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Moody’s Report on California Cities' Fiscal Vulnerability Issued

Promises to Review and Report on All Rated Municipal Debt Issues in Next Six Weeks

August 20, 2012

Moody’s Investor Services issued a report on Aug. 17 entitled, “Why Some California Cities Are Choosing Bankruptcy,” that examines the growing fiscal pressure on California cities that have prompted four cities (out of 482) to seek Chapter 9 federal bankruptcy protection recently — three in the last few months.


The report accurately assesses the growing fiscal pressures on cities due to the recession that have caused property values and property and sales taxes to plummet in many cities. The report also accurately analyzes the revenue raising restrictions placed on cities by Proposition 13 and the fact that once affordable employee benefits now are unsustainable in the current fiscal environment.

Two aspects of the report seem premised on incorrect information or conclusions, however, and will be of particular interest to city officials. First, Moody’s incorrectly concludes that cities in California are less vulnerable to state spending reductions than other local governments. Having just sustained the devastating diversion by the state of $130 million in local vehicle license fee revenues and the senseless abolition of the $5 billion local redevelopment program that generated $2 billion annually in state and local tax revenues, it is hard to see how California cities have been spared from suffering the slings and arrows of the state's reductions. Later in the report, however, Moody's acknowledges this when it writes: "in fact, since the state has had its own severe fiscal challenges, in recent years it has more likely exacerbated local governments’ fiscal stress by borrowing and shifting money from local governments."

Secondly, the suggestion that greater state oversight of local finances may be called for when California state government has operated with a chronic budget deficit of its own for many years and the Pew Center on the States has reported it has had the nation’s worst credit rating over the past 11 years is more than ironic. Despite crushing financial conditions, the vast majority of California cities have maintained a very strong commitment to honoring their financial obligations by making tough spending cuts, raising local taxes and fees when possible, and partnering with employees and residents to avoid even deeper service cuts. 

The report indicates Moody's rates debt issues for about 20 percent of the state's 482 cities and closes by saying: "We expect to be reviewing data for all California cities (whose debt Moody's rates) in the coming weeks and in depth reviews of stressed cities in the month of September. The results of these reviews will be communicated as they progress and any rating or outlook changes will be announced at that time."


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