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Rating Action:

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

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 challenges.

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.

OUTLOOK

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

OBLIGOR PROFILE

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 lift stations.

LEGAL SECURITY

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 enterprise.

USE OF PROCEEDS

Not applicable.

PRINCIPAL METHODOLOGY

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 methodologies.

REGULATORY DISCLOSURES

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 are derived exclusively from existing ratings in accordance with Moody's 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 support provider's credit rating. For provisional ratings, 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 for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person(s) that paid Moody's to determine this credit rating.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Lori Trevino
Analyst
Public Finance Group
Moody's Investors Service, Inc.
One Front Street
Suite 1900
San Francisco, CA 94111
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Kristina Alagar Cordero
Asst Vice President - Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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
No Related Data.
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