LOS ANGELES — Despite high-profile bankruptcies and talk of financial instability, Standard & Poor's analysts said California city ratings have remained relatively stable.
Following an in-depth review of the 202 California cities it rates, they determined that most of the cities made it through the recession with their reserves and credit quality intact despite a large decline in revenues.
"For the most part, our biggest rating action has been the affirmation of ratings," said Matt Reining, the lead Standard & Poor's analyst on the report.
S&P rates the general obligations of 202 of the state's 482 cities, including 36 of the 40 most populous cities. It affirmed the ratings or outlook on all but 30 credits this year, according to the S&P report.
Of the 25 rating changes, 88% of those were rating reductions, but Reining didn't find that extraordinary considering the country is coming out of a recession.
With the exception of cities like Stockton and San Bernardino, currently in bankruptcy, Reining said that most cities experienced one-notch downgrades within investment grade.
Most city leaders have responded proactively to serious revenue declines by implementing expenditure cuts, he said.
"Overall, we have seen responsive management," S&P analysts said in the report. "In cities that are seeing rebounding revenues, can raise voter-approved revenues, or still have flexibility to cut, we expect to see continued effective management of finances."
Many cities will continue to face credit pressures, however, and will likely need to make additional cuts, according to the report. In addition, California cities still face the additional complication of dealing with the dissolution of redevelopment agencies.
Though climbing, pension liabilities, other postemployment benefits, and debt are not generally driving short-term credit quality, but these issues combined with additional financial pressure and a lack of management response to rising costs are affecting credit quality in some cases, according to the report.
"We do not believe that pensions and debt are the primary reasons for the recent decline of certain credit's quality," Reiner said. "Our analysis shows that pensions are more of a longer-term challenge for cities due to faster-than-average growth in contribution rates and unfunded values."
Data from three cities that have hit the headlines recently for their fiscal distress — San Bernardino, Stockton and Hercules — show that such distress in the short run is a more complicated issue than simply pointing to annual pension pressure, the report said.
San Bernardino ran deficits for three years, from 2008-2010, allowing two years to pass before it tried to institute major expenditure cuts in fiscal 2010, the report said.
The city's fixed costs of pensions, OPEB obligations, and pension obligations bonds were relatively stable during this period and were slightly above the mean, at about 8.5% of total government fund expenditures in 2010, according to the report.
"The annual contributions were not near the levels we view as particularly onerous," S&P analysts said.
Stockton's numbers demonstrate a more complicated picture, according to the report, but the pension payments made by the city in 2010, at 6.6% of total government fund expenditures, were near the California city median.
The POB debt service of 2.1% increased the total pension payment ratio to 8.7% much higher, but the largest outlier was the city's OPEB costs, which had grown from 2.3% of total expenditures in 2008 to 4.2% in 2010.
"In total, Stockton's pension and OPEB obligations were growing at a rapid rate," the report said. "However, we believe the city's more immediate issues with controlling expenditures, depressed revenues and lack of financial clarity point to a broader set of reasons for its distress."
Hercules has not filed for bankruptcy or defaulted on any general fund debt. It has floated the idea of bankruptcy and indicated it would not cover certain general fund-backed bonds if the enterprise revenue currently paying the bonds was insufficient. S&P analysts said in the report that the city's pension and OPEB costs are a small fraction of its expenditures.
S&P analysts said no one factor has contributed to the financial distress seen in some cities, but all will have to continue to make strides to manage costs including pension benefits going forward.
"Although the most common rating action on California cities in 2012 has been to affirm ratings, we have lowered more ratings this year than last, and we believe that some cities are likely to experience continued financial stress," analysts said in the report. "Currently, 23 or our 202 rated cities have negative outlooks."
