Moody’s Investor Services, one of the two dominant bond ratings companies, announced on Tuesday that it was reviewing the ratings of 32 California cities, including Berkeley. Three issuances by Berkeley are under review by Moody’s: the $28 million 2003 certificates of participation, the $5.8 million 2010 animal shelter financing, and the $9.1 million 1999 lease revenue bonds.
Refinancings were recently agreed on both the 2003 and 1999 issuances, with new AA ratings from Standard & Poor’s. According to City Finance Director Robert Hicks, both of the refinancings will be completed before the Moody’s review. That is likely to mean that only the $5.8 million animal shelter financing, currently rated Aa3, will be subject to review.
According to David Jacobson, a spokesman for Moody’s, the overall economic and legislative climate in California triggered the reviews.
“The factors here don’t apply just to Berkeley,” he said. “Over the last few years, California municipalities have been through interesting developments. There have been three bankruptcies. Over 50 have declared fiscal emergencies. We reanalyzed all the 90 cities in California that we rate. We determined that there were about 30 where we decided to place the rating on review and decided to just make sure they were rated appropriately.”
Jacobson said that the reviews throughout the state are focused primarily on pension obligation bonds and lease back bonds, not general obligation bonds.
“The revenue [for pension obligation and lease back bonds] comes out of the city’s general fund,” he said. “They have to compete with everything else that comes out of the city general fund.”
Jacobson said rising pension obligations and healthcare costs were key concerns.
Berkeley’s current AA ratings place the city in an elite group of municipalities. Should the animal shelter bonds be downgraded, there are three steps of single A ratings, which still count as “upper medium grade and low credit risk”, according to Jacobson. Each rating step down, however, can result in a 25 to 30 basis points (0.01%) change in interest rate. On the refinanced 1999 and 2003 bonds the city will pay 3.1%.
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