CITY HALL — Moody’s Investor Service announced Tuesday that it would be reviewing Santa Monica’s gold-plated credit rating over concerns that six of its bonds reflected a higher level of certainty than they deserved.
Those six are lease-revenue bonds, a type of financial instrument which was used to pay for the Public Safety Facility, Main Library, Downtown Parking Structure, Civic Center Parking Structure and Parking Structure 6.
Of those, only Parking Structure 6 has yet to be completed.
A downgrade would likely result in higher future borrowing costs.
The review was prompted by a general weakness seen in California cities, which has manifested in bankruptcies and other fiscal emergencies, said Dave Jacobson, a spokesperson for Moody’s.
The agency took a look at roughly 90 cities that it rates and, of those, chose 30 to examine more closely for a potential downgrade.
“What we announced yesterday was the culmination of that,” Jacobson said.
The announcement, which city officials received a day before the general public, took City Hall by surprise because, unlike many California cities, Santa Monica doesn’t have drastic budget deficits and is nowhere near bankruptcy.
As it happens, Santa Monica is a victim of its own success.
Lease-revenue bonds are usually marked two grades below a city’s general obligation bond rating by industry standards. Santa Monica’s, however, was only one grade off.
It was that high rating that flagged the city for review, despite the fact that all three of the main credit agencies — Moody’s, Standard & Poor’s and Fitch Ratings — had reaffirmed its triple-A rating just six months ago.
“What we’re doing is reviewing whether that differential is accurate anymore with the stress that a lot of California is under,” Jacobson said.
Another area of concern is that the bonds represent competition for money out of the city’s General Fund along with payroll obligations, pensions, health care and other costs of doing business.
Cities across the state have seen weakened general funds in the past few years, particularly because of weak property taxes, which got a double whammy from the bursting of the housing bubble and the ongoing yoke of Proposition 13, a measure passed by voters in 1978 that capped property taxes at low levels.
The state’s “hands-off” approach to recent municipal bankruptcies also concerned Moody’s, Jacobson said.
In fact, Santa Monica has been fighting to keep the state slightly more hands off than it’s been so far.
City Hall announced that it would run a $100,000 deficit until a change in law at the state level caused a grab of redevelopment funds.
Despite that, officials and the City Council have improved the city’s reserves and kept pressure off of the General Fund by renegotiating contracts to get employees to contribute to the cost of their health care and pensions and paying down unfunded pension liabilities to the tune of $20 million.
“We’re perplexed, but I guess Moody’s review is understandable,” said Gigi Decavalles-Hughes, director of the Finance Department.
In a report issued in May, Moody’s reaffirmed Santa Monica’s triple-A rating, attributing it to a diverse tax base and “exceptionally strong” financial operations with “sizeable (sic) reserves.”
It did note, however, that Santa Monica faced some challenges because of tax revenue dependent on the tourism industry and that its residents were less wealthy than most cities with similarly high ratings.
Santa Monica was recently rated Los Angeles County’s third most valuable city, and showed a 4.6 percent growth in property values over the previous year.
Much of that bump came from increased sales and development including residential construction, remodels and tenant improvements.
All in all, the review has less to do with Santa Monica than the fiscal state of California as a whole, said City Manager Rod Gould.
“I think Moody’s is making an overall statement about their concern about California cities in general,” he said.