OAKLAND, CALIFORNIA – Moody’s, a major credit rating agency, has downgraded the City of Oakland’s credit ratings for several types of debt, including general obligation bonds and pension obligation bonds, from Aa1 to Aa2 (a lower rating).
It also downgraded the city’s lease revenue bonds from Aa2 to Aa3. Additionally, the city’s financial outlook has been revised from “stable” to “negative.”
Why Was Oakland Downgraded?
The downgrade reflects concerns about Oakland’s financial situation:
- Spending is growing faster than revenue: Costs, particularly for public safety, are exceeding the city’s income.
- Dependence on pandemic relief funds: Oakland used one-time federal pandemic aid for ongoing expenses, which isn’t sustainable now that the aid has ended.
- Falling revenues: Declines in real estate transfer taxes and other income sources have hurt the city’s budget.
Oakland’s Financial Condition
- The city ended fiscal 2024 with a $30.3 million deficit and has an available general fund balance of $211 million (22% of its revenue).
- Despite cost-cutting efforts, Oakland expects to face a $93.1 million deficit in fiscal 2025.
- The city has $843 million in outstanding long-term debt and elevated fixed costs (e.g., pensions and other liabilities).
What Does Aa2 Mean?
- Aa2 is still a high-quality rating, but it signals more risk than Aa1. It reflects that Oakland can meet its debt obligations but is under financial pressure.
- The city retains some strengths, like a diverse economy and valuable property base in the Bay Area.
Negative Outlook
A negative outlook means Moody’s is concerned about further deterioration in Oakland’s finances. If the city doesn’t control spending or stabilize its budget, future downgrades are possible.
What Would Help Improve or Hurt the Rating?
To Improve Ratings:
- Increase financial reserves to over 30% of revenue.
- Lower long-term liabilities (e.g., pension obligations).
To Worsen Ratings:
- Fail to control spending or rebuild reserves.
- Let general fund reserves fall below 15% of revenue.
- Increase fixed costs or long-term liabilities further.
In summary, Oakland’s credit downgrade reflects concerns about the city’s ability to balance its budget and maintain financial flexibility in the face of rising costs and declining revenue. The city must address these issues to prevent further downgrades.
