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04 Aug 2015
$316.9M combined city and wastewater enterprise debt; rated debt includes $11.2M POBs and $10.7M wastewater revenue bonds
New York, August 04, 2015 -- Moody's Investors Service has downgraded the City of Richmond, CA's
issuer rating to Ba1 from Baa1, 1999 Taxable Limited Obligation
Pension Bonds (POBs) to Ba2 from Baa2, and Series 2006 A wastewater
enterprise revenue bonds to Baa2 from A2. No outlook was assigned
and the review of ratings for downgrade was concluded.
SUMMARY RATING RATIONALE
This action concludes a review for downgrade initiated on May 13,
2015. At that time, Moody's downgraded the City of Richmond's
issuer rating (implied GO) to Baa1 from A1 and its pension obligation
bonds (POBs) rating to Baa2 from A2. The review for possible further
downgrade focused on the City's financial management, revenue volatility,
high levels of variable rate debt and derivatives, and large advances
to poorly performing operating and enterprise funds. Concurrently,
the A2 rating of the wastewater enterprise revenue bonds was placed on
review for possible downgrade. The review of the enterprise,
which has maintained a significantly better financial position,
focused on the potential financial pressure from the City's operations,
given the common management.
The current action downgrading the City's issuer rating (implied GO) to
Ba1 from Baa1 reflects the City's inadequate steps to address its long-term
structural imbalance in FYs 2015 and 2016, extremely narrow liquidity,
significant General Fund support of poorly performing cost recovery and
enterprise funds, and the risks associated with its high level of
exposure to variable rate debt and derivatives. Depletion of its
cash position over the last seven years has left the City with very little
flexibility to sustain its operations when faced with economic or fiscal
The downgrade to Ba2 from Baa2 of the 1999 POB rating incorporates these
same elements, as well as a one-notch distinction from the
City's issuer rating to account for the limited levy available to pay
debt service, bolstered by the senior lien against the levy associated
with the rated 1999 POBs. Under California law, a GO pledge
is an unlimited ad valorem pledge of the tax base whereby the issuer must
raise property taxes by whatever amount necessary to repay the obligation,
irrespective of the issuer's underlying financial position. Richmond's
pension override is a limited tax levy at the pre-Proposition 13,
voter-approved rate. Declines in the pledged pension override
revenue could require the City to rely on other resources, which
are currently extremely limited.
The downgrade to Baa2 from A2 of the Series 2006 A wastewater revenue
bond rating reflects the risk of the City borrowing from the wastewater
enterprise's sizable reserves for short-term liquidity purposes,
and the plan to issue additional debt in the near term for a substantial
capital program. Already incorporated within the rating is the
wastewater enterprise's high level of cash on hand, which is largely
offset by exposure to puttable variable rate debt and derivatives.
Factored positively into the rating is the recently adopted rate increases
to support debt service coverage requirements and fund capital projects.
Outlooks are usually not assigned to local government credits with this
amount of debt outstanding.
WHAT COULD MAKE THE ISSUER AND POB RATINGS GO UP
• Significant and sustained improvement in reserves and liquidity
• Strong management action to control expenditures and bring operations
into structural balance
WHAT COULD MAKE THE WASTEWATER REVENUE BOND RATING GO UP
• Sustained increase in debt service coverage level
• Significant improvement in the City's liquidity without borrowing
from the wastewater enterprise
WHAT COULD MAKE THE ISSUER AND POB RATINGS GO DOWN
• Further deterioration of financial position
• Decline in the tax base
WHAT COULD MAKE THE WASTEWATER REVENUE BOND RATING GO DOWN
• Significant depletion of cash reserves
• Decline in debt service coverage levels
The City of Richmond, CA encompasses 34 square miles on the western
shore of Contra Costa County (Issuer Aa2/Stable), with 32 miles
of shoreline on San Francisco Bay. Established in 1909 at the western
terminus of the Santa Fe Railroad, the City is a center for oil
refining, shipping, and transportation. The City burgeoned
during World War II, with the Kaiser Shipyards and naval fuel depot,
but experienced significant decline thereafter. Richmond is a charter
city, providing a full range of municipal services, as well
as a library. It operates the housing authority, sewer system,
storm water system, deep water port, and marina as enterprises.
Residents receive water service from East Bay Municipal Utility District
(GO Aa1/Stable). Like other California cities, Richmond's
redevelopment agency was dissolved in 2012. It had been an active
agency with a large staff and numerous project areas, generating
over $19 million in annual tax increment prior to dissolution.
The enterprise provides sewer services to approximately 18,000 residential
parcels and 2,100 industrial and commercial parcels. Sewer
charges are included on tax bills for residential customers and billed
for non-residential customers. The wastewater system includes
a collection system, treatment plan and disposal system.
The collection system consists of 185 miles of sanitary sewer pipes,
13 wastewater lift stations, 94 miles of storm water main lines,
3,300 catch basins, six miles of open ditch, 1,200
manholes, six miles of V ditch, and seven miles of storm water
The 1999 Taxable Limited Obligation Pension Bonds are secured with a senior
pledge of the City's 0.14% ad valorem secured pension override
property tax levy. It is a general obligation of the City,
which receives sufficient revenue from the county for its debt service,
which is then paid by the City.
The 2005 Taxable Pension Convertible Capital Appreciation Bonds are secured
by a subordinated pledge of the 0.14% ad valorem secured
pension override property tax levy. It is a general obligation
the City. The county collects the pledged tax revenue and pays
it directly to the trustee, net of the senior pledged revenue paid
to the City for the 1999 POBs. The Contra Costa County Board of
Supervisors has the power and obligation to levy and collect the City's
ad valorem secured pension override property taxes upon all property within
the City subject to taxation, limited to the voter-approved
rate of 0.14% (except certain personal property taxable
at limited rates) for use by the City for identified pension obligations.
The lease revenue bonds are secured by payments made by the Richmond Financing
Authority, which are the derived from rental payments made by the
City to the authority for the use and occupancy of recently renovated
civic center complex, and by the port enterprise to the authority
for use and occupancy of certain terminal facilities at the Port of Richmond.
The wastewater revenue bonds are secured by the net revenues of the wastewater
USE OF PROCEEDS
The principal methodology used in the issuer rating and pension obligation
bonds was US Local Government General Obligation Debt published in January
2014. An additional methodology used in rating the pension obligation
bonds was The Fundamentals of Credit Analysis for Lease-Backed
Municipal Obligations published in December 2011. The principal
methodology used in rating the wastewater revenue bonds was US Municipal
Utility Revenue Debt published in December 2014. Please see the
Credit Policy page on www.moodys.com for a copy of these
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
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rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
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this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The following information supplements Disclosure 10 ("Information
Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J)
of SEC Rule 17g-7") in the regulatory disclosures made at
the ratings tab on the issuer/entity page on www.moodys.com
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for additional regulatory disclosures for each credit rating.
Public Finance Group
Moody's Investors Service, Inc.
One Front Street
San Francisco, CA 94111
Kristina Alagar Cordero
Asst Vice President - Analyst
Public Finance Group
Moody's downgrades Richmond, CA issuer rating to Ba1 from Baa1, pension bonds to Ba2 from Baa2, and wastewater revenue bonds to Baa2 from A2; concludes review with no outlook assigned
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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