City Council-Will You Act Now? Bond ratings drop again

On September 24th El Cerrito’s bond ratings once again dropped. The Sales Tax Revenue bond rating dropped to BBB+ and the CA COP rating dropped to a BBB-. Google what BBB- means and you see that it is one step above junk bond.

Yesterday I posted a blog post about how at the last meeting there was an unwillingness to act on further cuts even though they were suggested by Councilperson Pardue-Okimoto at least twice during the meeting.

We just got an 8.5 million dollar TRAN loan a few months ago. Our normal bank did not take the loan so it went to the open market and ended up costing the city considerably more in interest. The reason that happened is because of a prior bond rating drop in November 2019 from A to BBB. With this new drop, it appears that the risk of not getting a TRAN loan for next year has also dropped. At a minimum, the cost of getting the loan has risen again.

The article on the drop to BBB- states

El Cerrito, CA COP Rating Lowered To ‘BBB-‘ On Negative General Fund Reserves And Reduced Expenditure Flexibility

SAN FRANCISCO (S&P Global Ratings) Sept. 24, 2020–S&P Global Ratings lowered its underlying rating (SPUR) to ‘BBB-‘ from ‘BBB’ on El Cerrito, Calif.’s certificates of participation (COPs) outstanding. The outlook is stable. 

“The lowered rating reflects our view of the weaker economic and financial circumstances under which the city is attempting to stabilize its budget and restore reserves,” said S&P Global Ratings credit analyst Tim Tung.

The COVID-19 pandemic and related recessionary pressures have further strained the city’s revenues, yielding an operating deficit for fiscal 2020 and pushing available fund balance further into negative levels based on unaudited actual results for fiscal 2020 provided by management. The city’s fiscal 2019 audit marks the third consecutive year in which the audit was transmitted with a “going concern” opinion by the auditor, which reflects the auditor’s concern about the city’s ability to meet required operating obligations, and we anticipate that this trend will continue for a fourth year when the fiscal 2020 audit is produced. The outlook is stable based on our view that the city’s corrective actions during the past year are adequate to at least maintain credit quality at the current rating level.

El Cerrito’s credit quality is currently driven by the city’s negative general fund reserve position. Although the city has been in the process of realigning the budget with a focus on restoring reserves, it now faces recessionary pressures that present diminished growth prospects as compared to last year, when the economy was in the late stages of an economic growth cycle. Also, based on unaudited actual results for fiscal 2020, we understand that the general fund produced a negative $2.3 million net result, which worsens the existing negative available fund balance and further sets the city back from its targeted reserve goals. 

While we acknowledge that the city has taken aggressive action during the past year to set in motion plans to achieve structural balance and restore reserves–including a rapid adjustment once the COVID-19 pandemic and economic recession injected additional complications–the expenditure cuts that the city has made and will be making further reduce its expenditure flexibility if needed in the future,” Mr. Tung added. “Given the expenditure reductions already made, any substantial additional expenditure reductions will likely require layoffs, which would likely be politically challenging. Finally, while the adjusted trajectory to restoring reserves still achieves the city’s stated goals, that trajectory is now starting from a lower point, is on a steeper incline than before, and reaches the goal at a later projected date.

Despite these challenges, we still view the city’s liquidity as very strong. We also note that the city’s otherwise robust tax base and close proximity to the San Francisco economy is limiting the downside effects of its current fiscal situation.”

The article dropping the sales tax bond rating to BBB+ states

El Cerrito, CA Sales Tax Revenue Bond Rating Lowered To ‘BBB+’ On Weakened Obligor Creditworthiness

SAN FRANCISCO (S&P Global Ratings) Sept. 24, 2020–S&P Global Ratings lowered its long-term rating to ‘BBB+’ from ‘A-‘ on El Cerrito Public Financing Authority, Calif.’s sales tax revenue bonds, issued on behalf of the City of El Cerrito. The outlook is stable.

“The downgrade reflects our view of the obligor’s creditworthiness weakening,” said S&P Global Ratings credit analyst Tim Tung. For more information on our view of the city’s overall creditworthiness, see our article published Sept. 24, 2020, on RatingsDirect.

The city benefits from a strong and stable local economy, as evidenced by continued assessed value growth, and its location within the San Francisco-Oakland-Hayward, Calif., metropolitan statistical area. However, the city’s general fund has experienced financial challenges during recent years resulting in weakening reserve levels, and leading to weaker creditworthiness, in our view, which limits the rating on these sales tax bonds.

Although sales tax revenue declined sharply in the fourth quarter of fiscal 2020 as the COVID-19 pandemic and related shelter-in-place activities constrained economic activity, we have observed some rebound in recent months although not to prerecession levels. While pledged revenue has experienced some volatility in recent years, coverage has remained strong. We anticipate at least stable performance in the near term, supported by an established sales tax base.“

So is another bond rating enough to act? One suggestion in the meeting was low hanging fruit. The non-management (non-public safety) staff are only furloughed through the end of the calendar year not the fiscal year. That is something that can be addressed quickly even if the benefits do not come into play until Jan 1st. It should have been already done.

The Public Safety budget is 50% of the budget and needs further evaluation. We can’t cut fire safety for obvious reasons so it is time to look at the ECPD. Chief Keith has previously stated that they are responding to fewer calls. He also stated that burglaries are down most likely due to so many more people being home. If you look at the weekly crime reports there are more and more days with no calls at all. Whether or not you support any change in police funding for racial and social justice reasons it is certainly worth looking at whether or not the largest piece of the pie is taking its fair share of the cuts. El Cerrito Progressives has reported 

“The ECPD will now take  31.2% of our city budget, and the proposed “restructuring” will take place over three years and still not address our concerns and demands to reimagine policing. , As Chief Keith explained, the savings they hoped (his word) would affect the ECPD budget were based on attrition, in other words, if an officer decides to leave the agency or retire the savings would kick in. These are aspirational reductions, and certainly do not affect the budget in a real way or address the concerns of so many residents. ”

The City Council and staff are continuing to move very slowly and not make significant enough cuts. As I reported in the last post we are projected to be only a few hundred thousand above what we need to pay the TRAN loan in June 2021. There is no way we move towards reducing the TRAN when we are still at risk of not being able to pay it at all. We ended FY 19/20 with an estimated 2.3 million dollar deficit because Council and staff were so slow to respond. El Cerrito was warned they were in trouble. Their own auditor brought up concerns in November of 2018 that they disregarded. Then they were told early in the 2nd quarter of FY 19/20 that the State Auditor (October 2019) considered the city at high risk of bankruptcy but action was delayed for months until the problem was compounded by the COVID 19 crisis.

We have been asking the City to act since the State Auditors report was issued. We beg them to act now.