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Friday, May 27, 2005 | One of the three major credit rating firms ratcheted the city of San Diego’s credit rating down another notch Friday, yanking the city to the investment quality of a mid-sized city with a troubled economy.
Although the nation’s seventh largest city as a whole continues to flourish economically, political and budgetary unrest continue to wilt the city government’s once-vibrant credit worthiness, Fitch Ratings analysts concluded.
A statement from Fitch cited the continued lack of audited 2003 and 2004 financial statements and the numerous ongoing investigations into city business as the reason for its fourth action on San Diego’s credit rating in the last year-and-a-half. It also cited talk of bankruptcy by City Attorney Mike Aguirre and mayoral candidates in its explanation.
In the immediate future, the downgrade essentially means little for day-to-day business at City Hall. The city currently has no access to public financial markets because outside auditors haven’t yet certified its financial statements form 2003 or 2004 amid concerns of errors and omission in financial statements and political wrongdoing.
“There aren’t a lot of people that have really strong economies and good revenue bases and are in such a leadership and political void,” said Amy Doppelt of Fitch Ratings.
Fitch first lowered San Diego’s rating from AAA to AA in early 2004 for its general obligation bonds. In September, it put the city on a negative watch after the release of an investigation into the city’s financial disclosure process. The city then was moved to A in February.
Friday’s downgrade leaves the city’s general obligation bonds at a BBB-plus rating.
Junk bond rating is considered BB-plus. The city’s lowest rated bonds, which are $250 million in leased back debt, are now ranked one step above junk status as BBB-minus.
Owner of San Diego bonds will also likely have a tougher time trading, Doppelt said. The city’s rating could rebound with a healthy audit, she added.
“Fitch’s rating action reflects the city’s continued delay in releasing its fiscal year 2003 and 2004 audit and the negative effect the ongoing political conflicts and upcoming election have on the city’s ability to resolve … its sizable financial challenges,” said the Fitch statement.
After being admonished by Fitch for their lack of leadership and political consensus, city officials lashed out at each other for causing the downgrade.
City Manager Lamont Ewell and Councilmen Scott Peters and Jim Madaffer, who are political enemies of Aguirre’s, seized on the tidbit from the Fitch statement that cited the city attorney. Likewise, Aguirre blamed the mayor and council for continuing to honor a decade’s worth of pension benefits he believes to be illegal.
“All of us need to be about solving the problem, and not about pointing fingers at each other and laying the blame,” Peters said.
Aguirre said consensus building begins with integrity.
The city’s pension deficit is estimated to be between $1.37 billion and $2 billion. The political machinations that led to the deficit, as well as the failure to report it to investors, have prompted parallel probes by the U.S. Attorney’s Office and the Securities and Exchange Commission.
The audit’s release still hinges on the completion of an investigation into city politics and finances by outside forensic auditors, as well as the waiver of attorney-client privilege by the pension board.
To date, the pension board has denied investigators access to documents pertinent to the investigation.
Ewell said in a statement that he anticipates similar action by Moody’s Investors Service, as well. Standard and Poor’s Ratings, the other major ratings firm, suspended San Diego’s rating in fall 2004.
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