Although critics will find plenty of negativity to delight them in this report, the fact remains that Standard & Poor Rating Services has recognized that Richmond’s fiscal affairs are headed in the right direction and will improve if the City Council adopts a structurally balanced budget for 2015-16 and a sustainable five-year plan.

The Report summary states:

Outlook
The stable outlook reflects our view that the city's performance of a multiyear financial forecast should enable management to identify and implement gap solutions that keep budgetary flexibility from weakening. Providing additional support for the ratings is the city's participation in a broad and diverse metropolitan area. We do not anticipate changing the rating during the two-year outlook horizon.

Upside scenario
A higher rating is possible if financial performance is consistently balanced and management puts a credible plan in place to maintain balance over multiple years.

Downside scenario
We could consider a negative rating action in the event budgetary flexibility becomes very weak or if we come to believe the city's capacity to cut spending has become limited given an inability to restore and maintain structural balance with ongoing solutions.

City Manager Bill Lindsay commented, “All in all, this is the best news that we could have hoped for.  I will distribute the published report as soon as I receive it…Certainly, there is much work to do regarding the City's finances, but this is a step in the right direction.”

Richmond, CA Ratings Affirmed And Removed From CreditWatch On Lowered Liquidity Risk

• 23-Dec-2015 19:11 EST

View Analyst Contact Information
SAN FRANCISCO (Standard & Poor's) Dec. 23, 2015--Standard & Poor's Ratings
Services affirmed its 'BBB+' issuer credit rating (ICR) on Richmond, Calif.,
and its 'BBB' long-term rating and underlying rating (SPUR) on the city's 2009
lease revenue bonds. At the same time, we removed the ratings from
CreditWatch, where they had been placed with negative implications on Sept. 1,
2015. The outlook is stable.

The CreditWatch action reflects our view of the city's resolution of JPMorgan
Chase Bank N.A.'s early termination option of the swaps related to the pension
funding bonds series 2005B-1 and B-2, eliminating an immediate contingent
liquidity risk.

RELATED CRITERIA AND RESEARCH

Related Criteria

• USPF Criteria: Local Government GO Ratings Methodology And Assumptions,
• Sept. 12, 2013
•  
• USPF Criteria: Financial Management Assessment, June 27, 2006
•  
• USPF Criteria: Debt Statement Analysis, Aug. 22, 2006
•  
• USPF Criteria: Appropriation-Backed Obligations, June 13, 2007
•  
• USPF Criteria: Assigning Issue Credit Ratings Of Operating Entities, May
• 20, 2015
•  
• Criteria: Use of CreditWatch And Outlooks, Sept. 14, 2009
•  

Related Research

• S&P Public Finance Local GO Criteria: How We Adjust Data For Analytic
• Consistency, Sept. 12, 2013
•  
• Standard & Poor’s Earthquake Model, Oct. 25, 2012
•  

Complete ratings information is available to subscribers of RatingsDirect at
www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by
this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column.

Standard & Poor's Ratings Services affirmed its 'BBB+' issuer credit rating (ICR) on Richmond, Calif., and its 'BBB' long-term rating and underlying rating (SPUR) on the city's 2009 lease revenue bonds. At the same time, we removed the ratings from CreditWatch, where they had been placed with negative implications on Sept. 1, 2015. The outlook is stable.

The CreditWatch action reflects our view of the city's resolution of JPMorgan Chase Bank N.A.'s early termination option on the swaps related to the pension funding bonds series 2005B-1 and B-2, eliminating an immediate contingent liquidity risk. We understand that JPMorgan Chase Bank will transfer the swap agreements to Royal Bank Of Canada (RBC). In addition, the swap agreement with RBC will be amended to remove Moody's ratings from the ratings termination events and lower the Standard & Poor's downgrade trigger on the ICR to lower than 'BBB'.
The rating on the bonds is one notch lower than the ICR, in accordance with our criteria, to reflect the appropriation risk associated with appropriation-backed obligations. The lease revenue bonds are payable from a pledge of lease payments made by the city, as lessee, to the Richmond Joint Powers Authority, as lessor, for the use of certain city facilities. The city has covenanted to budget and appropriate for lease payments. We evaluated the seismic risk of each leased asset pursuant to our criteria and estimated that none of the leased assets has a greater than 5% probability of incurring more than 25% damage during the life of the bonds. The series 2016 bond proceeds will be used to fund the termination payments for the lease revenue bonds (civic center) series 2007 basis swap and series 2009 swaption with RBC.
The ratings reflect our view of the city's:

• Strong economy, with access to a broad and diverse metropolitan statistical area (MSA);
• Weak management, despite "standard" financial policies and practices under our Financial Management Assessment (FMA) methodology;
• Very weak budgetary performance, with operating deficits in the general fund and at the total governmental fund level in fiscal 2014;
• Adequate budgetary flexibility, with an available fund balance in fiscal 2014 of 6.0% of operating expenditures;
• Weak liquidity due to non-remote contingent liabilities exceeding 10% of general fund revenues; 
• Very weak debt and contingent liability position, with debt service carrying charges at 8.9% of expenditures and net direct debt that is 286.5% of total governmental fund revenue; and
• Strong institutional framework score.

