Moody’s Keeps City’s Bond Rating Steady; S&P Makes Downgrade But Improves Outlook

April 10, 2014

Moody’s Keeps Cincinnati’s Bond Rating Steady, S&P Makes Downgrade But Improves Outlook

Rating agency praises recent pension, budget efforts

Moody's Investors Service has notified the City of Cincinnati that it will keep the City's bond rating unchanged, while Standard & Poor's has downgraded the City's rating by two positions.

Although Standard & Poor's downgraded Cincinnati’s rating two positions, from AA+ to AA-, it credited the City for its commitment to dealing with its financial obligations and improved its outlook.

Standard & Poor's changed the City’s outlook from "negative" to "stable," indicating a more positive long-term trend for the city's finances.

A bond rating downgrade was expected because of the City’s $862 million unfunded liability in the Cincinnati Retirement System. Most of the unfunded liability is due to the recession in 2008 and losses the City incurred for its pension investments.

At Mayor John Cranley's urging, Cincinnati City Council last week unanimously approved the mayor’s plan to have the city manager negotiate a plan to stabilize the pension system with representatives of current employees and retirees, done under the oversight of U.S. District Judge Michael Barrett. Negotiations began March 24.

S&P cited the pension negotiations and Cranley's commitment to passing a structurally balanced municipal budget as reasons for the improvement in outlook.

The full S&P report is scheduled to be released Monday, while Moody’s report will be released soon.

"The stable outlook reflects Standard & Poor's view of the city's strong management conditions and very strong liquidity," wrote S&P Credit Analyst Caroline West in a report.

"Although the projected 2014 fiscal returns indicate a reduction in budgetary flexibility and weak budgetary performance, given that management has a credible strategy to implementing a structurally balanced budget in the short-term and addressing the city's large pension liability over time, we do not believe the rating will be pressured over the two-year outlook horizon," West added.

S&P stated if city management can implement the changes already identified, "we could consider a higher rating in the next two years."

Moody's, the other major credit-ratings agency, has said it will keep the City's bond rating at Aa2. Moody’s first issued the rating to Cincinnati in July 2013.

Cranley attributed the improving long-term outlook to policy changes he has implemented since taking office in December.

"We’ve stopped the bleeding," Cranley said.

Without the efforts to deal with the City’s pension and budget problems, S&P likely would have downgraded Cincinnati’s bond rating by three or four positions, the mayor added.

"The current downgrading was due to choices previous councils and administrations have made with their spending priorities," Cranley said. "There was nothing we could do to avoid it, but it could’ve been worse."

"If we had done nothing, we would have gone down three or four grades," the mayor added. "Standard & Poor's has recognized we have stabilized the situation."

Cincinnati’s $2.1 billion retirement system covers 4,400 retirees or surviving spouses; there are about 2,900 active employees who pay into the system.

A credit rating is a forward-looking opinion about the creditworthiness of a government based on several factors including financial obligations. The opinion reflects the agency’s view of the government’s capacity to meet its financial commitments as they come due.

Ratings are an assessment of default risk, but may include an assessment of relative seniority or ultimate recovery in the event of default.