Santa Monica, California, had its outlook revised to negative from stable and its Aaa issuer rating affirmed by Moody's Ratings on Tuesday.
Moody's cited the city's Sept. 9 passage
The city's ongoing fiscal challenges, brought on by a tepid recovery in tourism revenues post-COVID-19 and liabilities for child sexual abuse claims stemming from a city program, include about $60 million in projected shortfalls over the next five years if management takes no action to right-size the budget, Moody's said.
The beach city of 91,500 had $353 million in total outstanding debt as of fiscal year-end June 30, 2024, Moody's said.
Its lease revenue bond ratings were affirmed at Aa1 and Aa2.
Affirmation of the ratings reflects Moody's opinion that the fiscal distress resolution "does not indicate a decline in the city's financial position or overall credit quality sufficient to warrant a rating downgrade," analysts wrote.
Management is proactively formulating plans to achieve structurally-balanced operations, but if the city is unable to successfully close budget shortfalls in fiscal 2026 and beyond, a rating downgrade is likely, Moody's said.
Moody's pointed to the city's substantial long-term strengths including a strong economy and favorable resident income levels and operating flexibility in affirming the Aaa rating.
Moody's attributed the revised outlook to the expectation the city will face ongoing budgetary challenges over the next 18 months, partly from increased liabilities from ongoing sexual abuse settlement negotiations.
Claims of sexual abuse by Eric Uller, a former Santa Monica police dispatcher, have already cost the city $229 million in settlement payouts and the city still faces 180 claims of sexual abuse by the same employee, Santa Monica City Manager Oliver Chi told The Bond Buyer
The city like many local governments and school districts in California is struggling to pay
The city had financial reserves of more than 62% of revenue as of fiscal 2024 year-end, despite a multi-year trend of declining revenues from tourism since the COVID-19 shut-downs in 2020, coupled with tapping reserves to pay the sexual abuse claims, Moody's said.
The Aa1 rating on the city's Series 2018, 2017 and 2015 lease revenue bonds is one notch lower than the city's Aaa issuer rating, reflecting the standard California abatement lease legal structure and leased assets that Moody's said it views as "more essential." Leased assets for these bonds include public safety facilities, a city services building, and a civic center parking garage, respectively.
The Aa2 rating on the city's Series 2021A lease revenue bonds is two notches lower than the issuer rating, reflecting leased assets Moody's said it views as "less essential." Leased assets for the Series 2021A bonds include a standalone parking facility.
The negative outlook could be removed it the city successfully implements plans to close the projected budget baps in fiscal 2026 and beyond, while maintaining strong reserve levels, Moody's said. On the flip side, if the city experiences further declines in its fund balance ratio to less than 50%, tourism revenues continue to lag budget expectations, and its long-term liabilities ratio balloons to over 350% of revenue, Moody's could downgrade the ratings.
The city has AAA ratings with stable outlooks from Fitch Ratings and S&P Global Ratings.
