UNIVERSITY PLACE, Wash.—Long a model American community with high-performing schools, beautiful parks and rising real estate values, this city of 31,000 on the Puget Sound has lately turned into a reluctant showcase for the downgrading of America.
It was in the midst of building a new downtown virtually from scratch when the financial crisis set in three years ago, leaving the city with a big debt and little of the new tax revenue it expected by now.
So, University Place cut its work force by 30% to save money. With growing unemployment, some residents lost their homes. Then, earlier this month, the coup de grace: Moody's Investors Service cut the credit rating on the city's debt and assigned it a "negative outlook."
That created a stir in Sam's Barber Shop, tucked into a strip shopping center around the corner from City Hall.
"The city had the same attitude that got everybody in trouble around the country," says owner Joe Veillette, snipping the white hair of a customer who has been coming since the late 1960s. "It had good credit, so it got credit cards and spent too much. Sooner or later, it catches up."
Like its counterparts nationwide, the city began building a vision deemed reasonable in the boom years, and had to scale back those dreams when the recession hit.
"We're realizing that we have to take small leaps instead of big leaps," says City Manager Steve Sugg. "We have to develop over time, slowly, the way towns used to develop before the era of big finance."
Patricia Mannie, a longtime resident who considers herself "underemployed," says that she has become increasingly disappointed with the reversal of fortune.
She says her salary fell from more than $50,000 when she was on staff at a small hotel chain to less than $12,000 per year running her own marketing business. "I don't believe everything is going to be fine," she says. "America isn't supposed to be this way."
The recent downgrade could ultimately affect the city's cost of borrowing. For now, it simply adds to the slipping feeling shared in communities around the country.
University Place in many ways tracks the American norm. Its unemployment rate is about 8%—just below the national average—and the city's household income is slightly above average.
The city's credit-rating downgrade reflected the national trend too. In August, Standard & Poor's stripped the United States of its AAA credit rating for the first time, saying that political divisions made it unlikely the U.S. could stabilize its finances. Moody's downgraded 163 municipalities in the third quarter, while upgrading only 31—the worst ratio since the beginning of the recession. This year, the ratings firm has downgraded 356 municipalities.
In University Place, city leaders earlier this year campaigned on television and online to counter concerns that the city was going broke. From shopping centers to public meetings, people were asking about public finances, showing a heightened awareness of municipal issues as some cities around the country were contemplating defaulting on debt and filing for bankruptcy protection.
"We had to work hard to explain that we are going to be OK," says Mr. Sugg, the city manager. The city, he notes, has a balanced budget with conservative estimates of future revenue that are not dependent on growth in real estate taxes or land sales. The city is in no danger of defaulting, he says.
The city owes more than $48 million, mainly for a mixed-use project known as Town Center that would house government offices, stores, commercial offices and homes. When the financial crisis hit in late 2008, investors and tenants disappeared—but the town pressed on with its part of the project.
While S&P in August affirmed the A+ credit rating on the debt, Moody's this month downgraded the city's debt to A2 from A1. Both ratings are considered investment grade, suggesting a low chance of default. Moody's also assigned a negative outlook to the rating, reflecting "near-term, significant budgetary inflexibility that will remain a challenge for the foreseeable future."
The issues are jarring for a city that has mostly been on the rise since incorporating in 1995. University Place, with just eight miles, has built 146 acres of parks, planted thousands of trees, developed a police department, sidewalks and streetlights. The county built a waterfront golf course that will host the US Open in 2015.
The city, mainly a residential outpost of Tacoma and Seattle, has had its share of setbacks. In 1999, the city lost a chunk of income when the state cut a car tax. This, says Mr. Sugg, cut about $3 million of University Place's budget, which is now about $16 million.
The city embarked on the Town Center project to generate more sales tax revenue. When the financial crisis scared away private investors, the city floated bonds and used federal grants to build its part of the project—a civic center—where the library and police department are now housed, as well as underground parking.
The first commercial tenant, a cafe, is slated to open at the civic center in 2012. Mr. Sugg and other city officials say a major anchor tenant is close to signing.