Moody’s Investors Service, the credit-rating agency that downgraded Long Beach’s rating five levels last year to a step above junk bond status, is calling the city’s effort to reduce its deficit a “credit positive,” though the agency acknowledged that the city may need to continue its cash-flow borrowing.
The announcement came after the City Council voted 3-2 on Sept. 19 to approve a three-year, 6.6 percent “deficit reduction surcharge,” or tax, to pay down a nearly $10 million deficit. The surcharge will bring the total tax increase to 14.5 percent this year.
In its Sept. 27 Weekly Credit Outlook, Moody’s said that the surcharge, which will raise $1.9 million annually and reduce the city’s accumulated deficit, “reflects positively on city management and demonstrates their willingness and ability to improve its financial operations.”
The surcharge will be instituted over the next three fiscal years, unless the state approves the city’s request to issue millions of dollars in deficit-reduction bonds. Because the State Senate denied the city’s request to finance its deficit over 10 years at a lower interest rate in June, Moody’s said that “the tax increase is an effective contingency plan because it narrows the deficit over the next three years with a stable and reliable revenue stream.”
“It’s … a small pat on the back,” said City Manager Jack Schnirman, “a reminder that we’re making financial progress and we’re on the road to recovery. Moody’s has repeatedly reaffirmed that the city is making progress in addressing the fiscal crisis we inherited.”
Moody’s said that issuing bonds would have precluded the need for short-term note borrowing. The agency added, however, that bonding would not permanently close the city’s deficit because it “has to ultimately repay the bonds’ principal in addition to paying semiannual interest expenses over the next 10 years.”
“They prefer us paying the deficit over three years instead of 10,” Schnirman said, adding that deficit financing would have eased the burden on taxpayers. “What they’re saying, essentially, is that they believe it’s better financially, because you don’t spend money on the interest.”