Strong economy
We consider Richmond's economy strong. The city, with an estimated population of 107,346, is located in Contra Costa County in the San Francisco-Oakland-Hayward MSA, which we consider to be broad and diverse. The city has a projected per capita effective buying income of 88.3% of the national level and per capita market value of $126,081. Overall, the city's market value grew by 8.9% over the past year to $13.5 billion in 2016. The county unemployment rate was 6.2% in 2014.

Richmond is located on the western shore of Contra Costa County. The Chevron refinery represented 23% of the taxable assessed value (AV) in fiscal 2015 (the most recent year reported by the city). The city reports no pending Chevron appeals. We understand that the 14% decline in fiscal 2014 AV is attributable to the Chevron fire. In addition, the county incorrectly included the value of a parcel twice in its fiscal 2013 AV calculations.

The Chevron refinery is the largest employer in the city with 3,517 employees, equal to about 2% of total city employment, according to the city. The city's other leading nongovernmental employers include The Permanente Medical Group (698 employees); Kaiser Foundation Hospitals (506); Bio-Rad Laboratories (473); and Michael Stead Auto Depot & Sales (472). West Contra Costa Unified School District (1,580) and the Social Security Administration (1,259) are also among the leading city employers. The economy also includes heavy and light manufacturing and a multiterminal shipping port. Recent new development includes the city's selection as the future site of the Berkeley Global Campus at Richmond Bay.

Weak management
We view the city's management as weak, despite "standard" financial policies and practices under our FMA methodology, indicating the finance department maintains adequate policies in some but not all key areas.

Highlights of the city's management practices include presentation of monthly reporting of investment holdings to the council and the maintenance of a five-year rolling capital plan. The five-year financial forecast for operations was recently updated through fiscal 2021. The full city council performs budget review only at midyear. The city has an investment, debt management, and swap policy. It also has a reserve policy to maintain a minimum of 7% of the next year's budgeted general fund expenditures in reserve.

Very weak budgetary performance
Richmond's budgetary performance is very weak in our opinion. The city had operating deficits of 7.1% of expenditures in the general fund and of 10.3% across all governmental funds in fiscal 2014.
We consider the city's general fund budget to be structurally imbalanced and management does not yet have a plan in place that is sufficient to address the imbalance, which is a negative credit factor. General fund performance includes three consecutive years of deficits through fiscal 2014. The city's unaudited actual general fund results for fiscal 2015 are positive, and the general fund budget for fiscal 2016 is balanced. However, after adjustment for one-time sources, the general fund for fiscal 2015 remains imbalanced. In addition, the city's recent five-year baseline forecast shows that general fund expenditure growth is unsustainable without corrective actions. The baseline forecast includes an annual deficit of $4 million to $9 million in fiscal years 2017 to 2021 primarily as a result of the expiration of Chevron utility user tax settlement payments and elimination of one-time revenue and expense savings. The baseline forecast doesn't include increases to base wages or the impact of setting aside funds for long-term unfunded liabilities for the retiree health trust, and for maintenance of city roads, buildings, and parks. Although the city reports that staff will continue to examine opportunities for organizational restructuring, additional cost reductions and efficiencies, and new revenue opportunities, the city has not yet identified specific budgetary reforms that would ensure a structurally balanced budget.

The city is projecting balanced general fund operations for fiscal 2015. However, after adjustment for one-time revenue, general fund results would be negative 4.4%. For fiscal 2015, these one-time sources include $1.8 million of redevelopment successor agency pass-through funds. The city deferred all negotiated salary increases due during fiscal 2015 to fiscal 2016. In addition, the city received $9.3 million under an interest rate swaption agreement with Royal Bank of Canada, $5.9 million of which it used to pay debt service in fiscal 2015 for the series 2009 (civic center) lease revenue bonds. The city also plans to use the remaining $3.4 million of to pay a portion of the fiscal 2016 debt service but has also included the full cost of debt service in the budget.

Fiscal 2016 budgeted general fund revenue includes a 28% increase in sales and use tax revenue as a result of Measure U, which voters approved in November 2014. The measure increases the sales and use tax by half a cent effective April 2015. The fiscal 2016 general fund budget cuts spending in 14 of 16 departments, according to management. We understand that the fiscal 2016 budget also includes all negotiated salary increases deferred from fiscal 2015 to fiscal 2016 and negotiated salary increases for fiscal 2016. The city estimates the swap restructuring will add about $179,154 of costs in fiscal 2016, and roughly $1 million of costs in both fiscal years 2017 and 2018, before costs decline gradually to a little more than $100,000 annually through fiscal 2038.

