S&P’s negative rating outlook for Houston prompts finger pointing

Houston’s mayor and controller traded barbs on Wednesday over a negative rating outlook the city received from S&P Global Ratings ahead of a July general obligation bond sale that financed part of a settlement with firefighters. 

In his report to the city council, Houston Controller Chris Hollins said the action by the rating agency to revise the outlook to negative from stable was predictable given the settlement, which included $650 million in lump sum payments to firefighters financed with bond proceeds and pay increases in a new  five-year contract, which was approved “with no corresponding plan for how to pay for it.” 

He warned the city’s AA rating could face a future downgrade based on a spend down of reserves, anticipated budget shortfalls related to increased debt service and salary increases, and no “articulated plan” to raise revenue.

“We have to take this seriously and we have to take the steps necessary to put the city on a strong financial footing, not just for the sake of our creditors, but for the peace of mind of Houstonians,” Hollins said.

Mayor John Whitmire countered that the settlement allowed the city to avoid “a costly and risky” trial with firefighters and said his office is working to identify additional revenue to ensure there will be sufficient funds to meet obligations ahead of the next city budget.

“We’re in contact with Standard Poor’s and Moody’s (Ratings) and if some of our elected officials would quit frightening them and scaring them with misinformation, we’d be in a lot stronger financial picture,” he said.

The $734.25 million of GO bonds, which Moody’s rated Aa3 with a stable outlook, were priced by a Ramirez & Co.-led team of underwriters with a top yield of 3.8% for serial bonds due in 2044 with a 5% coupon, according to the official statement The deal’s $317.4 million of term bonds fetched yields of 4.05% in 2049 and 4.38% in 2051. 

Hollins pegged the total cost of the debt at $1.35 billion.