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S&P affirms Salinas ratings but revises outlook to negative, cites sewer fund oversight and projected operating draws
Summary
S&P affirmed the city's insured credit rating and lease revenue bond rating but changed the outlook to negative, pointing to weaker internal controls and exposure in enterprise funds — particularly the sanitary sewer fund — and to projected operating drawdowns if revenue measures lapse.
Finance Director Selena Andrews told the Finance Committee on Aug. 12 that S&P Global Ratings conducted a periodic review of the city’s outstanding leases and lease-revenue bonds, affirmed the city’s insured credit rating (ICR) at AA- and the outstanding lease revenue bonds at A+, and revised the outlook to negative.
Andrews said S&P’s negative outlook reflects concerns about internal controls and volatility in enterprise funds, particularly the sanitary sewer fund, coupled with a multi-year forecast that shows potential operating drawdowns. “S&P could lower the ratings if the city is unable to adjust rates or if the city experiences increased budgetary pressure,” Andrews said. The rating affirmation reflected S&P’s view that the city maintains a healthy general fund reserve position and conservative budget management.
Committee members asked for specifics about the internal-control concerns. Andrews and other finance staff explained that the sewer fund had not had a rates adjustment in more than a decade and that emergency repairs to pump stations had depleted reserves; those shortfalls and the lack of recent rate adjustments contributed to S&P’s assessment. Staff said they are tightening procedures, reviewing enterprise-fund funding and working on reserve and rate policies to strengthen fiscal controls.
The nut graf: the committee was told that while the city’s overall credit ratings were affirmed, the negative outlook signals possible downgrades if corrective actions (rate adjustments, reserve strengthening or expense control) are not taken; staff emphasized ongoing work to improve internal controls and enterprise fund sustainability.
Mayor Donahue and committee members noted public interest related to Measure G and other revenues; staff said S&P flagged the potential effect of a major tax measure sunsetting on the multi-year forecast. Finance staff said they will continue to monitor enterprise funds, pursue internal-control improvements and report back to council on corrective actions.
Ending: staff characterized the presentation as a receipt of information and described follow-up steps: audit and internal-control tightening, enterprise-fund rate evaluations and continued monitoring of the multi-year fiscal forecast.
