Houston hit with second negative rating outlook

Shrinking reserves led Fitch Ratings on Thursday to revise the outlook on Houston's AA rating to negative from stable, two months after S&P Global Ratings' outlook turned negative.

Fitch said its move reflects the "diminished margin of the city's available general fund reserves above 15% of spending," while Houston looks for revenue to fund a five-year collective bargaining agreement that increases firefighter pay.

"Without additional revenues or substantial budget cuts, the city's five-year forecast projects annual budget gaps to fund the base (firefighter) pay hikes that range from 10% in fiscal 2025 to 3%-4% through fiscal 2029," the rating agency said in a report.

The agreement was part of a court-approved settlement that also called for a $650 million lump-sum payment to current and retired firefighters to cover overtime pay from fiscal 2018 through 2024. That payment was financed with most of the proceeds from Houston's July sale of $734 million of general obligation bonds.

Ahead of that sale, S&P revised the outlook on Houston's AA rating to negative from stable, citing "challenges to balance the budget in the outlook period with material fund balance declines as a result of increased debt service and salary increases, with limited capacity to raise revenue due to a city charter that restricts property tax increase."

Moody's Ratings affirmed a Aa3 rating and stable outlook for the bonds.

Houston Controller Chris Hollins said the latest outlook revision to negative affirms concerns he has raised about the state of the city's financial health.

"While I'm confident that the city can take steps to address its challenges, the mayor must lay out a comprehensive financial plan that avoids the imminent fiscal crisis," he said in a statement.

Houston's structural budget gap has existed for over a decade and the firefighter settlement brought financial certainty and avoided a more expensive judgment, a statement from the city said.

An ongoing Ernst & Young study "will result in a report outlining recommendations for elimination of duplication, efficiencies, and consolidations, which will result in cost savings for the city," according to the statement.

"At the same time, the administration is engaged with our partners at the county, state, and federal levels to identify additional recurring revenues," it added.