HOUSTON- In its first report since voters approved Proposition B on Tuesday, November 6, 2018, Fitch announced Thursday it had changed the City of Houston’s outlook from stable to negative, while maintaining the city’s ‘AA’ bond rating.

Fitch wrote the outlook revision to negative from stable is due to “anticipated erosion of expenditure flexibility due to a charter amendment (Proposition B)” and that assuming implementation of the amendment, this additional spending will exacerbate an already challenged budgetary profile.”

“Today’s decision by Fitch to change the City of Houston’s outlook from stable to negative should concern every citizen who wrongly believed Proposition B would have no impact on the city’s ability to balance the budget and pay its expenses,’ Mayor Sylvester Turner said. “As I cautioned for months, Proposition B forces the city to increase firefighter pay by 29 percent at a minimum cost of $100 million annually without giving the city additional revenue to pay for it. Now, credit rating agencies are taking notice.”

Fitch Houston (TX) Release 11.15.18

As the only Texas city operating under a revenue cap, Houston cannot raise taxes to pay for the additional firefighter salaries, which the city controller has described as unsustainable. The only option is to cut spending by reducing services and laying off people including firefighters, police, and municipal employees, which includes solid waste, parks and library workers, among others.

“Last year, we worked hard to pass pension reform and the credit rating agencies removed the negative outlook and praised us for taking a responsible approach to improving Houston’s financial health. We were on the right track,” Mayor Turner said. “Proposition B threatens to set us back as a city and erase the gains we have made to put us on a strong financial footing.”

Fitch warned that the city’s inability to absorb increasing expenditures to match ongoing revenues will likely result in negative rating action and notes further cost cutting will be necessary.

However, Fitch also acknowledged Mayor Turner’s responsible approach to managing city finances. “The current administration had made structural budgetary balance a stated priority, and Fitch will closely monitor progress on this front as the city adjusts to increased firefighter salaries.”

The city is attempting to explore its options and obtain deliberate counsel to determine whether state law preempts the charter amendment completely. Absent any court action, the referendum stands and ultimately must be fully implemented.