Fitch Downgrades San Antonio Over Fiscal Inflexibility

After a nine-year streak of perfect ‘AAA’ bond ratings from the big three agencies, the city of San Antonio was recently slapped with its first credit downgrade in a decade. Fitch Ratings lowered the city’s bond rating from ‘AAA’ to “AA+’ to reflect what it describes as a lack of flexibility caused by the passage of Propositions B and C on last November’s ballot. The two other rating agencies, Moody’s and S&P, reaffirmed San Antonio’s ‘AAA’ bond rating of the city.

The adoption of Proposition B put in place cap San Antonio’s future city managers—limiting to them to eight years in office and capping the position’s compensation to “no more than 10 times the annual salary furnished to the lowest paid full-time city employee,” which amounts to approximately $300,000 per year.

With the passage of Proposition C, the International Association of Fire Fighters Local 624 was given unilateral authority to require the city to participate in binding arbitration. Prop. C serves as the main point of contention with the bond rating and is a byproduct of an on-going battle between the firefighters union and the city government. The proposition gives the union sole right to declare negotiations have stalled and to enter into binding arbitration.

Prop. C is driving “the city’s diminished expenditure flexibility” according to a December Fitch report:

Firefighters and police comprise the city’s largest expenditures, which have been expanding rapidly due to costly benefits. The city may opt to remain in the current firefighter CBA through 2024, during which time salaries remain flat, but Fitch believes longer-term workforce controls are materially weaker under a binding arbitration framework.

The San Antonio Fire & Police Pension Fund, in its most recent valuation report, released the recommended plan contribution at 31.48 percent of projected payroll, an increase of 0.94 percent of pay from the last valuation. In real dollars, San Antonio saw its recommended contribution to the pension fund increase from $94.9 million to $99.1 million in 2017. Public Safety, which includes public fire and police services, required over 60 percent of the city’s general fund, according to the City Council’s adopted 2019 budget. This expense will most likely continue to grow since pension obligations are expected to continue increasing. With such a large portion of the city’s general fund now subject to binding arbitration, the rating downgrade came as little surprise to city leaders.

San Antonio City Manager Sheryl Sculley stated, “The ratings agencies told us earlier this year that, if passed, the propositions on the November ballot could severely limit our financial flexibility and operation of the city organization.”

Just before the November election, Reason Foundation Pension Integrity Project policy analyst Anil Niraula discussed the mounting costs pension debt is having on the budgets of cities in Texas and highlighted how credit downgrades like this one can make borrowing costs for future publicly-funded projects much more expensive to cities and taxpayers.

Relatedly, the Pension Integrity Project and Texas Public Policy Foundation recently released a joint report providing an overview of the Teacher Retirement System of Texas demonstrating how current funding policies and actuarial assumptions are diminishing solvency and exacerbating fiscal pressures in public education. As a result, the system’s unfunded liabilities hit $35.4 billion in 2017.

Whether it be local firefighters or state teachers, retirement promises that have been made to public employees should be kept. For Texas policymakers to be able to honor their long-term commitments to public servants, avoid credit downgrades, and prevent financial crises from growing, governments at all levels need to reduce risks to their retirement benefit systems by applying sound funding policies and actuarial assumptions that can help ensure long-run fiscal sustainability.