Mayor Butt: Moody’s throws Richmond into debtor’s prison


by Mayor Butt,

[This Richmond Standard story is] about bond restructuring in Richmond that was precipitated by the recent rating downgrade by Moody’s.

People who are looking for a way to be critical of Richmond’s City Council or city manager have seized on this as evidence of poor management decisions in the past few years, but I submit just the opposite is the case. Some City Council members have even criticized the use of Measure U funds to balance the 2015-16 budget instead of spending on streets, but what they haven’t done is propose where other cuts should be made, such as reducing the number of police officers or closing libraries and fire stations.

Richmond, like other cities, depends on an uncertain stream of revenue sources that include primarily property taxes, sales taxes and utility user taxes plus state transfers such as gas taxes and a handful of other fees. When times are good, revenue tends to increase, and when times are bad, the opposite happens. That’s one reason cities accumulate reserves, also known as “rainy day funds.”

Like everyone else, Richmond failed to anticipate the recession, but when it came, we were able to ride it out without drastic cuts in staff and services by tapping into our rainy day funds and using non-recurring revenue sources such as funds from settling tax disputes with Chevron and refinancing various bond debts.

We came out of the recession much leaner but intact, a feat that would seem to be an accomplishment when cities all around us, like Stockton and Vallejo, were going into bankruptcy.

In FY 2014-15, City Manager Bill Lindsay wrestled what started as a significantly unbalanced budget into a $1.4 million surplus, and the City Council passed a balanced budget for FY 2015-16. The voters of Richmond provided an additional ½% sales tax in the November 2014 election.  Both property tax and sales tax revenue were returning to pre-recession levels, as was unemployment. Crime was down, and business was up. We knew we still faced fiscal challenges, but we could face them with some confidence and decision making flexibility.

Then came the bond rating reductions.

Bond rating agencies are like the mythical death panels that were conjured up in the federal health care debate, except that they are real, not imaginary. Three businesses, Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings, literally hold life and death decision making authority over public agencies, with a handful of self-appointed “experts” playing God with the fate of cities like Richmond.

It is questionable that Moody’s, Standard and Poor and Fitch have the credibility for such awesome responsibility; after all they are largely credited with causing the great recession. “Credit rating agencies (CRAs) — firms which rate debt instruments/securities according to the debtor’s ability to pay lenders back — played a significant role at various stages in the American subprime mortgage crisis of 2007-2008 that led to the Great Recession of 2008-2009 (also see here).”

What they are doing to Richmond now is comparable to the ancient practice of throwing people into debtor’s prison. The practice ceased when somebody figured out that society would be better off if the debtor were out working to pay off his debt and supporting a family instead of rotting in prison. Bond rating agencies haven’t evolved to that level yet.

Because Moody’s didn’t like the way Richmond had used non-recurring revenue to balance its budget during a recession Moody’s  played a significant role in causing, Moody’ downgraded the City’s bond rating, triggering a “termination event” for a 2005 pension obligation bond swap that could cost the City of Richmond as much as $1 million a year and triggering reduction in the number of police officers or closing of libraries and fire stations.

Richmond has never defaulted on a bond obligation in 110 years and has seen more serious financial crises than the recent one, but it is being treated by the bond raters like an irresponsible child. I personally met with Moody’s and pointed out numerous factual errors, many significant, that led to their bond rating decision, but they have not backed down. We have had better luck with the state auditor and controller, both of whom backed off a threat to audit the City, probably based on the bond rating reductions.

The City’s bond advisors continue to look for solutions with better outcomes, and the results may be better than anticipated.

This opinion piece was originally published in Mayor Tom Butt’s e-forum on Thursday.