Mendocino County may lose its rating from a top credit rating agency, due to a lack of sufficient information, according to Moody’s Investors Service.
Last month, Natalie Ramos, a lead analyst with Moody’s, filed a public records request for the fiscal 2022 audit or adequate draft financial documents that Mendocino County needed to respond to by June 30th. Without those materials, she wrote, Moody’s would “consider placing the district’s rating under review for possible withdrawal due to lack of sufficient information.”
Treasurer Tax Collector Auditor Controller Chamisse Cubbison closed the request on June 23 with no responsive documents, writing only that, “The County’s outside audit firm is still completing the fiscal year 2021-22 audit and the preparation of Annual Comprehensive Financial Review. The County does not have a draft of the financial statement available for review. We hope that the reports will be available in the next 30 days.”
CEO Darcie Antle confirmed that no documents were attached to the closed request. Neither Cubbison nor the outside auditor, Clifton Larson Allen, responded to a request for comment.
Moody’s also did not respond to a request for comment. But its online policy for withdrawal of credit ratings lists “Incorrect, insufficient or otherwise inadequate financial information” as its first reason for dropping an entity. Moody’s will withdraw its credit rating if the information available to support it “is insufficient to effectively assess the creditworthiness of the Rated Entity or the obligation; and (ii) such information is unlikely to be available to MIS in the near future.”
Moody’s is one of three credit rating agencies that scores the county’s financial viability, a measurement that is essential to investors or lenders as they calculate their financial risk. The credit rating is also important in determining the interest rates on bonds, which many public institutions rely on to pay for specific projects. According to the State Treasurer’s office, “Underwriters and investors rely upon the credit quality judgment made by the rating agencies (expressed as a credit rating). Some mutual funds, institutions, and investment trusts are restricted by law or by the terms of their organizational documents to buying securities at or above specified credit rating levels…[T]he credit rating is the most important factor in determining the interest rate on bonds relative to other issues sold at the same time.”
Credit rating agencies generally consider Mendocino County to be solidly in the middle range. Muniprofile.com, a municipal transparency website, lists its Moody’s rating at A1. We were unable to confirm that with Moody’s or the CEO’s office. Investopedia characterizes A1 as “upper-medium range and subject to low credit risk.” Fitch Ratings gave the county a grade of A+ last year, which Investopedia pronounces, “the fifth-highest rating a debt issuer or a debt instrument can receive.” And S&P Global Rating raised the county’s credit rating to an AA last year, citing its “improved financial position, supported by enhanced financial management policies and practices.” In a press release at that time, Supervisor Ted Williams said he believed the upgrade would “benefit bottom-line county finance for many years to come.”
But now, after balancing the budget with $7 million in one-time funds and no foreseeable end to negotiations with the county’s largest labor union, Williams is deeply concerned about the county’s credit rating.
Williams has filed his own request for public records to find out if Cubbison shared any financial documents with Moody’s. In an interview, he said, “Mendocino County is deficient in record keeping. The Board of Supervisors is struggling to do its job due to lack of financial acuity provided by the Auditor Controller.”
The county does not appear to be in great financial shape, though documents are sparse. The recently passed budget does not include a COLA for its employees, with the CEO’s office estimating that a 1% COLA would cost the county $1.3 million it doesn’t have. Antle told the Board of Supervisors last month that 33 employees would have to be laid off to pay for a 3% COLA. The assessor’s office has sent out 6,000 notices to taxpayers in an attempt to collect property taxes from up to four years ago. A half million dollars has been set aside to hire more assessors to help increase the county’s tax revenue, but hiring and training have been slow going. The $3.6 million health plan deficit will mostly be covered by ARPA, or the American Rescue Plan Act funds, but the remainder is still $800,000.
It appears that rating agencies typically approach a withdrawal by degrees. In March of this year, The Bond Buyer, an online financial news site, reported that S&P Global Ratings placed 149 bond issuers, including local governments, on CreditWatch “with negative implications,” due to a lack of financial information.
One large business that has also lost its credit rating for a lack of financial information is Twitter. Last year, Fortune reported that S&P downgraded the company after Elon Musk bought it, then withdrew its rating altogether. According to Fortune, “The group of banks that funded the buyout now face the challenge of syndicating the ($13 billion) debt to investors, many of whom use rating companies to determine the risk involved in buying credit.”
There have been other high-profile credit rating withdrawals. S&P’s own industry publication reported in May of this year that it lowered First Republic Bank’s rating from a B+ to a CC before withdrawing its rating. That was after the bank failed and the state appointed the FDIC as a receiver. JPMorgan Chase bought the bank’s assets but did not assume its corporate debt.
Entire countries can also lose their credit ratings. Last year, Reuters reported that the European Union banned credit rating agencies from rating Russia and Russian companies, as part of a sanctions package following the invasion of Ukraine. Moody’s, Fitch, and S&P all withdrew their ratings, rather than lose their licenses in the EU.
Closer to home, Williams reflected that, “It’s kind of a big deal if we lose our credit rating. I hope we don’t have to borrow again.”