The recent threatened bankruptcy of Vallejo appears to be an isolated case that does not portend more such problems for California governments, according to a special comment Moody’s Investors Service released last week.
“While fiscal challenges are on the horizon for all California municipalities, they are not of the same depth, or even necessarily of the same cause, as those experienced by the state and the city of Vallejo,” according to the comment, authored by Eric Hoffmann. “Furthermore, based on our annual credit surveillance we believe that California cities and counties with Moody’s underlying (or 'unenhanced’) ratings are generally well positioned to manage these challenges.”
Moody’s noted that it does not maintain underlying ratings on Vallejo’s debt. The agency maintains ratings on 101 of California’s 479 cities and 30 of its 58 counties.
Officials in Vallejo said they were prepared to declare bankruptcy in late February, but announced a last-minute concession deal with labor unions that averted a Chapter 9 filing, at least for a few months.
“Based on our observation of the city over the past 20 years and recent news reports, the city’s threatened bankruptcy appears to be a function of circumstances that are for the most part uniquely its own,” the comment says. “These would include the loss of its industrial economic base, unrealistic budgeting practices, and particularly challenging labor contracts, which have precipitated a severe near-term liquidity crisis.”
Moody’s said that it is unlikely that Vallejo’s recent problems can be primarily, or even largely, attributed to the current housing downturn. Given the way California city finances are structured, Hoffman wrote, the downturn is more likely to create long-term challenges than create a short-term liquidity crisis such as the one in Vallejo.
“The majority of a California city’s general fund revenues are not that sensitive to recent or short-term economic fluctuations,” the report said.
Of 101 cities rated in California, 63 have underlying ratings of Aa3 or higher, including four with Moody’s Aaa rating.
