SAN FRANCISCO – Moody’s Investors Service downgraded Stockton, Calif., two notches Tuesday to A3 from A1 because of its ongoing financial problems.
In the report, the agency said the city estimates it will completely draw down its fund balances by the end of the year. And for fiscal 2012, the city must address a $37 million budget gap.
Moody’s also downgraded Stockton’s taxable pension obligation bonds to Baa1 from A2 and its lease-revenue refunding bonds to Baa2 from A3.
It kept its outlook at negative.
“The negative outlook on the city’s rating reflects it precarious financial position in combination with the substantial challenges ahead,” Moody’s analyst Dari Barzel said in the report. “The city needs to successfully implement its balanced budget, closing a budget gap representing 20% of revenues.”
Without cost adjustments, Stockton’s expenditures are expected to rise almost 18% in fiscal 2012, mainly due to labor costs, according to Moody’s.
The city has been grinding through negotiations with its unions to try to reduce the labor costs.
The multimillion-dollar deficit comes after the government already cut 25% of its workforce over the last two years.
Stockton has $224 million of outstanding debt: $87 million of lease revenue bonds, $13 million of certificates of participation, and $124 million of pension obligation bonds, according to its most recent comprehensive annual financial report, for the period ending June 30, 2010.
Of the lease revenue bonds, $40 million are in variable-rate mode.
Moody’s noted that the variable-rate debt also adds near-term risk because of an insurance agreement.
