City's Credit Rating Downgraded

After affirming the City of Long Beach's A1 bond rating earlier this year, Moody’s Investors Service downgraded this status on Tuesday, according to the agency's website.

Moody’s downgraded the city’s rating to Baa3, a grade below A1, citing as its rationale, a press release stated, “the city's deteriorating financial position since 2008 marked by a lack of structural balance due to declining mortgage tax revenue and increasing expenditures. The rating also factors the city's sizable tax base with above average wealth levels and a manageable debt burden.”

Moody’s stated that it placed the rating on review for possible downgrade, which reflects “the projected deficit fund balance in fiscal 2012 and a deteriorating cash position resulting in near-term liquidity strain.”

The downgrade comes after the city’s cash-flow problems came to light last month, when in a Nov. 18 memo City Comptroller Sandra Clarson notified City Manager Charles Theofan that the city faced a $1.3 million deficit at the end of 2011, threatening the year-end payroll. At Clarson’s recommendation the City Council approved a proposal to borrow $4.5 million, in part to cover a payroll shortfall in December and to payout contractual obligation for retirees, using anticipation and budget notes.

The Moody’s release continues: “Projections show the city's cash balance is expected to decline further and may require additional cash flow borrowings in the near term which will require market access. Moody's is also reviewing the city's rating for withdrawal due to insufficient information given severe negative discrepancies between the city's projections in August 2011 of reserve and cash positions and unaudited reporting of its fiscal 2011 results earlier this month.”

Theofan told the Long Beach Herald that the agency was expected to announce Tuesday that it is downgrading the city’s rating.

“Moody’s is going to downgrade us. They said it was due to the cash flow and things like that. When it comes to finances, two different people can look at them, and now they’re looking at us in a very bad way and unfortunately a downgrade is going to reflect that.”

As Patch reported, Republican candidates running in the Nov. 8 City Council elections highlighted the city’s A1 bond rating as an example of the city’s fiscal stability, while their Democratic challengers expressed skepticism about this status.

At a candidates’ forum on Oct. 20 at the Long Beach Library, President Thomas Sofield Jr. characterized the city’s finances as “very good,” and to bolster this assertion he cited affirmation of the city’s A1 bond rating by Moody’s. “They upgraded us twice in the last four years,” he noted. 

But Councilman Len Torres expressed concerned then about whether the Moody’s rating can be sustained, and called to see the auditor’s report for the last fiscal year, which he said he has not yet seen at that time.

“That will tell us exactly where we stand,” Torres said. “ … We need to see what these figures are.”

Theofan said the city’s shortage of cash-flow is the result of the cleanup after Tropical Storm Irene, including unexpected overtime costs, hired contractors and materials used that amounted to more than $1 million, as well as about $300,000 in taxes owed by a major property owner, reportedly the Allegria Hotel.

* This story was updated at 3:29 p.m. on 12/20/11.