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Credit rating agencies helped do in his predecessor. San Diego Mayor Jerry Sanders is taking no chances with them.
Last week, Fitch Ratings, one of the country’s three primary credit rating agencies, issued a report that fired a shot across the bow of municipal governments talking about bankruptcy. The message? Stop.
As the pain of the recession continues to be felt, some municipalities may contemplate bankruptcy as a last resort, and others may use it as a threat to seek relief from onerous labor contracts and other obligations. While some have asserted that a municipality’s statements about bankruptcy are not a credit concern, Fitch Ratings believes such statements should be taken seriously.
Although it is reasonable to assume that elected officials will from time to time make informational inquiries about the bankruptcy code, such discussions will trigger an inquiry by Fitch. If bankruptcy is being actively considered, Fitch will assess whether the entity’s current rating should be maintained, as consideration of bankruptcy not only indicates severe financial stress but also a willingness to compromise the credit standing of bondholders through a bankruptcy filing.
San Diego is clearly sensitive to what rating agencies have to say. The city’s access to Wall Street is predicated on approval by rating agencies such as Fitch. Last year, the city returned to Wall Street for the first time since being exiled in September 2004 after the city’s pension and financial disclosure scandals.
So it should be no surprise that Sanders issued a scathing op-ed last weekend in the Union-Tribune against the idea of bankruptcy, especially since bankruptcy talks have been revived since the fall. Last month, for instance, Councilwoman Donna Frye said she believed the city would eventually have to file for bankruptcy.
Mayoral spokeswoman Rachel Laing said in an e-mail the weekend op-ed was planned and written before Fitch’s report was released Wednesday, but the city was aware of Fitch’s stance soon after the report was published.
“There was no relationship between the Fitch Ratings report and the mayor’s op-ed aside from the obvious: Both the mayor and Fitch recognize that the very consideration of bankruptcy has serious ramifications, as it signals a willingness to compromise the credit standing of bondholders,” Laing said.
Instead, Laing said, the impetus was City Attorney Jan Goldsmith’s dismissal of bankruptcy in a speech before the San Diego County Taxpayers Association two weeks ago.
“It’s encouraging that since the city attorney gave his detailed legal explanation of why bankruptcy is not an option for San Diego, no one has stepped forward to say otherwise,” Laing said.
Clarification: This post was updated to more clearly state the timing of the report’s Wednesday release.
— LIAM DILLON