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One agency lowers city’s bond rating

Thursday, September 10, 2020 by Jo Clifton

Moody’s Investors Service has downgraded city of Austin bonds from Aaa to Aa1 just before the city gets ready to sell $271 million in general obligation bonds. The agency cited Austin’s “high leverage and fixed costs attributable to the city’s pension and other post employee benefit plans” as the reason for the downgrade.

Mark Dombroski, Austin’s interim chief financial officer, told City Council members in an email last week that the other two bond rating agencies, Fitch and Standard & Poor’s, are expected to keep their higher grades for Austin, although Fitch may downgrade Austin’s outlook from stable to negative.

“Despite the action taken by Moody’s, the city of Austin’s credit remains among the highest of all major Texas cities and the citizens of Austin will continue to enjoy historically low interest rates,” Dombroski wrote.

Dennis Whaley with PFM, the city’s bond adviser, told the Austin Monitor Wednesday the city plans to sell $271 million in bonds and certificates of obligation for items voters approved in 2016 and 2018. He does not expect Moody’s decision to have any impact on the bond sales, scheduled for next Tuesday.

“I expect very strong demand for the city of Austin bonds. There’s always strong demand” for Austin bonds. “I do not expect any effect as a result of the downgrade,” he said. As far as future bonds, Whaley could not address that issue, but as for the sale next Tuesday, “I expect no problems.”

“We’re selling bonds for mobility and transportation, affordable housing, flood mitigation, health and human services,” as well as items such as backhoes.

According to the report from Moody’s, “The Aa1 rating also incorporates that pension reform is currently in progress to help subdue long-term unfunded liability growth, and will likely include new benefit tiers and contribution increases. The likely contribution increases will add to the city’s already high fixed costs and funding levels … signaling liability growth.”

But Moody’s also recognized that Austin has a “strong and large economy anchored by multiple institutions as well as high educational attainment levels that have led to significant economic growth in recent years.”

If the city manages to lower its pension liabilities, pegged at $6 billion in June, with $2 billion of that unfunded, Moody’s would likely take notice and that could have a positive impact on the city’s bond rating. City staffers have been working on a plan to deal with the liability for some time, as outlined in the report to the Audit & Finance Committee in June.

Mayor Steve Adler, who sits on the committee as well as the pension board for Austin firefighters, and Council Member Leslie Pool, a member of the committee and the pension board for civilian employees, both expressed optimism that the city would be able to come up with a plan to lower its liabilities. They noted that some of the city’s problems can only be fixed by the Texas Legislature. Adler said, “The city’s already moving to raise this issue” with legislators.

Adler told the Monitor the city needs to get legislative permission “to do yearly adjustments to keep the pension plans in an actuarially sound manner.”

Peck Young, executive director of the organization Voices of Austin, which opposes the item on the Nov. 3 ballot to finance Project Connect, sent out a press release Wednesday stating that the lower bond rating “means less credit worthiness for the city of Austin and thus higher borrowing costs for the city.” For this group, there is no justification for the cost of the $7 billion project.

Photo made available through a Creative Commons license.

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