SAN FRANCISCO - Standard & Poor's downgraded Mendocino County, Calif.'s issuer credit rating to BBB-plus from A-minus late last week, citing weak reserves, likely state budget cuts, and a failure to cut spending to match declining revenues.
The agency also downgraded the county's certificates of participation to BBB from BBB-plus. The county had about $122.1 million of debt outstanding as of June 30, 2008, including $92.2 million of general obligation bonds and $26.2 million of COPs, according to its audited financial report for fiscal 2008.
"Although the county has implemented some budget reductions, we believe the prospects for fiscal improvement remain ambiguous," said Standard & Poor's analyst Misty Newland in a report. She also cited the "lack of a clear path to improvement" for the county.
Mendocino is a sprawling, sparsely populated county of 86,200 people on the Pacific coast about 100 miles north of San Francisco. Its main industries include tourism, timber, fishing, agriculture, and related business.
The county's general fund is expected to run a budget deficit of about $600,000 this fiscal year, County Executive Tom Mitchell said in a budget meeting on May 19. That follows a $1.4 million deficit in the $142 million general fund last year.
The county has instituted mandatory furloughs for public workers and governmentwide spending cuts to rein in expenses, Mitchell said at the board meeting. He didn't return calls seeking comment by press time Friday.
The projected current-year deficit would eat up about a third of the county's $1.7 million of unreserved government fund reserves at the end of last year. Standard & Poor's said management stated that the county's contingency reserve would be depleted by the end of the current fiscal year.
"The county's financial profile ... has been in our view weak, characterized by limited general fund reserves and operating liquidity," Standard & Poor's said.
In addition to weak reserves, the rating agency singled out the county's mental health fund as a particular concern. Mendocino County listed $9.7 million of mental health payment receivables owed by the state of California as an asset on its balance sheet at the end of last year. Like all California counties, Mendocino relies heavily on the state for funding and is facing the possibility of deep cuts for the coming year. The California Legislative Analyst's Office said the state needs to close a $24 billion deficit in the current and upcoming fiscal years.
Gov. Arnold Schwarzenegger, a Republican, has proposed deep cuts in social service funding, as well as borrowing from local government tax revenues, to close the deficit. The Democratic-controlled State Legislature would have to approve any cuts or local revenue borrowing, and it has yet to act on his recommendations.
"We understand that a portion of revenues that would otherwise flow to the county may be diverted to the state general fund," Newland wrote. "This, coupled with the county's ongoing social service provision requirements and existing commitments, will likely continue to pressure general fund balances over the medium term."
