SAN FRANCISCO - Standard & Poor's downgraded Sacramento County's issuer credit rating to A-plus from AA-minus late Monday, highlighting the county's difficulty managing declining tax revenues and rising costs.
Standard & Poor's also lowered the county's pension bond and certificate of participation ratings to A from A-plus. The actions affect about $1.1 billion of outstanding pension obligation bonds and $412 million of COPs, the agency said. All told, California's eighth biggest county had about $1.7 billion of governmental debt outstanding as of June 30, 2008, according to its comprehensive annual financial report.
"The lowered ratings are based on our opinion of the county's structurally imbalanced budgets and reduction of its fund balance and other unrestricted reserves," said Standard & Poor's analyst Matthew Reining in a report.
Like other California counties, Sacramento County has been hard hit by the housing downturn, but it also faced increasing debt service costs, due in part to auction rate securities it had to refinance last year, and budget woes that predate the most recent economic downturn.
The county - which includes the state capital, the city of Sacramento lies in California's Central Valley northeast of San Francisco. Tax revenues rose sharply during the real-estate boom, as lower prices drew residents from the more expensive Bay Area and state government employment buoyed the local economy.
But the housing market has collapsed, with building permit values falling 31.5% in 2006, 11.5% in 2007 and unchanged in 2008, according to Standard & Poor's. Residents in existing homes are demanding property tax reassessments because of falling home values. The county assessor expects assessed values to rise just 1% this year and to drop 9% next year. The county is also suffering from falling sales tax collections.
The result is a big hole in the county's roughly $2.2 billion general fund budget. The county projects a $187 million shortfall for the coming fiscal year. The county has relied heavily on reserves and debt restructuring to balance past shortfalls.
"Large surpluses built up during a period of strong growth in fiscals 2005 and 2006 have been spent down during several years of structurally imbalanced budgets," Standard & Poor's said. The county's unreserved fund balance fell from $206 million at the end of fiscal 2006 to $98 million at the end of fiscal 2007.
While the agency calls that a "good" level of savings at 4.7% of expenditures, the numbers show that the county spent more than half its savings before the current recession really started to eat into county revenues. The county plans to draw the unreserved fund balance to $51 million, or 2.3% of expenditures, by the end of this fiscal year, leaving it with scant reserves to address its looming deficits.
"In the budget being developed for the upcoming fiscal year, we are making significant and admittedly very difficult cuts to programs, services and staff to reduce our costs," said Chris Marx, the county's debt officer. "We're operating in the same dynamic as our constituents, tightening our belts wherever possible, and simply reducing our spending."
