Standard & Poor's recently downgraded Glendale's general obligation bond rating from an A-minus to a BBB-plus.
The drop in rating is based on the agency's new criteria, and said the outlook for the city is negative.
“The change in the rating will not impact the city's existing debt service costs because the annual cost of the existing bonds is fixed,” said Tom Duensing, Financial Services executive director. “The direct financial impact of the rating change will occur when the city issues bonds in the future. There are no anticipated (general obligation) bond issuance for fiscal year 2014-15.”
S & P based the rating on what it called the city's weak management practices and its history of ongoing budgetary imbalance.
The city, which hosts the Super Bowl in February, has struggled for several years as they pursued professional sports teams.
S & P has downgraded the city's bond rating several times in recent years, and they quoted the city’s deal with the Phoenix Coyotes.
The city will pay the owners of the Coyotes, Renaissance Sports & Entertainment, to run Jobing.com Arena, which is owned by the city.
“Although the report mentions the arena costs specifically, the simple reality is that the General Fund financial conditions is due to past and forecasted structural imbalances (expenditure exceeding),” said Duensing. “There are many contributing factors, such as the recent recession, which also affected city investments, other contractual obligations, rising personnel costs, decreased state shared revenue, etc. The key to financial sustainability it reacting and making necessary, timely budget adjustments, which we are doing through the current budget process and the five-year financial forecast.”
The team's owners have an out-clause in the deal allowing for relocation of the team after five years if the Coyotes generate more than $50 million of accumulated losses during that time. If they leave, the city would be paid $45 million less shared revenues received over the period.
Excise tax revenues pledged to debt service fell 23 percent during the fiscal years from 2008-2012. Because of that, debt service coverage fell, but remained “satisfactory,” according to Moody's.
The lowered bond rating will affect the city if investors decide to invest or purchase bonds.
“An investor's decision to purchase or sell debt obligations of the city is based on many factors, including bond ratings,” Duensing said. “As each investor is unique, it is very difficult to tell whether the rating will affect future investors.”
The S & P report stated that the city has very weak budget flexibility, very strong liquidity, very weak debt and contingent liability, but strong institutional framework.
While the report stated weak management, it also says that one of the positive points is the new regime.
“The new city manager started in July 2013 and I started in October 2013,” Duensing said. “Other seasoned staff have joined with significant experience in finance, budgeting and local government in general. From a financial standpoint, I believe changes and improvements have already begun, with the forecasts and subsequent difficult budget discussions.”
While the bond has been lowered, Duensing believes the city is headed in the right direction.
“The bond rating from S & P is their opinion of the city's financial health,” he said. “As they explained in the report, the rating change is due to the application of new rating criteria released last fall. The negative outlook assigned by S & P indicates that additional rating action may occur within the next two years. If we fix the financial condition, which is within the city's control, the ratings should fix themselves in a reasonable amount of time.”
NOTE: Mr. Duensing will provide a commentary in this week's The Glendale Star explaining bond ratings and their impact on cities.