City forced to increase debt, rethink its finances
on October 16, 2015
Richmond and Athens have more in common than beautiful waterfronts. Hints of the same kind of financial turmoil–and heated debate about how to fix it–that plagued Greece now seem to be rising in Richmond, too.
Last week, Richmond’s City Council faced a painful choice between paying a $30 million bond termination fee or taking on an extra $10 million in debt over the life of the bond. Neither of these options help the city handle its deficit, but council members opted for continuing payment through the life of the bond. The choice pitted fiscal-responsibility advocates against the city’s fiercest defenders of city services.
City Councilmember Vinay Pimplé, sounding increasingly frustrated with the city’s inability to handle its money, maintains that the city needs to do a much better job of keeping its finances on track given, what he considers, “shockingly low” reserves.
As major financial restructuring looms over the city, Gayle McLaughlin, former city mayor and current councilmember, has emerged as the leading opponent to any plans that “cut and slash services.”
Richmond’s financial distress has been brewing over the last six years during which the city accumulated a $45 million deficit. That was one of the main reasons Moody’s, a bond rating agency, determined in May that the city’s finances were not structurally sound, downgrading Richmond’s credit rating three notches and placing the city on a credit watch list.
In reaction to the May downgrade, councilmembers restructured the city budget by moving $9 million in revenue from a 2014 bond measure called Measure U, intended for street upgrades, youth services and city parks, into reserves.
The council “consciously made the decision” to maintain services as best it could, even while taking strong steps to make its reserves look healthier, said Bill Lindsay, city manager.
The motivation behind the budget moves was to avoid further downgrades. A lower debt rating costs the city millions in higher borrowing costs by increasing the perceived risks among investors for Richmond’s bonds.
However, the summer actions did little to reassure Moody’s analysts. In August, the rating agency took the city down yet another notch, and accused the city of taking “inadequate steps” to deal with “extremely narrow liquidity.”
“Depletion of its cash position over the seven years has left the city with very little flexibility to sustain its operations when faced with economic or fiscal challenges,” Moody’s warned.
Mayor Tom Butt has taken strong exception to that characterization of the city’s financial picture.
He argued in a news release that the Moody’s August downgrade was “completely unwarranted ” and “filled with inaccuracies, unsupported statements, and pure conjecture concerning Richmond’s credit risks that do not reflect the city’s debt management history.”
Last week, Butt took more shots at Wall Street.
“Bond rating agencies are like the mythical death panels that are conjured up in the federal health care debate, except they’re real, not imaginary,” he wrote in his latest “Tom Butt E-Forum” blog.
Agencies like Moody’s, 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,” he said.
Others argue that the financial analysts made a fair point.
During an interview, Councilmember Pimplé said Richmond was applying financial Band-Aids rather than addressing the real problem. The city is also breaking promises with voters by moving the Measure U money away from its intended purpose. He abstained when his colleagues voted on the new city spending plan.
“This is not a structurally balanced budget,” Pimplé said. “The problem is that our expenses are increasing at a much faster rate than the money we are taking in.”
The fiscal issues have shifted the usual political alliances that shape Richmond’s policy debates at City Hall. McLaughlin, often on the opposing side of the current mayor, agrees with him on at least some aspects of the budget situation.
“We will continue to be frugal and find ways to cut expenses but there is no plan to cut and slash services,” McLaughlin said via e-mail in response to questions.
Rather than an austerity approach, McLaughlin calls for “creative ways to continue to serve our community,” such as by partnering with nonprofits to provide services including park renovation and maintenance.
Lindsay said the key is not to focus on improving a credit rating, but rather on taking the time to improve city finances.
The priority is “to get our house in financial order and balance our budget and keep us on an even keel,” Lindsay said.
As a result of the additional $10 million debt the city chose to take on, it now faces the more arduous job of finding ways to pay it off.
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