Below is a story about bond restructuring in Richmond that was precipitated by the recent rating downgrade by Moody’s.
People who are looking for a way to be critical of Richmond’s City Council or city manager have seized on this as evidence of poor management decisions in the past few years, but I submit just the opposite is the case. Some City Council members have even criticized the use of Measure U funds to balance the 2015-16 budget instead of spending on streets, but what they haven’t done is propose where other cuts should be made, such as reducing the number of police officers or closing libraries and fire stations.
Richmond, like other cities, depends on an uncertain stream of revenue sources that include primarily property taxes, sales taxes and utility user taxes plus state transfers such as gas taxes and a handful of other fees. When times are good, revenue tends to increase, and when times are bad, the opposite happens. That’s one reason cities accumulate reserves, also known as “rainy day funds.”
Like everyone else, Richmond failed to anticipate the recession, but when it came, we were able to ride it out without drastic cuts in staff and services by tapping into our rainy day funds and using non-recurring revenue sources such as funds from settling tax disputes with Chevron and refinancing various bond debts.
We came out of the recession much leaner but intact, a feat that would seem to be an accomplishment when cities all around us, like Stockton and Vallejo, were going into bankruptcy.
In FY 2014-15, City Manager Bill Lindsay wrestled what started as a significantly unbalanced budget into a $1.4 million surplus, and the City Council passed a balanced budget for FY 2015-16. The voters of Richmond provided an additional ½% sales tax in the November 2014 election. Both property tax and sales tax revenue were returning to pre-recession levels, as was unemployment. Crime was down, and business was up. We knew we still faced fiscal challenges, but we could face them with some confidence and decision making flexibility.
Then came the bond rating reductions.
Bond rating agencies are like the mythical death panels that were conjured up in the federal health care debate, except that they are real, not imaginary. Three businesses, Moody's Investors Service, Standard & Poor's, and Fitch Ratings, literally hold life and death decision making authority over public agencies, with a handful of self-appointed “experts” playing God with the fate of cities like Richmond.
It is questionable that Moody’s, Standard and Poor and Fitch have the credibility for such awesome responsibility; after all they are largely credited with causing the great recession. “Credit rating agencies (CRAs) — firms which rate debt instruments/securities according to the debtor's ability to pay lenders back — played a significant role at various stages in the American subprime mortgage crisis of 2007-2008 that led to the Great Recession of 2008-2009”(https://en.m.wikipedia.org/wiki/Credit_rating_agencies_and_the_subprime_crisis).
What they are doing to Richmond now is comparable to the ancient practice of throwing people into debtor’s prison. The practice ceased when somebody figured out that society would be better off if the debtor were out working to pay off his debt and supporting a family instead of rotting in prison. Bond rating agencies haven’t evolved to that level yet.
Because Moody’s didn’t like the way Richmond had used non-recurring revenue to balance its budget during a recession Moody’s played a significant role in causing, Moody’ downgraded the City’s bond rating, triggering a “termination event” for a 2005 pension obligation bond swap that could cost the City of Richmond as much as $1 million a year and triggering reduction in the number of police officers or closing of libraries and fire stations.
Richmond has never defaulted on a bond obligation in 110 years and has seen more serious financial crises than the recent one, but it is being treated by the bond raters like an irresponsible child. I personally met with Moody’s and pointed out numerous factual errors, many significant, that led to their bond rating decision, but they have not backed down. We have had better luck with the state auditor and controller, both of whom backed off a threat to audit the City, probably based on the bond rating reductions.
The City’s bond advisors continue to look for solutions with better outcomes, and the results may be better than anticipated.
Credit rating downgrades increase Richmond’s debt; council again warned about over-spending
Richmond Standard, Oct 7, 2015
Richmond’s recent credit rating downgrades — born from a perception in the financial markets that the city has a dangerous habit of spending more than it makes — is creating millions of dollars in additional debt.
On Tuesday, Richmond City Council was forced to approve the restructuring of a portion of its pension debt at an interest rate estimated to cost the city an extra $10 million over the life of the new loan. If council had declined to move forward with the recommended action, the city could have been slapped with a crippling $30 million payment and likely another damaging credit rating downgrade, officials warned.
The vicious financial cycle began when bond-rating agency Moody’s downgraded Richmond’s issuer rating in both May and August. Moody’s said perceived struggles to balance budgets raised concern over Richmond’s ability to pay off its mounting debts. For fiscal 2015-16, the city was forced to use all proceeds from Measure U, a tax promised for sustained road repair, toward plugging up a $9 million deficit.
The downgrade could potentially force the city to pay a $30 million bond termination fee and could eventually result in another downgrade, this time by S&P, which could cost the city another $25 million in fees.
In order to prevent further fiscal pain, city staff and consultants recommended that the city issue additional bonds to refund some of the related pension bonds and also to pay the termination fee.
Public finance attorney John Knox said Tuesday’s action was the best immediate step the city could take to steer away from financial crisis, but he advised over the longterm that the city rein in spending.
“In the longer term, the city has got to avoid over-spending its revenues,” Knox said. “And it has over the last several years done that. It’s had deficits in its general funds. It’s burned through a lot of cash…and that’s alarming to the markets. The city has an extremely thin margin of error in its budget.”
The city’s latest predicament drew fire from Councilmember Vinay Pimple, who argued that his fellow councilmembers ignored Moody’s downgrades.
“I just want to point out that when we had the first downgrade in May, immediately after the downgrade this council took up the space-based mind control weapons ban,” Pimple said. “When we were supposed to have the budget presented…council was obsessed about rent control.”
Time and again, Pimple has warned about council’s spending habits, arguing that few ideas have been pitched to create revenue beyond taxes. The $10 million the city just lost as the result of the credit downgrades could have boosted city services that council members have been trying to protect, Pimple said.
“It is about being honest about our expenses,” Pimple said. “People keep talking about how our budget was structurally balanced. It was not structurally balanced.”
Councilmember Gayle McLaughlin disagreed, saying the city doesn’t need to rein in spending and has passed balanced budgets.
“I don’t think the answer is austerity, I really don’t,” McLaughlin said, adding that the community needs the services in question. “I do not think this council has made poor decisions. I do not think the City Manager has made poor decisions keeping our services to their extent.”
Mayor Tom Butt has also defended the city’s financial status, saying Moody’s and S&P’s assessments were based on “erroneous information” that resulted in “inaccurate conclusions.” A threat to investigate the city’s financial practices by the State Controller’s Office was recently called off after Butt said the city proved it is not nearing financial failure.
But Pimple said the city should not celebrate a budget that had to be plugged by tax proceeds that were supposed to be used to fix city streets. He also said the city should be concerned that its rainy day reserves are $12 million, calling the amount “ridiculously low.”
“We went back on our word to the people on our use of Measure U funds,” Pimple said. “Out of those $8 million, every single dollar went into balancing the budget. That is how we did not get into a complete hole.”