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Rating Action:

Moody's downgrades Richmond, CA issuer rating to Baa1 from A1, pension bonds to Baa2 from A2, and places city and wastewater enterprise ratings under review for possible downgrade

13 May 2015

City has $396M in combined governmental and enterprise debt; rated debt includes $12M POBs and $12M wastewater revenue bonds

New York, May 13, 2015 -- Moody's Investors Service has downgraded the City of Richmond, CA's issuer rating to Baa1 from A1 and the rating on its 1999 Taxable Limited Obligation Pension Bonds (POBs) to Baa2 from A2. Concurrently, all city ratings were placed under review for possible further downgrade, including the wastewater enterprise's revenue bonds currently rated A2.

SUMMARY RATING RATIONALE

The downgrade to Baa1 of the city's issuer rating (implied GO) reflects the city's seriously weakened financial position, evidenced by negative available operating fund balances and very narrow liquidity. While the tax base is large and grew in 2015, total assessed valuation (AV) remains well below pre-recession levels. The tax base has high taxpayer concentration, with Chevron Corporation (Issuer Aa1/Stable) representing over a quarter of total 2015 AV. In 2014, despite declining revenues, the city increased expenditures, reflecting unusually weak budgetary management. With a $45 million cumulative deficit over the last six years, the 2014 audit emphasized that any further deficit spending would reduce the likelihood that the city will be able to continue as a going concern. This weakness is offset somewhat by new revenue in 2015 from a voter-approved sales tax increase. Debt levels are elevated, with exposure to variable rate debt and derivatives. Pension and OPEB liabilities are large and growing.

The downgrade of the POB rating incorporates the same elements mentioned above, as well as a one-notch distinction from the issuer rating to account for the limited levy available to pay debt service. Under California law, an unlimited ad valorem pledge of the tax base means the issuer must raise property taxes by whatever amount necessary to repay the obligation, irrespective of its underlying financial position. The city's pension override tax levy is limited to the pre-Proposition 13, voter-approved rate, regardless of any declines in the pledged revenues. Declines in the pledged pension override revenue could require the city to rely on other resources, which are currently extremely limited.

These ratings have been placed on review for possible downgrade, as well as the A2 rating on the city's wastewater revenue bonds. The wastewater enterprise has maintained a significantly better financial position than the city. The city's history of inter-fund borrowing and lending for cash flow and operations, including its enterprise funds, and its significant financial pressures going forward pose some risk to the wastewater enterprise. Our review will focus on the city's financial management, including what steps it will take to bring its operations into structural balance in the current and subsequent fiscal years, address large accumulated deficits in its operating funds, and manage the inherent revenue volatility stemming from its highly concentrated tax base. Additionally, our review will assess the level of risk posed by high levels of both variable rate debt and derivatives, the large sums advanced from city funds to support its port and storm water enterprises, and potential for financial pressure on the wastewater enterprise.

WHAT COULD MAKE THE RATING GO UP

• Strong management action to bring city operations into structural balance

• Steady and strong growth in the tax base

• Favorable resolution of contingent liabilities

WHAT COULD MAKE THE RATING GO DOWN

• Further deterioration of financial position and liquidity through continued deficit spending

• Decline in the tax base

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 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.

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.

RATING 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 debt 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.

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

Christian Richard Ward
Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Richmond, CA issuer rating to Baa1 from A1, pension bonds to Baa2 from A2, and places city and wastewater enterprise ratings under review for possible downgrade
No Related Data.
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