Long Beach's Looming Credit Downgrade is Lifted

Moody's Investors Service on Tuesday confirmed the City of Long Beach's Baa3 bond rating on $48.3 million outstanding general obligation debt, lifting the municipality’s potential downgrade to junk status.

In a statement, Moody’s said that the city's rating is “no longer under review for downgrade, but the outlook has been revised to negative.” While the city’s strengths are its large tax base with above average wealth levels and its manageable debt position, the ratings agency reported, the negative outlook reflects Long Beach's potential for continued deterioration of its financial position and liquidity.

“We will focus on the city's ability to access the capital markets for short-term cash flow borrowing and deficit reduction bonds, as well as management's ability and willingness to improve the city's financial position and liquidity,” Moody’s reported stated. 

Last December, Moody’s downgraded the city’s bond rating from to a Baa3, five levels below its previous A1 status, and the city incurred a general obligation debt of $48 million and $107,000 remaining in its general fund at the end of the 2010-11 budget year, down from $7.5 million in 2008. In February, the City Council passed a resolution declaring a fiscal emergency, and the following month, days before Moody’s was expected to reevaluate the city’s finances, City Manager Jack Schnirman announced a projected $10.2 million deficit for the fiscal year ending in June.

On Tuesday, Moody’s report noted that the city still faces challenges such as a significant weakening of financial position due to severe structural imbalance, and that cash positions continue to deteriorate and are projected to be depleted by year’s end, which will necessitate cash flow borrowing. “[T]he city expects to issue additional cash flow notes by the end of June of this year, as well as deficit reduction bonds in January 2013,” the report states.  

In May, the City Council adopted a $87.9 million budget for 2012-13, representing a 2.6 percent tax levy increase and a 5.3 percent deficit reduction surcharge. The city faced possible penalties, including a further downgrade to its credit rating to junk bond status, if it failed to close the $10.2 million deficit and balance the budget before the new fiscal year starts on July 1. Schnirman said the city was able to reach those numbers through various measures, including an early retirement incentive, personnel reductions, and spreading out payment for debt service over 10 years instead of three.

“We are happy that Moody’s praises our new budget for stabilizing the city’s financial position,” Schnirman said in a statement. “And we understand that Moody’s will keep a close watch as we implement our balanced budget plan.”

Moody’s report states that the city’s failure to execute on a its new budget plan to return to structurally balanced operation and further liquidity declines could still push its rating down. To improve its rating, the city would have to demonstrate an ability to manager near-term cash shortfalls, implement newly budgeted cost controls and revenue enhancements and continue its ability to access capital markets for additional cash flow notes and deficit bond issuances. In March, the City Council approved a $6 million revenue anticipation note, a borrowing measure that Moody’s recommended as a means to pay off the city’s liquidity needs, including to cover payroll.

About Tuesday's report, Councilman John McLaughlin, the lone Republican on the City Council, told Patch: “I'm extremely pleased with the report but we still need to pare back moving forward. Jack did a nice job in his dealings with Moody's and I congratulate him on his efforts.”