Richmond’s recent credit rating downgrades — born from a perception in the financial markets that the city has a dangerous habit of spending more than it makes — is creating millions of dollars in additional debt.
On Tuesday, Richmond City Council was forced to approve the restructuring of a portion of its pension debt at an interest rate estimated to cost the city an extra $10 million over the life of the new loan. If council had declined to move forward with the recommended action, the city could have been slapped with a crippling $30 million payment and likely another damaging credit rating downgrade, officials warned.
The vicious financial cycle began when bond-rating agency Moody’s downgraded Richmond’s issuer rating in both May and August. Moody’s said perceived struggles to balance budgets raised concern over Richmond’s ability to pay off its mounting debts. For fiscal 2015-16, the city was forced to use all proceeds from Measure U, a tax promised for sustained road repair, toward plugging up a $9 million deficit.
The downgrade could potentially force the city to pay a $30 million bond termination fee and could eventually result in another downgrade, this time by S&P, which could cost the city another $25 million in fees.
In order to prevent further fiscal pain, city staff and consultants recommended that the city issue additional bonds to refund some of the related pension bonds and also to pay the termination fee.
Public finance attorney John Knox said Tuesday’s action was the best immediate step the city could take to steer away from financial crisis, but he advised over the longterm that the city rein in spending.
“In the longer term, the city has got to avoid over-spending its revenues,” Knox said. “And it has over the last several years done that. It’s had deficits in its general funds. It’s burned through a lot of cash…and that’s alarming to the markets. The city has an extremely thin margin of error in its budget.”
The city’s latest predicament drew fire from Councilmember Vinay Pimple, who argued that his fellow councilmembers ignored Moody’s downgrades.
“I just want to point out that when we had the first downgrade in May, immediately after the downgrade this council took up the space-based mind control weapons ban,” Pimple said. “When we were supposed to have the budget presented…council was obsessed about rent control.”
Time and again, Pimple has warned about council’s spending habits, arguing that few ideas have been pitched to create revenue beyond taxes. The $10 million the city just lost as the result of the credit downgrades could have boosted city services that council members have been trying to protect, Pimple said.
“It is about being honest about our expenses,” Pimple said. “People keep talking about how our budget was structurally balanced. It was not structurally balanced.”
Councilmember Gayle McLaughlin disagreed, saying the city doesn’t need to rein in spending and has passed balanced budgets.
“I don’t think the answer is austerity, I really don’t,” McLaughlin said, adding that the community needs the services in question. “I do not think this council has made poor decisions. I do not think the City Manager has made poor decisions keeping our services to their extent.”
Mayor Tom Butt has also defended the city’s financial status, saying Moody’s and S&P’s assessments were based on “erroneous information” that resulted in “inaccurate conclusions.” A threat to investigate the city’s financial practices by the State Controller’s Office was recently called off after Butt said the city proved it is not nearing financial failure.
But Pimple said the city should not celebrate a budget that had to be plugged by tax proceeds that were supposed to be used to fix city streets. He also said the city should be concerned that its rainy day reserves are $12 million, calling the amount “ridiculously low.”
“We went back on our word to the people on our use of Measure U funds,” Pimple said. “Out of those $8 million, every single dollar went into balancing the budget. That is how we did not get into a complete hole.”