March 23rd, 2012
Long Beach, NY – As the new administration begins moving forward in response to the $10 million deficit inherited from the previous administration, Moody’s Investors Service issued an interim review affirming Long Beach’s current rating and negative watch. After analyzing the size of the inherited fiscal deficit, Moody’s determined that the City’s financial deterioration was “far larger than anticipated” based on the information they had received form the previous administration. However, Moody’s lauded the new administration for the response thus far – declaring fiscal crisis and “slowing expenditure growth,” specifically by saving the City $1.2 million in reduced overtime costs, lower overall management salaries, and amortizing state pension payments.
Moody’s stated that the work the new administration has done thus far to responsibly handle what they have inherited has helped the City avoid another rating downgrade at this time. Moody’s affirmed Long Beach’s current rating, maintaining the City’s access to capital markets and citing the importance of continuing to use cash flow borrowing as a bridge to expected incoming revenues. As a direct result of Moody’s guidelines for improving the City’s bond rating, the City will be looking to go to market for $6 million in Revenue Anticipation Notes at a special City Council meeting on Tuesday, March 27 at 7pm.
In Moody’s ratings review, the following challenges were indentified:
- “The city’s newly-appointed financial manager attributes the budget deficit to the previous management team’s overly aggressive estimate of revenues and failure to control expenditures.”
- “With the continued decline in the city’s financial position, maintaining adequate cash flow for operations has become increasingly difficult. In December 2011 the city issued a $1.75 million budget note and a $1.5 million tax anticipation note to make payroll in December and pay for employee termination payments. The city has $631,419 in debt service payments due through the end of April, which according to management will be paid with cash currently on hand, currently at approximately $5 million. However, cash continues to decline and the city expects to issue additional short-term notes in April to raise cash for ongoing liquidity needs. Absent the additional cash flow borrowing in April the City may not have enough liquidity to make future debt service payments in June of 2012.”
- “The city’s General Fund’s position has been in decline for the past four years, declining to an estimated negative $7.4 million at the end of the FY 2012 from a high of $8 million in FY2008. In addition, the city’s Water Fund, Sewer Fund, and Risk Retention Funds are all expected to end the year with negative fund balances. Management projections indicate that failure to address the city structural problems will increase the budget deficit to nearly 25% by the end of fiscal 2015.”
- “Positively, the city’s declaration of a fiscal crisis in February gives the city manager greater control over expenditures which have contributed to year over year deficits. This action has already led to a reduction in overtime expenses by nearly 70%. Management also notes that since January the new administration has reduced expenditures by $1.2 million from mid-year projected spending levels. Additionally, management is actively working with collective bargaining units to achieve savings including offering the CSEA an early retirement incentive.”
Moody’s also gave the City information concerning its outlook for the future, stating “Moody’s continues to review the city’s rating for possible downgrade, in the context of its deteriorating financial position and liquidity. Specifically, our review is focusing on the city’s ability to access the capital markets for short-term cash flow borrowing, as well as management’s ability and willingness to improve the city’s financial position and liquidity.”
The following is a list of what could cause the rating to go up or down:
WHAT COULD CHANGE THE RATING – UP (REMOVAL OF WATCHLIST ACTION):
- Demonstrated ability to manage cash shortfalls in the near-term.
- Continued ability to access the capital markets or privately place additional note borrowings.
- Development of a financial plan to return the city to structural balance and begin increasing reserves in all funds.
WHAT COULD CHANGE THE RATING – DOWN
- Failure to return to structurally balanced operations
- Further liquidity declines.
Since a key credit rating criteria used by Moody’s is liquidity, or a projection of balances in the future, Long Beach is issuing revenue anticipation notes now which will have a maturity after the receipt of next year’s property tax bills and seasonal revenues. This ensures that the City will be able to perform essential services while the gap-closing measures take effect. This borrowing serves as a bridge to allow the City to make the necessary changes to balance the budget going forward. If this borrowing did not take place, the City would have been forced to immediately layoff 20-30% of its staff.