I am happy to report that, after its regular periodic review of the City’s financial condition, S&P Global Ratings has raised the City of Richmond’s issuer credit rating (ICR) to “A-“ from “BBB+”.  By definition of its rating categories:

An obligation rated 'A' (Richmond is A-) is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitments on the obligation is still strong.

While the City is not accessing the credit markets at the current time, the upgraded credit rating would lower the cost of future borrowing.  Perhaps more importantly, it serves as an important indicator regarding the overall financial health of the City.  The analysis and report (http://www.ci.richmond.ca.us/DocumentCenter/View/45270) that accompanies the revised credit rating is also informative as to current and future financial management policies.

I have provided an excerpt below from the S&P Global Ratings report, with annotations referencing my specific comments:

Excerpt from S&P Global Ratings Report:

S&P Global Ratings raised its issuer credit rating (ICR) to 'A-' from 'BBB+' on Richmond, Calif. At the same time, S&P Global Ratings raised its long-term rating and underlying rating (SPUR) to 'BBB+' from 'BBB' on the city's 2009 lease revenue bonds and series 2016 lease revenue bonds. The outlook is positive.

The rating action is based upon our view of the city's recent track record of stable to positive budgetary performance, coupled with management's expectations that this will continue through the current fiscal year.  As a result we no longer consider the city to be structurally imbalanced under our Local Government GO Ratings criteria. The removal of the structural imbalance criteria rating cap lifts the rating to a full rating category (three notches) above the previously amended RBC swap agreement rating termination event of lower than BBB. In addition, we anticipate that the city will increase its budgetary flexibility to a level that we view as strong, or above 8% as a percent of operating expenditures.

The positive outlook is based upon our view that there is a one-in-three chance of a further rating upgrade, of potentially by more than one notch, if the city's fiscal 2017 audit approximates the general fund net results in the unaudited actuals and if the city also maintains at least stable fiscal 2018 and 2019 results. At the same time, the rating and outlook incorporate our view that the city's large pension and other postemployment benefit liability and the lack of a credible plan to address the large obligation could represent a drag on operating performance.

Comments by City Manager Bill Lindsay on the S&P Report:

• S&P comments specifically on the City’s recent history of balancing its budget, and indicates that they “no longer consider the city to be structurally imbalanced…”  Attaining structural budget balance has been a focus of the City Council for the past several years, and this focus clearly needs to continue if the City is to maintain its financial health and achieve the further rating upgrade that is possible, as described in the report.

• The S&P Report describes budgetary flexibility as “strong,” which reflects the improved liquidity (cash balances) that has been increased over the past several years.

In sum, the two factors specifically cited by S&P in upgrading the City of Richmond’s issuer credit rating are (1) a structurally balanced budget, and (2) cash in the bank.  These factors will continue to be emphasized by staff as we discuss the budget at mid-year and as we move in to the FY 2018-19 budget year:  balance the budget and maintain healthy cash reserves.

• S&P has assigned a “positive outlook” which is an improvement from the most recently evaluated “stable outlook.”   In short, S&P notes that a future ratings upgrade is possible if the City achieves the financial objectives (balanced budget and healthy liquidity) discussed above.

• Finally, and certainly not to be overlooked, is the notation to S&P’s report regarding “the city's large pension and other postemployment benefit liability.”  There are clearly challenges ahead for the City as it works to balance the budget and increase cash reserves; these challenges include increased annual pension costs from CalPERS and other post-employment benefits (OPEB).  These issues will need to be at the forefront of the City Council’s short- and long-term budget discussions during the months ahead.