PHOENIX — Moody's Investors Service dropped Richmond, Calif. to junk late Tuesday with a three-notch downgrade that brought the city's implied general obligation rating to Ba1.
Moody's also dropped Richmond's pension obligation bonds to Ba2 from Baa2, and its wastewater revenue bonds to Baa2 from A2.
The rating agency cited the city's long-term structural budget imbalance, narrow liquidity, significant general fund support of poorly performing enterprise funds, and high exposure to variable-rate debt and derivatives.
"Depletion of its cash position over the last seven years has left the city with very little flexibility to sustain its operations when faced with economic or fiscal challenges," Moody's analysts wrote.
The action concluded a review for downgrade started in May. No outlook is assigned.
The downgrades to the other bonds are related to the city's overall fiscal struggles, Moody's said, along with others unique to their structure. The POBs, for example, have been assigned a lower rating because the city's pension bonds are secured by a more narrow pledge of property tax revenues.
"Declines in the pledged pension override revenue could require the city to rely on other resources, which are currently extremely limited," Moody's said.
The wastewater bond downgrade stemmed from "the risk of the city borrowing from the wastewater enterprise's sizable reserves for short-term liquidity purposes, and the plan to issue additional debt in the near term for a substantial capital program," Moody's said.
The issuer and POB ratings could both go up if the city demonstrates "significant and sustained improvement in reserves and liquidity" and "strong management action to control expenditures and bring operations into structural balance," Moody's said, but could go down if the city's financial situation deteriorates or the tax base erodes.
The wastewater bonds could be upgraded if the debt service coverage level increases and the city's liquidity improves, but could drop if cash reserves decline.
Richmond officials did not respond to a request to be interviewed about the downgrades.
