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Moody’s downgrades Long Beach's credit rating

Agency cites a lack of a structural balance, declining mortgage tax revenue and increasing expenditures

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Moody’s Investors Service, which gave Long Beach a solid bond rating last year, downgraded the city’s financial status in a scathing report released on Tuesday, following a cash-flow shortfall in November that led the city to borrow $4.5 million to make its payroll by Christmas and to meet its payout obligations for a number of retirees.

The agency announced a downgrade of the city’s rating to Baa3, several grades below its previous A1 rating and one step above what one city official called “junk bond status.”

“They said it was due to the cash flow and things like that,” City Manager Charles Theofan said. “… [N]ow they’re looking at us in a very bad way, and unfortunately a downgrade is going to reflect that.”

In the months leading up to the November election, city officials touted the A1 rating - reaffirmed by Moody's in August - at candidates’ forums and in city newsletters, saying that Long Beach was on solid financial footing that would allow it to avoid a tax levy increase. But in late November the city faced a serious cash-flow problem that threatened its ability to pay its workers and outgoing or retiring police officials.

The unforeseen overtime and other costs that the city was forced to contend with in the aftermath of Tropical Storm Irene were cited as one of the main reasons for the cash-flow shortfall. At an emergency City Council meeting on Nov. 30, the city issued a $1.75 million tax anticipation note to make its December payroll and borrowed up to $2.5 million through a budget note to meet its contractual obligations.

The city’s bond rating has fluctuated over the years. In 2008, it was upgraded to A3 from Baa1. According to Moody’s, a rating in the A range reflects low credit risk, while Baa indicates a moderate risk where “protective elements may be lacking or may be characteristically unreliable.”

“The Baa3 … is the lowest investment grade,” said Moody’s spokesman Dave Jacobson. “If the city wants to borrow money or float more bonds in the future, it could mean that it has to pay a higher interest rate, or it could mean that if you hold a bond, the value of it could go down.”

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