Why did Moodys issue its first downgrade? Why did they say that the city had “unusually weak” financial management?
Moodys issued two downgrades of 3 notches each in May and August (the typical downgrade is just one notch) for a total of 6 notches.
Here are some of the reasons for the first 3 notch downgrade of Richmond’s bond rating issued in May 2015:
- The $9+M deficit in the 13-14 budget.
- The borrowing of $9.3M through a swaption, $5.9M of which was used to fill a hole in the 14-15 budget.
- The low cash reserves.
- The suppression of the grim five-year financial forecast in 2014.
Why did Moodys issue the second 3 notch downgrade?
In their May 2015 downgrade, Moodys had warned of a further downgrade. We were under the gun to produce a disciplined budget. Here is why I strongly objected to the 2015-16 budget:
- The budget used $3.4M of borrowed money (the remaining part of the swaption).
- It didn’t present a financial forecast.
City Council passed the budget over my strong objections. Predictably, Moodys gave us a further downgrade, this time to junk bond status.
What were the consequences of the Moodys second downgrade?
The full market value of the $9M+ swaption came due. We had to pay $16M on the $9M we had borrowed in 2014.
The city didn’t have the $16M, so had to borrow the money. The net present value of the additional debt service cost of this borrowing was over $10M.