City Hall last issued a bond in 2002, to raise money for the new library. The $25 million bond sold with interest rates between 2 percent and 4.6 percent, depending on the length of the investor’s commitment.
At that time, City Hall applied for and was given a triple-A rating from Moody’s, Standard and Poor’s, and Fitch — the three agencies that evaluate all bonds, including those in the private sector. The rating scale for bonds goes from triple-A at the top, down to single-C at the bottom.
“The bond rating lets the community know several things about its city government and how it’s run,” Stark said. “It shows that the city is strong financially, that it has low debt levels, that it’s conservative in its budgeting, that it has expenditure flexibility.”
The rating also lets investors know something about City Hall. “(The rating companies’) purpose is to educate investors as to the quality of the bond issues and the bond issuers, and they try to give an independent appraisal of the credit quality of a bond,” Stark said.
Municipal bonds are called “tax exempt” bonds and are favored by investors because they accrue interest, Stark added.
City Hall currently has $191.5 million in bond debt, or $2,144 for each of the city’s 89,333 residents, as estimated by the state finance department. That debt was accrued from 12 bonds issued in the last 14 years, and is being paid off at $15.4 million each year, Stark said.
When City Hall decides it needs money and wants to go into bond debt, it first determines exactly how much money it needs. City Hall financiers then call bond underwriters, present the bonds to the marketplace — Wall Street — and markets and sells the bonds, Stark said.
There are four types of bonds City Hall can issue. The most common is a “general obligation” bond, meaning it is “backed by the full faith and credit of the city’s general fund, meaning the first priority on the city’s general fund revenue is to pay the bonds,” Stark said.
Then there are “revenue” bonds, where City Hall must dedicate a particular revenue source to repay the bond. The third type is called a “tax allocation” bond, where certain taxes are set aside to repay the bond. Finally, there’s an “enterprise fund” bond, where the money comes from a self-supporting source, Stark said, adding the water department and airport are both considered enterprise funds.
Each bond is rated before it’s sold to investors. Though City Hall hasn’t applied for a formal rating since it issued the $25 million bond for the library, Stark said its standing hasn’t changed.
“We’ve not gone through an official rating since August of 2002,” he said. “However, annually, we send to our rating agencies our financial statement, our budget, our budget message, our financial outlook, and they review that. And, as the case of the state of California, if the rating agencies were concerned, they could downgrade your rating … Even though you technically get rated when you issue a bond, you’re constantly reviewed and analyzed for changes.”
In Santa Monica, revenue is derived primarily from what’s called the “big eight” — property tax, sales tax, utility users tax, transient occupancy tax, business licenses tax, real property transfer tax, parking facilities tax, and fines and forfeitures.
“One of our attributes is that we have a diverse revenue base, so we’re not overly reliant on one revenue stream,” Stark said. “For example, if we were a city that was funded 70 percent by sales tax, that would be a concern, because if the economy went down, sales tax went down — that would be a concern, because we wouldn’t have the flexibility.”
Raters next look at debt. Santa Monica has $191.5 million in bond debt, plus $4.6 million in loans. Bonds were issued in 1990, 1993, 1995 and 1998. In 1999, City Hall issued three bonds and in 2002 it issued five bonds, though the number of bonds can be misleading, Stark said, because City Hall was refinancing the same debt in some of those bonds to take advantage of low interest rates.
“Santa Monica is very conservative in debt issue,” he said. “It’s obvious, or it wouldn’t be receiving the highest possible credit rating.”
“Santa Monica is very conservative in debt issue. It’s obvious, or it wouldn’t be receiving the highest possible credit rating.” — – STEVE STARK Finance director
Third, bond assessors look to the financial condition of the city, meaning how it has historically managed its finances and responded to changes in economic conditions. Stark said City Hall bodes well in this category because of conservative budgeting — especially in the last few years of constrained budgeting.
Finally, the raters look at the philosophy and values of the city manager and policy makers. A key issue there is how much money cities keep socked away for difficult times, Stark said.
City Hall has $17.4 million in reserves — plus $4 million it set aside fearing Sacramento wouldn’t share vehicle license fee revenue with local cities. Another $138 million is technically reserved because it’s “encumbered” for things like capital improvement projects, but that money isn’t viewed in the same way because it’s designated, Stark said.
City Hall also puts aside money on an ongoing basis for things like replacing aging cars, so that, for example, policy makers aren’t stuck with a decision between police cruisers and funding a community program, Stark said.
It’s foresighted economic planning like that which keeps City Hall’s bond rating high.
“We set aside those monies for the unknowns,” Stark said. “That is a positive attribute driven by the City Council and city manager.”
Originally published in the Santa Monica Daily Press print edition on May 10, 2004. Read the original PDF.