A three-notch upgrade will buoy Richmond, California, as it prepares to bring refunding bonds to market.
Fiscal red flags remain for the San Francisco Bay area city after two significant upgrades in recent months, according to one analyst.
S&P Global Ratings upgraded the city’s issuer credit rating — equivalent to the rating it would get for general obligation bonds if it had any — three notches to AA-minus on May 31. At the same time it elevated the city’s pension obligation debt rating to AA-minus and boosted to A-plus from BBB-plus $100 million in outstanding Richmond Joint Powers Financing Authority lease revenue bonds.
S&P's upgrade widened an already sizable rating gap between it and Moody's Investors Service, which on Nov. 28 raised the city’s issuer rating to an investment grade Baa3 from speculative-grade Ba1, and boosted the rating on the pension bonds to Ba1.
“For the last three or four years, we have had structurally balanced budgets and the city has done as well or better than other cities in the region,” said Tom Butt, mayor since 2014 and city council member for 20 years prior. “I think that is the reason the ratings were restored.”
In 2014, Moody’s
The trouble raised speculation about bankruptcy that city officials
The city was able to avoid the termination trigger by refinancing into a swaps agreement with RBC that included tying the trigger only to S&P’s pension bond rating falling below investment grade, but not Moody’s.
Marc Joffe, a senior policy analyst at the Reason Foundation, said the city’s latest comprehensive annual financial report for the fiscal year ended June 30, 2019, raises multiple red flags.
Joffe cited a weak cash position, a Kids First Initiative that will divert 3% of the general fund to programs for children, and increased payments to CalPERS with contributions projected to rise from $31 million in the current 2018-19 fiscal year to almost $50 million in 2024-2045.
The city’s audited financial documents, filed 50 days after the March 31 deadline include “going concern” language, which is a vehicle auditors can use to signal their concerns about a potential bankruptcy, Joffe wrote in a draft report for the Foundation that he shared with the Bond Buyer.
Even with the marked improvements cited by the rating agencies, analysts also concede that challenges remain. Moody's and S&P both have stable outlooks for the city.
“The Richmond Housing Authority Enterprise Fund, Port of Richmond Enterprise Fund, other Non-Major Enterprise Funds and Non-Major Governmental Funds had borrowed $32.9 million from the general fund and other funds,” according to the CAFR. “As a result of the interfund borrowing, city-wide, the city has a total of only $36.6 million of unrestricted cash as of June 30, 2018. If deficit spending continues in the funds that continue to borrow from the General Fund and other funds, it reduces the likelihood that the city will be able to continue as a going concern.”
S&P analyst Li Yang said the city expects the “going concern” language will be removed in the fiscal 2019 CAFR, because the expected $9.5 million sale of a city property by the Port of Richmond and spinning off the majority of the Housing Authority’s responsibilities to Costa Contra County will pay off the inter-fund loans. The outstanding balances are not included as part of the cash reserve calculation, Yang said.
“We don’t view the city as having a structural imbalance anymore; the past four years of audited results have been positive, assessed value has been growing by a considerable amount, sales tax has grown significantly and they passed a sales tax rate increase on April 1, 2015,” Yang said.
The city’s finances are narrow, but have improved since fiscal 2014, a key consideration in the Moody's November upgrade that brought the city's issuer rating to investment grade.
The city’s taxable assessed valuation has grown to $15.2 billion in fiscal 2019 with home values reaching a median of $500,000, though it retains a reliance on a Chevron refinery as its largest single taxpayer, according to Moody's.
City leaders have made several changes to their practices including a five-year financial forecast, the assumptions in the budget are more reasonable, and in 2015 the city hired Belinda Warner as finance director, who was instrumental in turning things around, S&P's Yang said.
S&P assigned its A-plus rating to $93 million of upcoming Richmond Joint Powers Financing Authority lease revenue bond refunding deals, broken into a $21 million Series 2019A and $72 million Series 2019B
RBC will be lead on the
In his February State of the City speech, Butt said that while Richmond’s financial condition remains stable, there is practically no wiggle room, and more work is needed to keep the city’s bottom line safe.
That comment was accompanied by a chart that shows expenditures exceeding revenues in fiscal year 2021.
He also mentioned Moody’s improved rating, a mid-year surplus of $142,416, a real estate transfer tax approved to offset the cost of the Kids First program and that the city had increased its cash reserves policy to 15% of expenditures.
The city is looking for additional methods to enhance revenues including real estate development and a revenue measure that would reduce the amount of money to Kids First or increase property taxes to pay the entire amount, Butt said in an interview. City leaders are also considering following San Francisco in adopting a litter tax on cigarettes, he said.
Richmond increased employee contributions to the California Public Employees’ Retirement System during a financial crunch in 2003-04, so it is in better shape there than some cities, Butt said.
Moody’s gave the city’s pension obligation bonds a Ba1 rating, narrowing the notching between the issuer and POB ratings from its typical two to one on California city POBs, because the bonds benefit from a pension tax.
“The city has a high level of net direct debt, with a complex structure, escalating debt service and high overlapping debt,” Moody’s analysts wrote. “Pension and OPEB liabilities are elevated and will pose ongoing budget pressures, consistent with other California cities.”
The city is working on closing a $2 million to $3 million shortfall in the upcoming budget, Butt said.