Adequate budgetary flexibility
Richmond's budgetary flexibility is adequate, in our view, with an available fund balance in fiscal 2014 of 6.0% of operating expenditures, or $8.0 million.

Based on the city's current projections, we do not anticipate a change in the budgetary flexibility score through fiscal 2016. In recent periods, one-time revenue and expenditure solutions have supported the fund balance. Although we believe there is some capacity to cut additional spending, we could consider the city's capacity to do so limited if management does not restore and maintain structural balance with ongoing solutions.

Weak liquidity
In our opinion, Richmond's liquidity is weak, with total government available cash at 19.3% of total governmental fund expenditures and 2.2x governmental debt service in 2014. Weakening Richmond's liquidity profile, in our assessment, are non-remote contingent liabilities that exceed 10% of general fund revenues. In our view, the city has strong access to external liquidity if necessary.
We understand that the early termination option of JPMorgan Chase Bank for the swaps related to the pension funding bonds series 2005B-1 and B-2 was triggered when the Moody's credit rating was lowered to less than 'Baa2'. The early swap termination option contingent liability risk will be eliminated through an agreement by JP Morgan Chase Bank N.A. to transfer the swaps to RBC. RBC will remove Moody's ratings from the termination events and lower the rating termination event on the Standard & Poor's ICR to lower than 'BBB'. The city reports that the RBC swap agreement will add a mandatory tender in 2023, but that the swap fixed and floating rates will remain unchanged. We view the city’s swaps related to the series 2005B-1 and 2005B-2 as a non-remote contingent liability risk given the ICR of ‘BBB+’ is within two-notches of the swap agreement rating termination events. After the swap transfers and terminations, the city will have four swaps outstanding related to pension funding bonds series 2005B-1 and 2005B-2, variable-rate wastewater revenue refunding bonds series 2008A, and tax allocation refunding bonds (merged project areas) series 2010A, which are currently rated above the ratings termination events.
Although the state allows for investments that we view as permissive, we believe the city does not currently have aggressive investments. The city investment policy authorizes investments that are rated 'A' or higher for most types of investments. ('A' is the top rating category for money market mutual funds.) The city also invests in state investment pools.

Very weak debt and contingent liability profile
In our view, Richmond's debt and contingent liability profile is very weak. Total governmental fund debt service is 8.9% of total governmental fund expenditures, and net direct debt is 286.5% of total governmental fund revenue.

The city's direct debt excludes business-type activities debt and includes $113 million of debt issued by the former redevelopment agency. We understand the city has no plans to issue additional debt within the next two years.

We understand that previous litigation related to a land development agreement and a petition filed by other taxing entities disputing the city's share of a property tax reimbursement paid to Chevron that we had viewed as speculative contingent liabilities were settled in the city's favor. In addition, the city's proposed program for mortgage principal reduction for residential property owners through eminent domain is no longer under active consideration.

Richmond's combined required pension and actual other postemployment benefits (OPEB) contributions totaled 9.6% of total governmental fund expenditures in 2014, with 8.6% representing required contributions to pension obligations and 1.0% representing OPEB payments. The city made its full annual required pension contribution in 2014.

The city provides retiree pension benefits through the California Public Employees' Retirement System, and has contributed the actuarially determined annual required contributions (ARC). The combined pension ARC plus OPEB contribution was less than 10% of total governmental funds expenditures for fiscal 2014. The city's pension tax override, a voter-approved property tax (14 cents per $100 of AV), is deposited into the secured pension override fund and excess revenue, after payment of annual debt service for the pension obligation bonds, can be used only to pay for eligible pension costs.

Strong institutional framework
The institutional framework score for California municipalities required to submit a federal single audit is strong.

The institutional framework score is based on the state legislative and functional environment under which these local governments operate, including a framework that encourages transparency by requiring these local governments to perform annual financial statement audits of its entire operations if it is subject to the federal single-audit requirement due to federal awards in multiple programs exceeding $500,000 per year.

Outlook
The stable outlook reflects our view that the city's performance of a multiyear financial forecast should enable management to identify and implement gap solutions that keep budgetary flexibility from weakening. Providing additional support for the ratings is the city's participation in a broad and diverse metropolitan area. We do not anticipate changing the rating during the two-year outlook horizon.

Upside scenario
A higher rating is possible if financial performance is consistently balanced and management puts a credible plan in place to maintain balance over multiple years.

Downside scenario
We could consider a negative rating action in the event budgetary flexibility becomes very weak or if we come to believe the city's capacity to cut spending has become limited given an inability to restore and maintain structural balance with ongoing solutions.