LOS ANGELES - Moody's Investors Service said it does not anticipate immediate or widespread rating revisions for California cities, noting that many of them prepared for recent state cutbacks affecting local property tax revenues.

"Concerns persist, however, about the long-term impact on credit quality of the state's continuing recession and ongoing budget difficulties," Moody's said in a report. "Consequently, some rating downgrades are possible for local government debt in the longer term."

The Moody's report, released late Friday, explores the fallout after California cut cities' property tax receipts by $200 million to help balance the state's fiscal 1993 budget. Those funds were diverted to school districts, thereby lessening the state's responsibility to provide the money.

Moody's observed that the "real-location of property taxes to schools begins to undo the property tax allocation system which has been in place since 1979, following the passage of Proposition 13."

Larger shifts of such revenues away from cities "are possible elements of future state budget packages" if problems persist, Moody's added.

The agency, which maintains ratings on tax-supported debt of more than 250 cities in California, acknowledge that the state cuts have caused near-term pressure on cities "already strained by three fiscal years of recession" and earlier state funding reductions.

The ability of cities to respond in the current fiscal year also is limited because the property tax reduction occurred a quarter of the way into fiscal 1993, the agency added.

But "we do not anticipate the need for immediate or widespread rating revisions" because many cities developed adequate contingency plans and also are expected to react quickly in offsetting the revenue loss, Moody's said.

In Oakland, for example, Moody's noted that a revenue loss of $4.25 million was less than the $10 million contingency reserve included in the city's budget.

Other alternative solutions include expansion of existing hiring freezes, voluntary furloughs, temporary office closings, and layoffs, Moody's said.

California cities also have "a relatively higher degree of flexibility to raise revenues and reduce expenditures than counties or school districts," the rating agency explained.

By developing a broader revenue base after Proposition 13, cities in general now rely only on property taxes for about a quarter of operating revenues, and the percentage is even less for larger cities, Moody's said.

The state cutback also is softened because "the current shift in property taxes represents only 2% to 3% of total [city] revenues," Moody's added.

But the report says long-term credit concerns persist.

A continued recession would have a negative impact on city revenues tied to the economy, such as sales taxes, business taxes, and development fees.

And California's recent budget-balancing actions "demonstrate that cities and other local governments are highly exposed to the state's problems," the report says.

In addition, Moody's observed that the tax and spending limitations imposed by Proposition 13 and other voter initiatives continue to affect flexibility.

As a result, "actions taken at both the state and the local level over the next two years will have a critical impact upon the credit quality of debt issued by California cities."

Moody's said it will monitor cities' actions on a case-by-case basis.

"Failure to adopt and implement a plan in a timely manner, the reliance on questionable revenue or expenditure projections, or the excessive use of one-shot actions could contribute to an erosion of overall credit quality and the need for rating revisions in certain cases," the report says.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.