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Berkeley under review by Moody's for possible credit downgrade

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OCTOBER 11, 2012

Moody’s Investors Service announced Tuesday that Berkeley would be one of 32 California cities whose bond credit ratings will be under review.

Berkeley will be joining cities including San Francisco, Los Angeles and Oakland for review. Of the 32 cities, only Los Angeles and San Francisco are under consideration for upgrades, while the remaining cities are being considered for credit rating downgrades.

The credit agency pointed to three of Berkeley’s lease-backed revenue bonds to be reviewed, said Moody’s spokesperson David Jacobson. Jacobson expects the results of the review to be released within the next 90 days.

Jacobson said bond ratings indicate to prospective investors what the chances are that “one, that they’ll get fully paid back, and two, the likelihood of a default.” Current bond ratings for the three leases under review stand at Aa3, Aa3 and A1 — all rather high on the credit rating scale.

He pointed to the severe economic situations in many California municipalities as part of the reason that Berkeley is now under review.

“The state is clearly trailing the rest of the country when it comes to the economy,” Jacobson said. “There have been 52 (California) cities that have declared fiscal emergencies, and over the summer, you’ve had three declare bankruptcy.”

Given the current economic environment, City Auditor Ann-Marie Hogan said such reviews were to be anticipated.

“It’s not surprising that the rating agency is looking at California cities in general,” Hogan said in an email. “California cities have less flexibility in responding to tough economic times because of their limited ability to adjust taxes (due to Proposition 13).”

Prop. 13 is a California initiative voters approved in 1978. The proposition decreased property taxes statewide and made the passage of local special taxes more difficult.

Still, Hogan and city spokesperson Mary Kay Clunies-Ross downplayed the significance of the review, citing other strengths the city has in bond ratings.

For one, the review does not look at Berkeley’s general obligation bond ratings — bonds that are more of “an indicator of how the City is doing in general,” Hogan said in the email.

Standard & Poor’s — one of the main investment services besides Moody’s — rates Berkeley’s GO bonds as AA+, said City Manager Christine Daniel in an email. Moody’s gives Berkeley’s GO bonds a rating of Aa2, Jacobson said. Both are some of the highest ratings the agencies issue.

But Hogan said two of the three bonds under review by Moody’s may not even come into significant consideration.
“There does not appear to be significant impact to Berkeley if the bond rating were to affect these three bonds,” Hogan said in an email. “One rather odd fact is that two of the three bonds they will be reviewing were just refinanced at a substantial savings to the city.”

Jaehak Yu is the lead city government reporter. Contact him at [email protected].

OCTOBER 11, 2012

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