the overall performance of the local economy and its level of debt and financial liabilities.

Similar to a person’s credit score, a city’s bond rating affects its ability to borrow money and the interest rate it pays. Phoenix’s lower rating could mean it will have to pay more in interest to issue bonds in the future.

Phoenix officials said the downgrade is largely the result of a change in S&P’s rating criteria this year, placing a higher emphasis on local economic conditions. In particular, Phoenix’s property values, which plummeted during the housing-market crash, depressed its rating, they said.

“A lot of what this is about is not within our control,” City Manager Ed Zuercher said. “What property values do, we don’t have direct control over that. But the things that we do have direct control over, we feel good about.”

Although S&P noted Phoenix has managed its budget “proactively” in recent years and has high levels of available cash, the agency said the city’s amount of debt and financial liabilities is weak.

Rating analysts compared its total outstanding general-obligation debt, which is usually paid from sales and property taxes, to its revenues over the course of the year, suggesting its debt ratio was unfavorable compared with other cities. According to the report, Phoenix’s payments on its debts made up nearly 10 percent of its total governmental expenses for the fiscal year that ended June 30.

S&P also called attention to the city’s pension liabilities. The city’s retirement system for general employees, the City of Phoenix Employes’ Retirement Plan, is 62.2 percent funded, with an unfunded accrued liability of $1.11 billion. A trust is considered fully funded if it has enough assets in hand to cover 100 percent of existing pension liabilities.

City executives said they learned of the potential downgrade Friday afternoon and attempted to convince S&P to hold off on its decision, citing improvements in the local economy and recent reforms to reduce pension liabilities. Those attempts were unsuccessful.

Phoenix’s bond rating was upgraded to AAA from AA+ in 2007, at the height of the real-estate boom. The city faced the threat of a downgrade during the recession, when it faced a record $277 million budget shortfall.

Former Chief Financial Officer Jeff DeWitt, who recently left Phoenix to take the same post in the city of Washington, D.C, had negotiated with the rating agency to avoid a downgrade several years ago.

Mayor Greg Stanton released a statement Friday, saying, “I’m disappointed the new S&P criteria have affected Phoenix, but we still have the second-highest bond rating in the nation and earned the highest marks for budget flexibility and fiscal management.”

But several City Council members said the downgrade was a wake-up call.

Councilman Sal DiCiccio suggested the downgrade shows Phoenix needs to get serious about pension reform and make changes beyond modest reforms enacted this year. He said the city must realize its growing budget impacts its ability to pay down long-term debt.

“Is the downgrade huge?” DiCiccio asked. “No, it’s not. But it’s a warning bell. You have to actually have a real plan in place that prevents Phoenix from being the next Detroit.”

Zuercher said the city’s pension debt was not a major factor in the downgrade, explaining that city officials expect pension reforms passed by voters and the City Council will save $830 million over the next 25 years. However, Zuercher said the city must continue to focus on efficiencies and live within its budget.

Ratings analysts from S&P could not be reached for comment after the report was released Friday evening. However, the city put out a news release quoting an agency analyst who said the rating “is directly attributable to S&P’s newly released, changed criteria.”

While the downgrade was a major disappointment to city leaders, they said it will not immediately affect its finances because the city has no plans to issue additional bonds. However, the city could end up paying up to a tenth of a percent more in interest on future debts or if it seeks to refinance bonds, officials said.

Vice Mayor Bill Gates said Phoenix might have maintained its AAA rating if S&P used its old methodology, noting that the new rating includes property valuations from roughly two years ago. Gates said he’s concerned residents and outsiders will misinterpret the rating change.

But Gates said the biggest wake-up call is for the council to do more to attract jobs and development, which will in turn increase property values and its economic outlook.

“Apple going to Mesa was a wake-up call. This now — today — was a wake-up,” Gates said. “We’ve got to get focused.”