Bond Raters Note Fiscal Strains As Miami Embarks On Bigticket Projects
Written by Lou Ortiz on January 11, 2008
By Lou Ortiz
Just six years removed from the clutches of a state financial oversight board, the City of Miami is ignoring fiscal warnings as it embarks on an ambitious multi-billion-dollar public works plan.
Moody’s, Standard & Poor’s and Fitch bond rating firms describe Miami’s financial health as "stable" and "improved." The city’s bonds are rated as investment medium grade at A, A2 and A-, up from the lowest end on the investment grade scale of BBB.
"It’s a very good rating overall but it’s average for a municipality," said Amy Laskey, managing director of the public finance group at Fitch. "They’re getting there, but they’re not there yet."
The agencies also note in their reports that the city has experienced strong tax base growth, has a diverse economy and is an important hub for imports and exports of goods and services from South America and the Caribbean.
But despite fiscal improvements, "significant financial, capital, and economic burdens remain," said Fitch in a financial analysis of Miami about five weeks before the city announced its "global" projects initiative.
The initiative, an intricate pact with Miami-Dade County and the city’s Community Redevelopment Agency, lays out a plan to fund projects such as the Port of Miami Tunnel, a proposed Marlins Stadium, a revamp of Bicentennial Park downtown and a possible streetcar system using redevelopment dollars and tourist and convention tax revenue.
The plan depends largely on property tax valuation increases to garner the billions needed to pull-off the projects.
Reports from both Fitch and Standard & Poor’s warn about the potential weakness in the housing market that could affect the city’s property tax base, growing pension costs that could put pressure on yearly budgets, and a statewide effort to rein-in property taxes that could lead to an even tighter municipal budget.
However, a report from Moody’s is more optimistic.
"Moody’s believes that with the implementation of financial and debt principals, the city has provided the framework for sustaining long-term financial stability and positions the city to control its financial operations," the November report says.
In terms of potential future property tax cuts, the report notes that "the city’s initial assessment of the impact of the proposed legislations is a decrease of about $30 million in property taxes in fiscal 2009. Officials believe that they have effectively absorbed this potential loss with an equal amount of recurring budget cuts made for fiscal 2008."
Still, it says, "Moody’s will closely monitor the city’s ability to maintain financial stability in light of adopted and proposed property tax legislation."
The Fitch report found the city’s capital improvements program troublesome because of "sizable capital needs, with only some funding sources identified."
None of the issues from the Standard & Poor’s and Fitch reports were raised when the city and county governments announced their global projects program in mid-December.
"The softening of real estate values could have an impact on overall financial operations, given the city’s dependence on property taxes," the Fitch report says.
It adds that future budgets "could be pressured by the limitation on property tax revenue growth, which limits growth to a rate equal to per capita personal income growth in Florida."
Further limitations on revenue growth of the general fund would occur if the global agreement is enacted. Under the pact, two city redevelopment districts would be expanded and thus shrink the amount of property tax revenues generated within those areas that would normally feed into general funds
City Chief Financial Officer Larry Spring said in an e-mail Tuesday that "the city always considers the impact on the overall bonding ratings when doing any long-range financial planning."
Financial projections for the global pact included the possible impact of potential property tax legislation and "had very conservative estimates of taxable values and growth rates," he said.
The city’s 2007 budget totaled about $508 million. Pension benefits were estimated at $85 million in 2007 — up from only $7 million in 2000 — until the city changed the actuarial methods. Those changes saved the city $15 million in 2007 and are expected to save $20 million in fiscal 2008.
"While this reduction in costs provides some short-term relief on pension costs, the city continues to contribute significantly more in pension costs than it did in the early 2000s; growth in payroll and salaries could continue to result in significant budgetary pressure," the Standard & Poor’s report says.
The bond rating firm is also skeptical about an agreement between the city and fire and police unions to work toward lowering payroll pension costs from 60% to 37% of city pension payroll.
"Significant uncertainty exists as to the ability of both parties to achieve this target," Standard & Poor’s says.
In the area of capital improvements, Miami is expected to use bonds to partially fund a portion of a five-year, $800 million capital works plan, says the Fitch report, adding that the city has identified another $600 million in unfunded capital needs.
The long-term financial picture for the county, Miami’s partner in the global agreement, is more favorable because it has a bigger tax base, among other things.
"The stable outlook reflects the underlying strength of the county’s economy and favorable financial trends," Standard & Poor’s report says.
Former Gov. Lawton Chiles ordered state oversight of Miami in 1996 as the city reeled from corruption, mismanagement and a large budget deficit.
The financial irregularities extended to bond issues, the approval of unfunded projects, the improper diversion of money to pay old bills and the payment of high salaries.
In an unprecedented move, Gov. Chiles gave the state board veto power over city spending and taxation.
To improve its financial condition, the city imposed new fees on garbage and parking, cut budget spending, got unions to make concessions and took advantage of federal grants.
The Moody’s report notes that "Since December 1996 when the city was declared to be in a state of "financial emergency’ and an Oversight Board was appointed by the Governor, the city has made notable strides."