Fitch warned Jacksonville earlier this year that a credit downgrade was waiting in the wings if the city didn’t move to control its rising pension costs.
Fitch has now followed through on the threat, downgrading several city bonds from AA+ to AA, and others from AA to AA-.
In doing so, Fitch becomes the second agency to downgrade Jacksonville’s credit in the last four months. Moody’s did so in June.
From the Jacksonville Daily Record:
Fitch Ratings has downgraded several of Jacksonville’s bonds, citing pension risk and lack of reform as key drivers to its negative changes.
In all, about $1 billion in bonds and commercial paper notes were downgraded. Three bonds went from AA+ to AA, while one bond and the city’s commercial paper went from AA to AA-.
Regarding the city’s unlimited tax general obligation, its pension and liability profile is more consistent with an AA rating as opposed to an AA+ rating, the agency explains in its notes. Ratings affect the city’s interest rates on borrowing.
“The rating action focuses on credit risk associated with the city’s pension plans, which have a large collective unfunded actuarial accrued liability and rapidly escalating funding costs,” it states.
The city’s police and fire pension plan’s unfunded liability is more than $1.6 billion. The annual cost of paying into the plan is a projected $154 million for fiscal year 2014-15, up $6 million from the year before.
Chief among Fitch’s concerns is the city’s stalled pension reform efforts. One Fitch analyst said reform has been “very slow to evolve”. From the Florida Times-Union:
Fitch Ratings voiced concerns Monday about whether Jacksonville can actually achieve pension reform that will strengthen the city’s financial outlook.
[…]
After noting that some City Council members have filed amendments seeking to change a pension bill introduced by Mayor Alvin Brown, Fitch’s report questions “when or if” the City Council will vote on that bill.
Fitch also points out that Brown’s bill doesn’t identify a “definitive long-term funding source” to pay for a $400 million piece of Brown’s proposal — a criticism also lodged by several City Council members and the Jacksonville Civic Council, a high-profile business group.
[…]
Fitch put Jacksonville on notice earlier this year it would downgrade the city’s ratings if pension reform isn’t achieved. Brown filed his pension bill in June but it went on the back-burner during the summer budget hearings. The City Council conducted its first session last Wednesday to discuss the bill.
The Mayor’s Office has said the question-filled meeting was productive. But Fitch’s analysts were “concerned that it was not the progress they were after,” said city Chief Financial Officer Ronnie Belton, who talked to the analysts last week.
“I think the message from them is, ‘We’re looking for you to deal with the No. 1 issue you’ve got,’ ” Belton said.
Read the Fitch report here.