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CINCINNATI - The city of Cincinnati's troubled pension fund and its reliance on using one-time sources of money to balance its budget has caused a downgrade of its bond rating.
The bond rating – similar to an individual's credit rating – means it could cost Cincinnati millions of dollars more to borrow money in the future for major projects like the planned streetcar project.
Moody's Investor Services downgraded the city Monday to an Aa2 rating from an Aa1 rating. The rating level is still the third highest available.
Also, Moody's warned of possible future downgrades unless Cincinnati gets its financial house in order.
"The outlook on the city of Cincinnati is negative, reflecting our expectation that the city will continue to face budgetary pressure stemming from required pension contributions to the City Retirement System and potential long-term pressure from its exposure to statewide, multi-employer, cost-sharing pension plans," Moody's wrote.
Cincinnati's $2.1 billion retirement system, which covers current and former municipal employees, has an "unfunded liability" estimated at $728 million.
The pension system covers 4,400 retirees or surviving spouses; there are about 2,900 active employees who pay into the system.
The system is funded at a 67 percent level, meaning that its assets do not cover projected future expenses. To be considered financially healthy, a pension system should be funded at a minimum of 80 percent.
Money for the system comes from investment income, along with contributions by employees and government.
Cincinnati's funding problems stem from multiple causes including poor returns on investments due to the stock market crash in 2007-2008.
Besides the pension system's problems, however, Moody's also cited City Council's reliance on one-time sources of money to balance the budget in recent years.
Council approved a budget last month for Fiscal Year 2014, which began July 1, that again used one-time sources to avoid a deficit.
"Further, the city has a budget with General Fund expenses exceeding revenues for the current fiscal year 2014," Moody's wrote.
"While the city has a track record of achieving better operating results than its initial budgets and forecasts, it has also maintained its financial position in recent years in part by relying on one-time budgetary solutions and not contributing the full actuarially required contribution to its single-employer pension plan, which indicates a current lack of structural balance," it added.
"A failure to regain structural balance could result in further deterioration in the city's credit rating," Moody's report concluded.
City Manager Milton Dohoney Jr. informed City Council with a memo issued Tuesday about the downgrade.
"In reviewing this information it is important to keep in mind that even though the city did experience a downgrade in its bond rating, which is taken very seriously and will require much fiscal discipline to raise or keep stable, the city is still a Aa2-rated credit, which means the city is a top tier credit with the third highest rating available," Dohoney wrote.
City Councilman Christopher Smitherman, a financial planner, first began warning about pension problems in 2004 during his first council term.
Smitherman, an independent who often is in the council minority on policy decisions, has blamed the majority for funding what he calls superfluous projects instead of focusing on basic services.
One of the projects was Dohoney's plan for a $4 million renovation of the atrium at City Hall, so the area could be rented for events like weddings. After public outcry, council eventually killed the project.
"City Council has been on a reckless financial path for years," Smitherman said. "(Roxanne) Qualls is the chair of the Budget and Finance Committee and continues to push streetcars and atriums. The city needs a new majority on council. Bankruptcy is not progress."
Qualls and a council majority, however, have said development projects like the streetcar are the city's best method for expanding its tax base and growing its way out of the fiscal crisis.
Read the Moody's downgrade below or at http://goo.gl/kQzT3.
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