Moody’s downgrades Long Beach's credit rating

Agency says outlook remains negative; drops rating to just two notches above junk bond status

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Moody’s Investors Service downgraded Long Beach’s credit rating from Baa1 to Baa2 on Wednesday — just two notches above what is considered junk bond status — saying that the city’s expenses have exceeded revenues and that officials have relied too heavily on its reserve fund and borrowing to balance the budget.

“That is our second-lowest investment grade, not as low as where they were in 2011 but a notch above that,” said Moody’s spokesman David Jacobson. “Baa3 is our lowest, and after that it gets into what everybody but us calls junk.”

The downgrade comes nearly a year after the agency revised the city’s credit outlook from stable to negative, citing years of operating deficits, structurally imbalanced budgets and “the City Council’s failure to approve budgeted borrowing to pay for operating expenses.”

That negative outlook remained, Jacobson said, and the city could face another downgrade over the next year or two if it does not return to structurally balanced budgets, improve and stabilize its reserves and liquidity and stop borrowing for operating expenses.

“Implementing structurally balanced budgets and stabilizing reserves will be key rating factors moving forward,” Moody’s said in its report.

Acting City Manager Rob Agostisi, who has been in the job for just two weeks, said he was disappointed by the news, which came as he was in the process of putting a new management team together, including hiring a new comptroller.

Following the departure of former City Manager Jack Schnirman after he was elected Nassau County Comptroller in 2017, the city had been without a permanent city manager and a full-time city comptroller, and Moody’s has said that the lack of a management team added to the city’s financial pressure.

“The city faces significant challenges and recognizes the need to generate new, recurring revenue streams to support its staffing structure and related services,” Agostisi said. “Locating those streams is absolutely critical in order to maintain all services, along with the city’s long-term resiliency projects. As the new acting city manager, this will be my first and foremost priority.”

If the city looks to borrow money or float bonds in the future, the downgrade could result in higher interest rates or lower the value of previously issued bonds, Moody’s has said. Earlier this month, the City Council voted to refinance $12.2 million in bonds that officials said would save the city $800,000 in interest payments.

Last year, Moody’s said that the city’s long-term debt was expected to increase to $92.2 million.

In a report released on Wednesday, Moody’s cited “deficits in excess of what was expected during our review [of the city] in May of 2018. The rating also reflects the moderately sized tax base with wealth levels that approximate regional averages, a weak financial position and an above average but manageable debt and pension burden.”

Following the issuance of deficit reduction bonds in fiscal 2014, Moody’s said that the city reduced its overall total operating fund balance — which includes the general fund and a debt service fund — from $11.4 million, or 15.8 percent of revenues, to less than $700,000, or less than 1 percent of revenues, at the end of fiscal 2018.

“The declines over the past two fiscal years were a combination of a planned use of reserves, revenues coming in under budget and expenses exceeding the budget, particularly in 2018,” Moody’s said in its report. “Reflective of the city's structurally imbalanced operations, management continues to issue debt to pay operating expenses and expects to continue this practice for the foreseeable future.”

The fiscal 2019 budget, the agency added, included $1.9 million to fund separation payments for employees that left the city.

“Implementing structurally balanced budgets and stabilizing reserves will be key rating factors moving forward,” Moody’s wrote.

Agostisi said that Moody’s had expected the city to have no less than $2.5 million in its reserve fund in the current fiscal year, but the fund has just $1.4 million.

“They’re concerned about the city’s revenues and expenses, which are not matching up,” Agostisi said.

A turn for the worse

In 2016, four years after the city was on the verge of bankruptcy, Moody’s had upgraded the city’s rating from Baa2 to Baa1 — the second upgrade in a year — and had given it a positive outlook on future bond upgrades.

But it became apparent last year that the city’s finances had  deteriorated, and State Comptroller Tom DiNapoli’s office put the city’s level of fiscal stress in the “significant” category, the highest level under DiNapoli’s Fiscal Stress Monitoring System. DiNapoli’s office is currently conducting an audit of the city.

When Moody’s gave the city a negative outlook last May, the agency said that although the city’s reserves and liquidity had improved in recent years, “the city’s financial operations have been structurally imbalanced resulting in annual draws on financial reserves.”

Moody’s said last year that the city had continued to issue debt to cover operating expenses, adding that failure to implement a structurally balanced budget for fiscal 2018-19 — one that does not rely on reserves to balance the budget — could lead to a downgrade.

After a 3-2 City Council vote defeated a proposed $2.1 million bond measure last year to cover separation payments and “draw downs” of employees’ accrued time in the 2017-18 fiscal year — amid questions over whether a number of employees were entitled to the payments — residents were shocked when officials said that the city might be unable to make payroll, since the borrowing measure had been included as revenue in the budget.

That sparked harsh criticism from residents, who said that just before Schnirman left office in January 2018, he had touted a $9.4 million surplus and said that the administration had turned the city's finances around after it inherited a financial crisis in 2012.

At a recent council meeting, council President Anthony Eramo said that an influx of federal and state disaster relief funds after Hurricane Sandy had masked the city’s financial problems.

Last May, following an outcry from residents over a proposed 12.3 percent tax increase — which officials had floated to help fill a $4.5 million deficit at the time —the City Council voted unanimously to approve a revised $95 million budget for the current fiscal year that avoided layoffs and drastic cuts to services, and reduced the tax increase to 8.3 percent after officials made a number of cuts.

“Despite [an increase] in property tax revenues, management projects that fiscal 2019 will end with an additional $775,000 decline in [the] general fund balance,” Moody’s said, adding that the city's tax base remains strong and continues to grow.

The city made attempts to generate more revenue last year, including a proposal to raise the cost of permit fees for special events like Irish Day and the Polar Bear Plunge. That proposal was expected to save the city $400,000 in expenses, but the council did not vote on the plan following a backlash from organizers.

Moody’s said that the city continues to actively manage costs associated with Sandy and other storms through a separate Federal Emergency Management Agency fund, which had a negative $2.1 million fund balance at the end of fiscal 2018.

“Management continues to work with FEMA and the state to get reimbursed for qualified expenses,” Moody’s said. “We expect that any expenses that are not reimbursed will result in additional long-term debt being issued.”