Houston’s credit outlook takes hit after Prop B passage

Houston's credit rating took a hit this week after voters approved a proposition that could cost the city $100 million. >>Here are more winners and losers from the recent midterm election... Houston's credit rating took a hit this week after voters approved a proposition that could cost the city $100 million. >>Here are more winners and losers from the recent midterm election... Photo: Steve Gonzales, Staff / Houston Chronicle Photo: Steve Gonzales, Staff / Houston Chronicle Image 1 of / 24 Caption Close Houston’s credit outlook takes hit after Prop B passage 1 / 24 Back to Gallery

Houston’s credit outlook has taken a hit after residents earlier this month voted to pay firefighters the same as city police officers.

Fitch Ratings this week downgraded the city’s credit outlook from “stable” to “negative,” saying the anticipated $100 million annual cost of the Proposition B charter amendment will hamper the city’s spending ability and could lead to a downgrade in the its AA bond ratings in the future. Such a downgrade would mean higher borrowing costs and further squeeze the city’s budget.

Mayor Sylvester Turner and the city’s firefighters have spent months warring over the impact of Proposition B, but the Fitch analysis marks the first time an independent arbiter has weighed in.

After Fitch Ratings released its assessment on Thursday, Turner portrayed the analysis as a validation of past warnings he has issued about the impacts of the proposition, even as city firefighters again accused him of “vindictively punishing” them.

While the city saw its financial outlook improve last year with the passage of pension reform, Fitch Ratings Senior Analyst Steven Murray said Friday that the voter-approved ballot initiative is the latest financial challenge for the city, which has had a “periodic challenge” matching up revenues with expenses such as its pension obligations and debt payments.

He warned that further cost-cutting would be necessary given the city's limited ability to raise revenue because of its property tax revenue cap, and increased public safety and pension-related spending.

“Assuming Prop B is implemented, that’s going to be one more pretty big expense item that they’re going to have to deal with,” Murray said. “So we’re just putting them on notice that this is a concern for us.”

RELATED: Houston layoffs spurred by Prop B vote avoidable, some experts say

Fitch’s, one of three nationwide ratings services, is owned by the Hearst Corporation, the parent company of the Houston Chronicle.

Money managers and business leaders said Fitch’s credit outlook was unlikely to scare off investors or dramatically impact borrowing rates for now, but was nevertheless potentially worrying.

Gilbert Garcia, managing partner of Garcia Hamilton & Associates, L.P., a local bond management firm which holds more than $13 billion in assets, said the fact Houston maintained its AA rating was a good sign. By contrast, San Antonio and Austin both have AAA ratings, while Los Angeles has a credit rating of AA- and Chicago’s bond rating hovers at BBB-.

The downgraded credit outlook nevertheless raised concerns, he said, and signaled that the ratings agencies were watching Houston’s handling of the new charter amendment.

“If one of them already put [Houston] on outlook negative, it’s only a matter of time before they all do it,” he said. “So it behooves the city to work out something with the firefighters.”

Bob Harvey, president and CEO Greater Houston Partnership, said the revised credit outlook was “unfortunate but not surprising.”

“Our community worked hard on pension reform to bolster our financial stability,” Harvey said. “To take this step back is disheartening.”

Parity: Firefighters, mayor disagree on path forward after voters approve pay parity

Turner, who strenuously opposed the pay parity initiative, said in a news release while on a trade mission to India that Prop B threatened to derail the progress Houston made last year reforming its pension burden and improving its financial outlook.

“We were on the right track,” Turner said in the release. “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.”

Turner and City Controller Chris Brown have estimated the proposition will cost the city more than $100 million in its first full year. City leaders warned that the city would need to lay off hundreds of employees, starting with firefighters, if voters approved Proposition B. It passed with 59 percent of the vote, after an acrimonious battle between Houston firefighters on one side, and Turner and the city’s police on the other.

In the wake of the bill’s passage, Turner froze hiring of Houston firefighters, and continued to warn of the prospect of layoffs of hundreds of firefighters and impacts to other city departments.

Turner, meanwhile, has said he believes that unless the proposition is challenged in court, the referendum must be “fully implemented.”

Officials from the Houston Professional Fire Fighters Association pushed back on Turner’s criticism Friday, saying that despite his dire warnings, the mayor still has not responded to a Nov. 8 letter calling for a return to collective bargaining to hammer out a contract that would implement the raises in a way that would avoid sharp cuts.

In an emailed statement, HPFFA President Marty Lancton criticized ratings agencies for not voicing concerns over raises given to police officers in years past and issued a vague attack on past “corporate welfare tax abatements” granted by the city — but did not provide any specifics.

“This latest smoke-and-mirrors stunt by the mayor shows his failed leadership and deception,” Lancton said. “When he quits focusing on vindictively punishing firefighters, we’ll be ready to negotiate implementation of Prop B, like the voters ordered.”

St. John Barned-Smith covers public safety and major breaking news for the Houston Chronicle. Follow him on Twitter and Facebook. Send tips to st.john.smith@chron.com.