DALLAS -- Standard & Poor's Corp. on Friday downgraded Houston's general obligation rating one notch to AA-minus as the city prepares today to sell $448.4 million of refunding bonds to help balance its fiscal 1993 budget.
However, the action is not expected to delay today's pricing of the deal, senior managed by a Goldman, Sachs & Co.-led syndicate, according to an underwriter at the firm.
The drop from AA is the third downgrade of the city's debt by the rating agency since 1985, when Houston lost its AAA rating with Standard & Poor's.
Meetings were still under way late Friday, but the underwriter said the deal would include serial bonds and term bonds maturing in 2012. The issue is not expected to include bond insurance, the underwriter said.
The deal is tentatively structured with serial bonds ranging from 1997 to 2006, according to the preliminary statement. About $156 million of the loan is concentrated in a 2012 term maturity. The issue is dated June 15, 1992, and due March 1.
Officials said the downgrade is not likely to hurt today's pricing.
"We see very little, if any, impact at all," said Henry Sauer, vice chairman of Masterson Moreland Sauer Whisman Inc. of Houston, the city's financial adviser.
The Standard & Poor's downgrade also affects $609.5 million of outstanding parity GO debt.
"It's not a result of any one thing," said Vladimir Stadnyk, managing director at the agency. "The reasons behind it are all-encompassing. The refinancing is obviously one element of it."
Standard & Poor's said in a statement that the action reflects "a substantially weakened financial position, very limited property tax flexibility, and tenuous solutions for the fiscal 1993 budget. The city expects to end fiscal 1992 with its third consecutive general fund operating deficit."
While the debt restructuring will help Houston balance its $844 million budget for the fiscal year that begins July 1, future budgets will hinge largely on the city's ability to either persuade voters to raise a decade-old cap on property taxes or to manage the limitation.
"I think they face financial challenges now," said Chris Evangel, vice president at Moody's Investors Service, which last week affirmed its Aa rating of the city. "I think they faced economic challenges before."
Fitch Investors Service affirmed Houston's GOs at AA on Friday afternoon.
The distinction cited by Mr. Evangel is not lost on Houston Controller George Greanias, who argues that the nation's fourth largest city needs to better manage how it spends its money. In recent years, he said Houston has had revenue growth of about 3% annually, while expenditures have risen about 5%.
"From a bondholder's perspective, the underlying strength of the Houston economy is there," he said Friday. "It's a matter of how we manage it. It's the same problem facing most American cities."
For fiscal 1993, the Houston City Council and Mayor Robert Lanier have chosen to balance the budget largely by restructuring the city's GO debt with the refunding.
By extending the average payout on its $1.1 billion of GO bonds, the city will move from paying 78.5% of its debt in the first 10 years to retiring 52.3% during the same period. That rate is comparable to other major U.S. cities.
"Things are going to be tighter now going into the future," said Richard Raphael, a managing director at Fitch. "They are basically using up their flexibility in addressing next year's budget shortfall."
The restructuring will generate nearly $36 million in debt service savings to help close a $70 million deficit in the fiscal 1993 budget. Another $11 million in yet-to-be-specified savings are planned.
But Mr. Greanias has argued in city hall that the restructuring has too high a price, noting that it will ultimately cost taxpayers $150 million in additional interest when the bonds are retired in 20 years.
Moreover, he said last week that the restructuring will give the city less flexibility in fiscal 1994 because it will raise the property tax for city operations to the 50 cents per $100 of assessed valuation limit imposed by Houston voters in 1982.
"It means no flexibility on the operations side to add income if the expenses rise faster than the natural growth in revenues," Mr. Greanias said.
Whether Houston will reach the cap in fiscal 1993 is uncertain, but few debate that the city will have little room to raise new properly tax revenues in the absence of a strong rebound in the city's tax base.
Also, city officials could not call an election to ask voters to raise the property tax cap in the city charter until November 1993, when the next citywide elections are scheduled.
The tax cap on operations does not affect the city's ability to use its $500 million GO authorization approved by voters last year. In fact, officials plan to sell debt in blocks of $100 million each June for the next five years.
The city currently levies an operations tax of 44.8 cents per $100 of assessed valuation. Moody's said that levy has remained fairly constant in recent years and last was significantly increased in fiscal 1989 when it jumped five cents from 39 cents.
Peter D'Erchia, senior vice president at Standard & Poor's, said the city could benefit from a continuing rebound from the economic down-turn caused in the 1980s by the collapse of global oil prices.
"They have always been close to the cap," he said. "There could be ample growth in the cap through economic growth that would expand the taxable base."