CITY HALL — A leading credit rating agency announced Monday that it would downgrade one of Santa Monica’s bond ratings, a move that could lead to higher borrowing costs in the future for City Council-approved bonds.
Moody’s Investors Service affirmed City Hall’s triple-A rating on its voter-approved general obligation bonds, but downgraded its lease-revenue bonds to AA2, the company’s third-highest rating.
That rating, which is a measure of how risky it is for investors to buy bonds, brings City Hall’s lease-revenue bond rating in line with industry standards and does not reflect real weakness on the part of Santa Monica’s finances, said Gigi Decavalles-Hughes, finance director with City Hall.
“We’re not operating under any different terms, and circumstances have not changed for us,” Decavalles-Hughes said.
Although City Hall isn’t planning for any additional lease-revenue bonds in the immediate future, there is some possibility that the decision could impact the costs of future borrowing, she said.
The repayment costs on the $87.6 million in outstanding debt will not likely be impacted.
Moody’s put dozens of California cities on review because of the weakness seen in their general fund revenues.
Unlike general obligation bonds, which are paid back using property tax revenues, lease-revenue bonds lean directly on cities’ general funds, flexible accounts with money that can be used for most city costs.
Santa Monica used lease-revenue bonds to pay for the Public Safety Facility, the Civic Center Parking Structure, the expansion and rebuild of Parking Structure 6 and all of the Downtown parking structures, Decavalles-Hughes said.
California comes with a number of roadblocks that prevent its cities from raising general fund money, notably Proposition 13, a 1978 ballot measure that capped the increase in property taxes, a major source of revenue for local government, said Dave Jacobson, a spokesperson for Moody’s.
Moody’s now believes that all of the bonds backed by general funds should run at least two rating “notches” below the grade for the general obligation bonds because of the strain that general funds are under to meet their commitments like paying for police, fire, parks and pension costs, Jacobson said.
At least four California cities have filed for bankruptcy in 2012 including San Bernardino, Vallejo, Stockton and Atwater, and the credit rating agency warned in October that more may follow.
“At the end of the day, the ratings state what we believe the risk is to bondholders and what the likelihood is that they will be paid when the bonds mature,” Jacobson said.
Overall, Santa Monica still leads in that category.
Santa Monica’s general obligation bonds come with a triple-A rating, the highest score that Moody’s offers.
A May 2012 report by Moody’s reaffirmed the rating, citing the city’s “large and diverse tax base” and “exceptionally strong” financial operations with high reserves.
Local sales tax came in 6 percent higher than budget estimates in 2012, due in part to the opening of the Santa Monica Place mall, and the half-cent transaction and use tax approved by voters in 2010, which was expected to raise $5.7 million annually for City Hall’s coffers.
Other sources of income depended on tourism, in particular a tax on hotel rooms, which was expected to increase by 5.7 percent in the 2012 fiscal year.
Fund balances were on the rise through 2012, the report noted, and overall debt represented only 1.7 percent of the city’s total assessed value.
The biggest threat noted in the report to the general fund remained the dissolution of the city’s Redevelopment Agency, an entity that paid for capital improvement projects to improve blighted areas of the city.
Depending on how that agency is unwound, Moody’s reported that the estimated net impact on the general fund could range from $2 million to $12 million.