Santa Monica, California, received a second negative outlook on its bonds with Fitch Ratings joining Moody's Ratings in lowering the rating outlook.
Fitch's revision to negative Wednesday reflects heightened uncertainty from potential liabilities related to 180 child sexual abuse claims, which could impact the city's fiscal profile and/or liability profile, analysts wrote.
Fitch affirmed the city's AAA issuer default rating and its lease revenue bonds at AA-plus.
Moody's also affirmed its Aaa rating when it
S&P Ratings doesn't have an issuer or general obligation rating on the city, but downgraded its lease revenue bond rating to AA from AA-plus in June 2024 citing the claims. The city's water system bonds retain S&P's AAA rating.
The city's
The affluent beach city of 90,500 residents had $346.27 million in
The city has already settled cases at a cost of approximately $229.8 million, which it paid from a combination of resources including general fund reserves and interfund borrowing, Fitch wrote.
"As a result of the first round of settlement payments, mounting near-term unrelated budgetary pressures, and the remaining contingent liability from the unsettled claims, the city found it necessary to declare a state of "fiscal distress," Fitch analysts wrote. "The city states that the 'fiscal distress' resolution is intended to assist them as they seek funding from state and other grantor agencies and communicate the fiscal challenges to stakeholders."
The city has not disclosed an estimate on anticipated costs from the unsettled claims. Reserves, which are equal to roughly 35% of spending in fiscal 2024, remain adequate for the "AAA financial resilience assessment," Fitch said. The city reports a modest surplus or stable results in fiscal 2025 and Fitch said it has a history of taking cost-cutting action when necessary.
The ratings reflect the city's AAA financial resilience assessment "though with potentially less headroom" at the AAA level over the next several years, Fitch wrote.
Fitch's report questioned whether the city could remain at its AAA rating if it issues judgment obligation bonds or long-term debt to support capital projects in lieu of cash funding, based on metrics the rating agency uses to evaluate ratings at that level.
The combination of taking on additional debt and the erosion of fund balances could possibly tip them out of having AAA resilience, said Pascal St. Gerard, a Fitch senior director.
The city would be expected to close its current structural deficit through a combination of saving and cost cutting, but the child sexual abuse liability raises red flags, he said.
"The city has strong budgetary tools, including the ability to raise revenue from an affluent populace and a history of implementing spending cuts when needed," Gerard wrote in the report. "Given these capabilities, Fitch expects that the city will maintain general fund reserves at or above 15% of spending."
The city has $197 million in direct debt, not including its enterprise funds and pension liability of $627 million, resulting in carrying costs of 17.3% of governmental expenditures, Gerard said.
"I don't want to estimate what the pending claims might amount to, but if they are similar to what they have already paid out then hypothetically it would be a doubling of their direct debt," Gerard said. "The depletion of existing cash and liquidity would be material. But there are so many unknowns it's enough to elevate or raise the issue about credit risks that needed to be shared with the market."
He also noted that there will be more clarity when the city manager shares his plan with the City Council in late October.
