The speculation posted here on Friday is now confirmed by Moody’s themselves. The City’s credit now sucks more. What’s most interesting about the downgrade is how clear Moody’s is in explaining exactly why they are downgrading, and then spelling out how to get out of this mess. Also, no where in this do they mention anything at all about Irene causing any of this as our soon to be departing Dear Leader told the Herald.
Now I’m sure a lot of you wonder “how could we be financially sound and improving in the Summer but now a financial disaster?” Don’t worry, Moody’s was kind enough to explain, and point a pretty big finger right at City Hall:
“Moody’s is also reviewing the city’s rating for withdrawal due to insufficient information given severe negative discrepancies between the city’s projections in August 2011 of reserve and cash positions and unaudited reporting of its fiscal 2011 results earlier this month.”
What’s that you say there? “Severe negative discrepancies”? In a nut shell, when Moody’s came in to look at the books and make their rating assessment they were told one thing, now they’re looking at reality, and it’s sadly very, very different. Was their analyst lazy? Were they not given the whole story? Were certain details like a crapload of pending lawsuits and a overtime disaster omitted?
Moody’s lays it out pretty clearly:
– Demonstrated ability to manage cash shortfalls in the near-term.
(Don’t spend more money than the City has)
– Continued ability to access the capital markets or privately place additional note borrowings.
(Keep borrowing money to fund big projects, slightly counter-intuitive, but Moody’s wouldn’t be in business if it didn’t encourage people to borrow money)
– Development of a financial plan to return the city to structural balance and begin increasing reserves in all funds.
(Make a budget that increases revenues while not spending more than we have)
Further, Moody’s basically says doing the opposite of this (not balancing the budget, and further shortfalls) would lead to yet more downgrades.
What does this mean for the city?
The City may be given worse interest rates when it goes to market to borrow money for things like covering payroll shortages. I emphasize may because banks use this rating in just one small part of how they determine how they loan money. To also get the City’s credit backup, it will have to raise revenue. Of course, that brings in that nasty “T” word, yup, taxes. So we either need our property values to go up, more people to move here, have an amazing summer season, or have super successful business so more money will be raised by our current tax structure, or else, they will have to go up. It’s not political, it’s just reality.
What does this mean to you?
Not much. In your wallet this really shouldn’t do anything. A downgrade A1 to Baa3 is actually only a one step drop on the road to having Greek-level “junk bond” credit. There’s 5 full steps between now and then. And also for a little history, the City only came off of a Baa1 rating in 2008, so this isn’t a particularly new position for the City to be in.
The greater impact is on what you should think of the politicians and the clowns running this City. Moody’s clearly states that they weren’t told the whole picture when they came in for their review, and because of that gave a rating that just wasn’t accurate. Convenient that that was right before a major election. Now that the election went the other way for those guys, it looks like the glue and tape that was holding this contraption together have effectively fallen off. I’ve always been a skeptic of anything coming out of a poltiican’s mouth, but after hearing months of gloating about this almighty credit rating, to see it yanked so quickly and so harshly is joke.
So, yet another mess for the new administration to have to attempt to stabilize. It would sure be great if there was a massive revenue-generating festival coming in six months to help with those cash shortfalls. Oh right, that was borked as well.
Full Press Release from Moody’s follows:
New York, December 20, 2011 — Moody’s Investors Service has downgraded to Baa3 from A1 the rating on the City of Long Beach’s (NY) $48.3 million outstanding General Obligation debt. Concurrently Moody’s has placed the rating on review for possible downgrade. The bonds are secured by the city’s unlimited general obligation pledge.
SUMMARY RATINGS RATIONALE
The downgrade to Baa3 reflects the city’s deteriorating financial position since 2008 marked by a lack of structural balance due to declining mortgage tax revenue and increasing expenditures. The rating also factors the city’s sizable tax base with above average wealth levels and a manageable debt burden.
The placement of the rating under review reflects the projected deficit fund balance in fiscal 2012 and a deteriorating cash position resulting in near-term liquidity strain.. The city recently issued Tax Anticipation Notes and a Budget Note in order to have sufficient cash to meet the December payroll. Projections show the city’s cash balance is expected to decline further and may require additional cash flow borrowings in the near term which will require market access. Moody’s is also reviewing the city’s rating for withdrawal due to insufficient information given severe negative discrepancies between the city’s projections in August 2011 of reserve and cash positions and unaudited reporting of its fiscal 2011 results earlier this month.
Effective January 1, 2012, all local governments in New York State will be subject to a property tax cap which limits levy increases to 2% or the rate of inflation, whichever is lower. While school district debt has been exempted from the cap, debt has not been exempted for all other local governments. Moody’s will continue to treat all general obligation debt issued in New York as an unlimited tax pledge through the end of the year. We continue to research what the impact of the new property tax cap will be on debt issued by nonschool districts after it goes into effect next year. For more information regarding the property tax cap please reference the Special Comment “New York State’s Property Tax Cap will Further Pressure Local Government Finances; School District’s Most Impacted” released July 5, 2011
– Large tax base with above average wealth levels
– Manageable debt position
– Significant weakening of financial position due to severe structural
– Cash position continues to deteriorate and projected to be depleted by
end of year, necessitating cash flow borrowing
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.