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California cities’ credit ratings hit by Prop 218

December 13, 1996

SAN DIEGO (AP) _ A new measure limiting local taxes has tarnished the credit standing of San Diego and may hurt other cities as well, leading to higher taxes or reduced services across California.

Under Proposition 218, which passed last month with 56.4 percent of the vote, cities must get voter approval before assessing most new taxes and fees. Voters also can veto previously approved taxes.

``It’s obvious when you read the initiative in detail that it creates a lot of uncertainty,″ said Wynne Furth, city attorney for Shasta, Needles, Fontana, Corona and other small California cities. ``Markets don’t like uncertainty.″

Ratings agencies such as Moody’s Investors Service and Standard & Poor’s fear Prop 218 could make paying off debt more difficult and less likely. Downgrading a city’s credit rating makes borrowing more expensive because higher risk translates into higher interest rates.

``What it will result in is increased expenses for the same results,″ Furth said Thursday. ``Whether it increases taxes or other revenue, you’ll get less for more.″

``We believe it seriously limits the revenue flexibility cities have,″ said Ken Kurtz, Moody’s vice president and senior credit officer. ``That was a key feature to the higher ratings out there, and that flexibility is gone or extremely limited.″

San Diego, which issued $60 million in bonds Thursday for stadium renovations, became the first casualty earlier this month. Moody’s and Standard & Poor’s dropped its general obligation bond rating one level, from Aaa to Aa1 and AA+ to AA, respectively.

Each notch on a bond rating translates into an extra $600,000 in financing costs for each $10 million of a 30-year general-obligation bond, said Jack McGrory, San Diego’s city manager.

``All cities are going to be in for rating downgrades,″ he said. ``The perspective of the rating agencies is that (Prop 218) places serious restrictions on cities and counties across the state.″

``It makes us less credit-worthy,″ he said.

Despite the downgrade, both rating agencies noted San Diego’s ratings were still high.

Both agencies are reviewing other California cities.

Wendy Walker, legislative advocate of the Howard Jarvis Taxpayers Association, which sponsored Prop 218, said rating downgrades were not expected but may be necessary to control tax-happy governments.

``Had local governments not been so egregious in the imposition of these assessments in the first place, Prop 218 would not have been necessary,″ she said. ``Sometimes democracy costs money.″

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