PRESS DEMOCRAT STAFF AND WIRE REPORT
Santa Rosa and Petaluma are among dozens of California cities having their credit ratings reviewed for possible downgrades by one of the nation's top credit rating agencies.
Moody's Investors Services said there is mounting concern over municipal bankruptcies and bond defaults.
Moody's will scrutinize the ratings of various types of bonds in 30 California cities. The agency also announced that it already had downgraded eight municipal pension obligation bonds.
"California cities operate under more rigid revenue raising constraints than cities in many other parts of the country," Eric Hoffmann, who heads Moody's California local government ratings team, said in a statement. "Combined with steeply rising costs, these constraints mean that these cities will likely recover more slowly than their peers nationally, even if the state's economic recovery tracks the nation's."
Santa Rosa City Manager Kathy Millison said she was surprised when Moody's officials contacted city officials Tuesday and informed them of the review.
The city provided the agency with additional information about its debt structure and efforts to reduce operating costs, she said.
Those efforts include significant staff reductions, concessions from existing workers, and an increase in the city's reserves.
"It is my hope that some of the actions we have taken will be helpful in at least holding things steady for the time being," Millison said.
Two specific bonds are apparently of concern to the agency: a $51 million pension obligation bond from 2003 and a $10 million bond to allow the city to purchase two downtown buildings in 2007, Millison said.
The pension obligation bonds were sold to help fund more generous pension benefits for city workers. The two buildings on First Street — the former Westamerica Bank building and the former home of the Santa Rosa Chamber of Commerce — were purchased to house a then growing work force and make way for a possible future civic center complex that would include a new City Hall and a performing arts center.
The outstanding debt on the pension obligation bonds remains about $42 million, but the other remains $9.7 million, she said.
The agency is concerned because, unlike utility bonds that are backed by ratepayers, these bonds are backed by the city's General Fund, which recent years have shown can take a huge hit when the economy and real estate markets swoon.
The bonds have a good rating, Aa3, but if they are downgraded, the city's overall rating could suffer.
"I think the real concern is a downgrade on these two could have an effect on the total rating for the city."
Other cities under review include Danville, Santa Monica, Sacramento and Fresno. Moody's will examine an array of factors, including falling tax revenue and increased spending.
Any downgrades would increase borrowing costs for cities and could hinder their ability to borrow for infrastructure projects.
The announcement follows an August report in which Moody's predicted more municipal bankruptcies and defaults in California, the nation's largest issuer of municipal bonds. Moody's warned that some cities are turning to bankruptcy as a new strategy to tackle budget deficits and abandon obligations to bondholders.