SAN FRANCISCO — The Port of Long Beach, Calif., the second-busiest port in the country, could see its rating come under pressure if a local ballot measure passes that would strengthen the hand of the city in its operations.
Long Beach voters in November will consider a two-part measure that would change the formula for fund transfers from the port to a trust that pays for harbor improvements. Secondly, the proposition would change the language in the city charter to clarify the city’s jurisdiction over oil properties at the port.
The potential fiscal impact of the measure, if any, remains unclear. City officials say the proposal is simply to streamline processes. Port officials remain cagey on the possible cost of the measure as they have been told by the city attorney to remain neutral.
The port is governed by the city.
Even without a major monetary impact, credits analysts are concerned about Long Beach’s increased interest in port revenues.
“Now that the city is going to be a little more involved, I don’t want to say it’s necessarily negative, but we would need to look at what that relationship will be going forward, especially if they are not going to have the autonomy. That could have an impact to the credit,” said Emma Walker, an analyst who covers the port at Fitch Ratings.
Walker said there are also questions about how any change in the port’s operating revenue could affect capital planning, even if the revenue impact is not tied to bonds, such as oil revenue. She said she had tried to get clarification on the issue from port officials but they were unable to provide a clear analysis.
Gary DeLong, the City Council member who sponsored the proposal, said the impact of changing the transfer formula from 5% net income to 10% gross would only be a slight monetary advantage.
“By basing on a gross, then we can make sure the port’s interests and city’s interests are in line with each other,” DeLong said, adding that the city would like to see the port explain its expenses.
DeLong admitted that Long Beach’s $20 million Tidelands Operating Fund, or TOF, which is a restricted trust to pay for improvements and development in the coastal areas, is expected to run a deficit in the future as recent transfers and city oil revenues have declined.
The city faces an $18.5 million general fund deficit for fiscal 2011. Since 2004, Long Beach has cut $118 million from its budget and eliminated 650 jobs, according to a city report. In addition, questions have been raised about the management of the Tidelands fund.
The Port of Long Beach’s “transfers to the TOF has continued to increase over the past several years, yet TOF continues to experience economic difficulties. We request that the city auditor conduct an audit of TOF and the funds it supports to substantiate that all the expenses charged are in compliance with the state of California Tidelands trust rules,” Richard Steinke, executive director of the Port of Long Beach, said in letter in June in response to a report on the transfers by the city auditor.
Steven Rubin, the port’s managing director of finance and administration, said the auditor made the recommendation for the formulaic change to make it simpler.
“From the standpoint of bondholders, it really doesn’t have a change on how they should view their bonds,” he said.
Rubin said the harbor board commission still has oversight over the transfer of funds and can decline to make the transfer if the money is needed to pay for port operations and especially debt service. As for the oil assets, Rubin said the port estimated in a recent report that it will earn $120 million in oil revenue from 2010 to 2014.
The port’s 10-year financial projections include a $4.6 billion capital program and an average 4.3% annual revenue growth due to cargo growth, tariff increases, and contractual rate increases, according to a recent report by Moody’s Investors Service.
Charles Parkin, deputy city attorney in Long Beach, said as it stands in the city charter, the council could go ahead and take oil revenue if they choose. He said the ballot measure would just clarify the language to avoid future confusion.
But concerns remain as some worry whether the city could ultimately shift oil revenues away from the port.
“Nobody at the city or the port has produced a full analysis of the financial impacts and questions raised by Measure D,” said Mike Jacob, vice president at the Pacific Merchant Shipping Association. “No staff reports have been produced illustrating the impacts to the port of transferring its assets to the city or what happens as a result of the city cutting in front of everyone else the port does business with for compensation.”
Kurt Forsgren, an analyst who covers the port at Standard & Poor’s, said only if the measure passes would they be able to assess the impact of the proposition, but added thatthe agency is monitoring the situation.
“Certainly any change in that policy that allows [the City Council] to transfer revenues from port to the city, which dramatically alters that arrangement, is something we certainly find concerning from a credit standpoint,” Forsgren said.
