SAN FRANCISCO - San Diego yesterday regained its credit rating from Standard & Poor's, setting the stage for California's second-largest city to return to the public bond market after a four-year absence.
Standard & Poor's gave San Diego's general obligation bonds an A rating with a positive outlook, while rating the city's certificates of participation and revenue bonds A-minus. Standard & Poor's rated the city's wastewater revenue bonds at A-plus and assigned its water utility bonds its AA-minus rating for senior debt. The agency withdrew the city's ratings in September 2004 after a pension fund scandal.
Standard & Poor's unusual decision to reinstate the rating with a positive outlook "reflects recent improvements in management practices that have begun to address the city's long-term financial challenges," said analyst Sussan Corson. "Should management continue to make necessary budgetary adjustments to offset projected budgetary gaps and target structural balance and financial stability, the rating could be raised into the next category."
San Diego delayed its financial reporting for four years, as it sought to come to grips with billions of dollars in formerly undisclosed pension and retiree health care liabilities. The city has worked since 2004 to complete certified annual financial reports and to reform its financial management. It completed its 2006 CAFR in March and expects to complete its 2007 report this summer.
In April, the Securities and Exchange Commission charged five former top city officials with fraud for failing to disclose the extent of the city's unfunded pension liabilities. In 2006, the SEC sanctioned the city for the disclosure failures.
Standard & Poor's rated San Diego's GOs AA-minus when it withdrew its ratings four years ago. Moody's Investors Service, which had rated San Diego Aa1 before the pension scandal, currently rates it A3. Fitch Ratings in March revised its outlook to positive from negative on its BBB-plus rating. It rated the city AAA before the pension scandal.
San Diego has been locked out of the public bond market since the pension scandal and the withdrawal of the Standard & Poor's rating. It has relied on small private placements to raise capital when it absolutely had to.
Mayor Jerry Sanders has touted his financial reforms in his campaign for re-election. Chief operating officer Jay Goldstone last month said the city hopes to begin issuing bonds in the public market in the second half of this year.
Sanders yesterday said that Standard & Poor's ratings action was the city's "most significant financial event" in the past five years.
Standard & Poor's said its rating reflects "a very diversified economy that has exhibited continued strong growth," "strong income and wealth" levels, "good" reserves and a "moderate" debt burden.
Those strengths are offset by a weak local housing market, "continued identified weaknesses in internal financial controls," limited revenue raising flexibility, structural budget deficits, and pension and other post-employment benefit liabilities.
The agency recognized that the city has "established new governmental positions and committees designed to coordinate the flow of information within the city and accurate disclosure to markets."
But by the city's own admission, it has not yet finished its financial reforms. It has completed about three-quarters of the changes that investigators from Kroll Inc. recommended for the city. The Kroll report was headed by former SEC chairman Arthur Levitt Jr.