Some of Montebello's municipal bonds have been downgraded to junk status, another blow to a city already teetering on the edge of insolvency.
The interim city administrator has predicted that the general fund will run out of cash if the city does not secure a loan by the end of September. The move by Moody's, a major credit rating agency, will make it more difficult for Montebello to get a loan, experts told city officials.
Moody's downgraded its rating of the city's 2000 series certificates of participation by two notches to Ba1, meaning that the general fund's long-term obligations are no longer viewed as investment grade. The Ba1 rating is the highest considered to be "junk" status.
The city's outlook as a bond issuer was downgraded from stable to negative, meaning Montebello may be at risk of a further downgrade.
"This is a city in a heap of trouble," said Raphael Sonenshein, a political science professor at Cal State Fullerton.
The general fund owes $16.8 million to the redevelopment agency, and is looking at a $1.2 million current-year budget deficit on top of that.
Additionally, the state controller's office has announced it will audit the city's finances amid allegations of inaccurate financial statements, and the U.S. Department of Housing and Urban Development has frozen funding to Montebello and demanded that it pay back as much as $5 million in grants due to issues with the handling of the funds.
City officials also are trying to sort out the full story of about $1 million in bond money that flowed through an off-the-books city bank account.
In a bid to remain solvent, the City Council voted Wednesday night — the same day Moody's issued its rating downgrade — to hire a financial advisor to help sort out its budget issues.
Montebello awarded a $50,000 contract to FirstSouthwest to move forward with a plan to keep the city afloat. In a report to the council, the company wrote that the city will need to secure some sort of loan in order for the general fund to pay off the redevelopment loan and continue providing services.
But FirstSouthwest warned that the bond rating downgrade probably will mean higher interest rates on any future loan the city seeks.
Councilman Bill Molinari said he expects the city's bond rating will climb again when the council passes a balanced budget with a reserve for the coming fiscal year. He pointed out that the projected general fund deficit for the current year has steadily decreased and revenues hit by the recession are increasing again.
"It's a very tough time, but we're moving in a very positive direction," he said.
Councilman Frank Gomez said this is further proof that the council must cut the city's budget.
"Every day we wait, it gets more difficult to pull the city out of this fiscal crisis," he said. "We need to do something."
Gomez added that the economic situation alone is not enough to explain the city's problems.
"You can't blame this on the economy," he said. "That's a bunch of baloney."