SAN FRANCISCO — With Moody’s Investors Service dropping Fresno three notches to A2 from Aa2 on Thursday, the California city’s membership in the “super downgrade” club has now been affirmed by all three credit rating agencies.
The downgrade followed similar moves by Standard & Poor’s earlier in the month and by Fitch Ratings in August.
Moody’s said it cut the rating because of Fresno’s weakening finances, exposure to a fragile local economy and an overstretched budget.
It said the city’s general fund has been saddled by high fixed costs and subsidies to other branches of government, while its emergency reserve is almost drained.
“Like all California cities, Fresno’s ability to raise revenues is highly constrained; its primary budget-balancing option is cost reduction,” Moody’s analyst Moses Kopar said in the report. “However, with services already significantly reduced, further cuts could prove more difficult.”
Moody’s changed its outlook on the city to negative from stable and also dropped the pension obligation bonds to A3 from Aa3 and the lease revenue bonds to Baa1 from A1.
Moody’s downgrade affects $477 million of rated debt.
Both Moody’s and Fitch had just raised the city’s rating in May 2010.
The recent recession hit Fresno and the rest of the so-called Inland Empire of California harder than the rest of the state. Fresno County has a 15.8% unemployment rate as of August compared to 12.1% across California, according to the U.S. Labor Department.
Led by double-digit declines in property and sales taxes, the city’s general fund revenues tumbled 12.5% in fiscal 2010 and 3.7% the previous year, Fitch said in an August report when it cut the city’s rating to A from AA. It kept its outlook at stable.
In reaction to the tough economy, Fresno has slashed payrolls and public services in an effort to right its finances.
The city also declared a fiscal emergency last year that allowed it to use emergency reserves.
City officials did not return a call for comment.
Fresno’s emergency reserves, which it has used in past years to balance its budget, are nearly depleted, Standard & Poor’s said in a report when it downgraded the city to A from AA with a negative outlook.
Analysts said the city’s poor reserves and cash balances leave Fresno with little wiggle room if revenues come in lower than forecasted in the budget. The city has balanced its general fund budget for fiscal 2012.
The emergency reserve fund for the next fiscal year stands at $1.46 million, or 1% of spending, according to Standard & Poor’s.
Further straining coffers, the city has had to use its general fund to pay $2.5 million of annual debt service for lease revenues for a parking garage at the convention center in support of its redevelopment agency.
The city has $1.2 billion of direct and overlapping debt outstanding, which includes bonds tied to the general fund and those backed by revenues, according to a disclosure filing.
Fitch said the city’s long-term liabilities appear manageable given no new plans to issue debt.
The rating agency added that Fresno’s pension and other retirement liabilities compare favorably to other large cities.