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Credit agency downgrades Long Beach bond rating

Moody's Investors Service cites the city's use of reserves to balance its budget, and also gives a negative outlook.

Long Beach's credit rating is now two steps

Long Beach's credit rating is now two steps above junk bond status.  Photo Credit: Steve Pfost

Long Beach’s bond rating was downgraded Wednesday by a Wall Street credit rating agency concerned that the city could exhaust $1.4 million in reserves by the end of June.

Moody’s Investors Service reduced the city’s bond rating from Baa1 to Baa2, two steps above junk bond status. The rating was based on a rising deficit and expenses surpassing the city's 2018-19 budget of $95 million, according to Moody’s.

The bond rating greatly influences interest rates on bonds the city issues to borrow for expenses, including capital projects and budgetary items. The city’s rating was reviewed after Long Beach officials voted to refinance $12.2 million in bonds last week to save $800,000 in interest payments.

Moody’s downgraded Long Beach’s rating, citing a concern of the city’s inability to manage its budget, city officials said. Moody’s also maintained  its negative outlook on the city fiscally moving forward.

“The negative outlook reflects the challenges the city faces in returning to a structurally balanced budget, one that does not rely on non-recurring revenues for expenses,” Moody’s stated in its review.

Long Beach City Council members approved an 8.3 percent tax hike, which was reduced from a proposed 12.5 percent increase by then-acting City Manager Michael Tangney to close a $4.5 million deficit.

Moody’s officials downgraded the city for using reserves to balance the budget and projected the city could exhaust its $1.4 million in fund balance by the end of its fiscal year, June 30.

 "The city faces significant challenges and recognizes the need to generate new, recurring revenue streams to support its staffing structure and related services," acting City Manager Rob Agostisi said. "Locating those streams is absolutely critical in order to maintain all services, along with the city’s long-term resiliency projects.”

The city also faces a $400,000 shortfall after expecting to receive new revenue from hosting special events, such as Irish Day and the Polar Bear Plunge. The city council failed to vote on a special events ordinance to collect fees following backlash from organizers.

The city faced a $2.1 million deficit last year after the council failed to pass bonds to cover retirement and separation pay to employees, police and firefighters, including $300,000 owed to current and former administration employees who drew down sick and vacation time.

City Council members voted in June to borrow $1.8 million in bonds to cover anticipated city retirements for 2019, but cautioned they may need to issue additional bonds to cover unexpected retirement payouts at the end of the year. 

State Comptroller Thomas DiNapoli’s office is conducting an audit of city finances and the separation payments, which could be completed as early as this spring.

Moody’s officials said the city could face a further downgrade if its 2018 and 2019 fiscal results are worse than expected and available funds deteriorate by the end of the fiscal year.

The bond rating could also be downgraded again if the city passes a new budget that relies on reserves to balance the budget, according to Moody's.

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