Post-Crash Summation and the San Diego City Council Session on Debt Servicing

The October 11 City Council agenda includes an informational item on council member training in debt servicing. Fitch Ratings will be sending Amy S. Doppelt, a managing director who can explain to council members the terminology and usage in how Fitch Ratings looks at the credit worthiness of individual municipal general obligations. The council members are required to receive four training sessions annually on a variety of financial and ethical issues.

For taxpaying members of the public and journalists in particular, council member training on debt servicing by Fitch Ratings puts a whole basket of issues on the table, right in time for a city vote on whether we actually need a half cent raise in our city's sales tax rate. For Fitch Ratings, our willingness to impose sales tax increases to service debt is a major economic driving factor in Fitch's evaluation of the local economy, where Fitch also considers municipal debt and other long-term liabilities, finances, management and administration rating factors in addition to economic rating factors.

With Fitch Ratings providing its U.S. Local Government Tax-Supported Rating Criteria (December 21, 2009) and other materials as supporting documents to public business, now anybody who can download a PDF can keep up with the buzzwords, concepts, and standard procedures that the politicians in office are now accountable for knowing, understanding, and hopefully using for managing to make improvements in the financial state of San Diego.

Of course, if the politicians in office don't, Fitch Ratings will darn sure want to know about it, pronto.

The Crash of 2008 was a change in business for the American economy. Regardless of the causes and the individuals who designed, implemented and triggered the conditions for those causes, the net effect for financial institutions, investors, regulators, and ordinary Americans are still developing.

As the near market failure was happening two years ago, many trading technicians expressed the opinion that they would love to see a v-shaped recovery, where the swiftness of the collapse from DJIA 14000 would be matched by the swiftness of the rise back to DJIA 14000. This has so far proven to be elusive, and the v-shaped recovery turned into more like a modest, nearly sideways jobless recovery in the stock market while unemployment remains high, business willingness to hire and invest in expansion remains low, and wary consumers remain cautious with cash while those still with discretionary income pay down debt and cut credit cards.

San Diego's current credit rating by Fitch of AA- needs to be understood in the revised process of arriving at those ratings. In April 2010 as related by Doppelt, Fitch chose, on observing a low municipal bond default rate during and after 2008 compared to other existing debt, to recalibrate by raising the ratings of all state, local government tax supported, water/sewer, public higher education, and public power (distribution only) general obligation and other debt. Fitch did this without a case by case evaluation of individual debt issues and without taking any action with regard to the government units that issued the debt. Fitch states that San Diego's rating outlook is stable. Historically for San Diego, the rating was at a high of AAA in May 2002 but fell to AA with Negative Outlook by February 2004. San Diego was again downgraded in February 2005 to A and then to BBB+ only three months later, after Fitch issued its Ratings Watch Negative advisory on San Diego in September 2004.

In March 2008, Fitch upgraded San Diego's rating watch to Positive, and as audits were published, raised San Diego's credit rating to A+ in December 2008, along with a ratings watch advisory upgrade to Stable. On recalibration without review or action by Fitch, San Diego was upgraded to the current AA- credit rating in April earlier this year, with no additional revisions of its advisory comments on San Diego.

Politically, it can be argued that San Diego's credit rating went up to AA- this year. Financially, it doesn't really mean much because all other state and local debt was upgraded at the same time for, according to Fitch, no good individual reason.

In terms of future ratings made by Fitch or any other rating agency, it may be instructive to look at the concerns a rating agency like Fitch might have about San Diego, our local economy, our city's debt and long-term liabilities, and municipal financing, management and administration. There are many, many issues here, all worth blogging about before the election and our vote on Proposition D:

  • Is San Diego's economy diverse enough to be stable? Don Bauder has regularly discussed the problems with having an economy that is tied to tourism and sports franchises without more emphasis on other sectors such as manufacturing. Shipbuilding is a significant local economic contributor, but the local concentration of shipbuilders in one large local firm is a ratings concern.
  • Does San Diego have a properly structured debt service reserve fund? Or any debt service reserve fund at all? If we do, then how much can be used to satisfy our $70+ million budget gap?
  • Does San Diego have favorable or unfavorable employment conditions? Is employment too concentrated in individual commercial sectors? See Bauder's Scam Diego Blog...
  • What is the tax effect of City Council absentee management of local government contracts and substantial increases in fees charged within the council's direct or indirect jurisdiction to residents and small businesses? Are the council-neglected fee increases sustainable at the current rate, and if not, what is the ratings evaluation impact of council inaction on fees as a tax increase effect?
  • Other topics, other blog posts...

See also:

"How the Big Redevelopment Deal Affects Prop. D" by Liam Dillon, Voice of San Diego

More like this:


While preparing this blog post, I accidentally managed to remove the original dated October 8, replacing it with the above including the link to the Voice of San Diego piece.

Also, while preparing this blog post, I was caught unaware of the October 8 KPBS blurb, "CCDC Spending Limit Raised, Is Chargers Stadium Coming Next?":

Seems like San Diego's Centre City Development Corporation rolls by getting its tax increment cap increase through the state legislature by statute in closed-door budget talks instead of by San Diego City Council action in the relative sunshine of civic debate here. For rolling like that on the end-around, award 10 Nomic points to CCDC, or more simply, add 250,000 fantasy ballot stuffers in favor of Prop. D...

BTW tax increment cap increases are a Fitch Ratings evaluation concern per supporting docs... especially with respect to municipal bankruptcy as to the ability of general obligation bond holders to get paid on their investment in city debt.

Log in to comment

Skip Ad

SD Reader Newsletters

Join our newsletter list and enter to win a $25 gift card to The Broken Yolk Cafe!

Each subscription means another chance to win!