WASHINGTON May 14 Many California cities will
remain fiscally challenged over the next few years due to limits
on raising revenues and demands for pensions and other spending,
Moody's Investors Service said on Tuesday.
The agency said it downgraded the ratings on 27 cities'
obligations and upgraded the general obligation ratings of two
cities - San Francisco and Los Angeles - after reviewing all of
the 95 California cities it assesses.
The review was inspired by the bankruptcy filings of
Stockton and San Bernardino, California, to understand the risk
of future bankruptcy filings and the cities' current budget
conditions, Moody's said.
California stunned the $3.7 trillion municipal bond market
last year with three bankruptcy filings. Mammoth Lakes also
filed for creditor protections under Chapter 9 municipal
In general, lease-backed and unsecured bonds are at greatest
risk, Moody's said, noting that all three bankrupt cities
defaulted on some of the obligations. It downgraded all
lease-backed obligations that already had ratings below an
issuer's general obligation rating, it said.
"These bankruptcies reinforced our belief that large tax
bases and stabilizing economies are not sufficient by themselves
to assure repayment," Moody's said. "The risk to these general
revenue-backed obligations is markedly greater than to those
supported by a city's general obligation pledge."
Stockton neighbor Fresno suffered a raft of downgrades. Its
taxable pension obligation bonds were knocked down three notches
to Ba2 with a negative outlook, as 10 of its lease revenue
refunding bonds were cut two notches to Ba1 with a negative
outlook. Some revenue bonds issued by nearby Sacramento were
The median rating for California cities' general obligation
bonds "remains relatively high" at Aa2, Moody's said, a
reflection of "their fair success, so far, in adapting to the
new fiscal reality: moderate revenue growth compared to
pre-recession levels and continuing cost pressures."
"After some initial optimism for a quick economic recovery,
most cities adopted more realistic economic expectations and
implemented significant budget cuts, reestablishing, for the
most part, structural budget balance and stable credit quality,"
The revenues of inland cities, which grew during the housing
bubble will likely not return to pre-recession levels "in the
next few years," Moody's said. San Bernardino is the anchor of
the part of the state known as "The Inland Empire," while
Stockton sits in the Central Valley.
Coastal cities, meanwhile, are recovering faster.
Across the most populous state in the country, though,
pent-up spending demands will likely eat up improving revenues.
"After declining for two consecutive years, expenditures
picked up again in 2012, and on average this increase in
expenditures more than offset the modest revenue gains," Moody's
In Los Angeles, the state's biggest city, Mayor Antonio
Villaraigosa has proposed raising revenue, cutting spending, and
reducing funds for many city employees, to help close a $216
million budget gap. San Francisco also faces a shortfall, of
about $124 million, and officials expect costs to outpace
revenue growth over the next five years.
Another major rating agency, Standard & Poor's, said earlier
this month that it does expect to see more bankruptcy filings
Nonetheless, rating agencies are closely watching for the
effects of a rate increase approved by California's public
pension fund last month. The California Public Employees'
Retirement System, known as Calpers, changed the methods for
calculating future pension obligations and amount of money to
set aside to cover costs. In some cases contribution rates could
rise as much as 50 percent.
"Retirement costs, which are growing at disproportionate
rates to cities' general revenue growth, are an additional and
likely longer lasting pressure on expenditures," Moody's said.