S&P Global still gives CUS a strong AA+ credit rating. However, the agency changed its financial outlook to negative following significant changes in how Houston funds city services.
Jaime Blansit of S&P Global said the outlook change is tied in part to structural changes within the utility fund.
"The reason is because of some of the structural changes they made to the utility fund," Blansit said.
One of the major changes was the city's decision to move its Waste and Recycling budget from the general fund into CUS. That move helped improve the financial outlook for the city's general fund, but put additional financial pressure on the utility system.
"They're shifting costs from the general fund to the utility, which stabilizes the general fund but puts more pressure on the utility fund," Blansit said.
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S&P Global recently revised the city's general fund outlook from negative to stable while changing CUS' outlook to negative.
The agency said it will monitor how Houston addresses the additional expenses imposed on the utility system, including how the city plans to increase revenue.
"What we're looking for, for the next year, is, what are the plans for increasing revenue?" Blansit said.
That could eventually mean higher water and sewer rates for Houston residents.
The city already has begun charging residents who use municipal waste and recycling services a $5 monthly fee on their water bills. Under the current plan, that fee could increase to as much as $25 per month over the next six years.
The fees have drawn criticism from some residents.
"This fee starts small enough to feel painless to approve, but it's designed to climb to roughly $300 per year, and that's not the same sacrifice for everyone," said Lindsay Williams, president of Super Neighborhood 64.
Blansit said S&P expects water and sewer rates to increase as Houston moves forward with a major capital plan that will require substantial funding.
"We do anticipate that, considering they have a very large capital plan which is going to require them to get a lot of debt or cash funding. We do anticipate water and sewer rates will go up," Blansit said.
Houston City Councilman Joe Panzarella said the negative outlook should serve as a warning to city leaders as they consider how to fund the infrastructure needed.
"It's a concern that we might not be able to invest in the water infrastructure we so desperately need," Panzarella said. "It doesn't mean we're being downgraded just yet, but it means we have to be on top of this to ensure we're spending the money on what it needs to be spent on."
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A negative outlook does not mean CUS has been downgraded. However, if the utility's credit rating were lowered in the future, borrowing money for major projects could become more expensive.
"It is higher borrowing costs. The higher the rating, the lower the interest you're paying on your borrowing," Blansit said.
Mayor John Whitmire said the city understands the challenges facing the utility system and plans to meet with S&P Global again in January.
"They recognize the challenges we have," Whitmire said. "We look forward to further discussions about how we're creating a strong foundation for finances, especially in the water fund."
For now, CUS maintains its AA+ rating, but S&P's negative outlook places the city's utility finances under closer scrutiny as Houston works to fund billions in infrastructure needs.