Posted on Thu, Dec. 01, 2005

Contra Costa's credit rating falls

By Rebecca Rosen Lum

CONTRA COSTA TIMES

A leading credit agency on Wednesday downgraded Contra Costa's rating and another agency warned it would do the same unless the county replenishes its budget reserves.

The action by Moody's serves notice to lenders that Contra Costa now presents a greater credit risk. "They were among a select group of highly rated counties," said Moody's analyst Kevork Khrimian. "That is no longer the case."

His agency cut its rating for the county from Aa2 to Aa3, a move that will spike the price the county must pay to insure its bonds by about 30 percent.

The second agency, Standard & Poor's, changed its outlook for the county from stable to negative, largely because the county has been gutting its reserves to pay for soaring labor, health and retirement costs, agency analysts said Wednesday.

Those reserves have melted from $115.7 million in 2002 to $58.7 million at the end of fiscal year 2005. And in 2006, the county will commandeer another $17 million to pay for labor costs and benefits.

While lowering the outlook for the county, Standard & Poor's left the county's rating unchanged at AA.

"Unless significant progress is made, the county may have to cut many programs and services in order to balance its budget," Standard & Poor's analyst Joon Kang said. "Those are politically difficult decisions."

The county is now in talks with 11 of its labor unions. On the table: a temporary wage freeze and cuts in benefits.

Supervisor John Gioia said the county has more room for service cuts and must negotiate contracts that hold the line on benefit costs. The supervisor's finance committee on Monday will tackle a policy to limit the spending of reserves.

"We don't need to bring (reserves) back up overnight, but if we bring them back up over time, that would send a good message to the agencies," he said.

To understand the effect of Wednesday's downgrade, consider how it would have affected $322 million in pension obligation bonds the county issued in 2003. The county paid $1.9 million for municipal bond insurance for that bond issue. The downgrade would have increased the insurance cost to about $2.5 million.

The downgrade does not affect the nearly $900 million in outstanding bonds. But, the county is planning to float $15 million in lease revenue bonds for a new district attorney building.

"A bond rating decline has a serious effect," said Treasurer-Tax Collector Bill Pollacek. "Investors are going to be reading those credit reports, and they know the first bad news is never the last bad news."

The county has yet to deal with its long-term health coverage bill. Its unfunded obligation for current and retired employees has been pegged at $1.5 billion.

The news did not come as a total surprise. In January, County Administrator John Sweeten sent the board a memo saying a ratings slide could follow if the county "is unable to devise and execute a plan for turning around our currently declining fund balance."

Critics said they had warned of credit fallout as early as 2002, when the county approved a robust retirement benefit that increased public-safety pensions by as much as 50 percent.

"They haven't been balancing their budget, they have this large pension issue out there, and they've failed to deal with the health care unfunded liability -- and that is going to be huge," said Kris Hunt, executive director of the Contra Costa Taxpayers Association. "Here you are in the middle of union negotiations without a solid number."

Other counties rated by Moody's at Aa2 include Orange, Santa Clara and San Diego. Those rated one notch lower at Aa3 include Alameda, Los Angeles, San Francisco and Ventura. Riverside, Sacramento and Riverside are A1, two notches lower.

Rebecca Rosen Lum covers county government. Reach her at 925-977-8506 or rrosenlum@cctimes.com.