Fitch revises San Antonio's rating outlook to positive

San Antonio, Texas, could be on its way to a third triple-A rating after Fitch Ratings this week revised its outlook to positive from stable ahead of the city’s sale of about $555 million of debt next month.

Fitch, which rates the city’s limited tax general obligation bonds AA-plus, cited improved spending flexibility, aided by the favorable resolution of police and firefighter collective bargaining agreements for the outlook change. It also noted a downward trend in carrying costs for debt, pensions and other post-employment benefits, which if continued, “could result in positive rating action.”

“The combination of the city’s ample revenue flexibility, minimal expected revenue volatility during moderate economic downturns, moderate carrying costs and large reserves leaves it well positioned to address both the current economic recovery and future cyclical downturns,” the rating agency said in a report.

Fitch Ratings said the positive outlook for San Antonio’s AA-plus bond rating reflects improved spending flexibility, aided by the favorable resolution of police and firefighter collective bargaining agreements.

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San Antonio, the second largest city in Texas and the seventh largest nationally, has triple-A ratings from Moody’s Investors Service and S&P Global Ratings.

A five-year contract San Antonio approved in May 2022 for its police union is estimated to cost about $93 million, which Fitch called a modest amount relative to the city’s $1.5 billion fiscal 2023 general fund budget. Arbitration in 2020 resulted in a contract through the end of 2024 with firefighters that was favorable to the city, Fitch added.

“Because overall firefighter compensation levels are within the top tier relative to other Texas cities, Fitch believes the risk of outsized future binding arbitration awards is mitigated,” the report said.

More debt issuance is looming after San Antonio voters approved $1.2 billion of general obligation bonds in May 2022.

“Fitch expects debt service to grow but overall carrying costs to remain steady or decline as a percentage of governmental spending given the city’s goal and practice of maintaining a level debt service tax rate to fund its capital plans,” the report said.

In a statement, San Antonio said Fitch’s rating outlook action reflects the city’s “sound financial policies and practices and overall strong financial position.”

The city will sell general improvement bonds, certificates of obligations and tax notes, scheduled for the week of Aug. 21.