Tue May 14, 2013 1:47pm EDT
WASHINGTON May 14 (Reuters) - Many California cities will remain fiscally challenged over the next few years due to limits on raising revenues and pension and other spending pressures, Moody's Investors Service said on Tuesday.
The agency said it downgraded the ratings on 27 cities' obligations and upgraded the general obligation ratings of two cities - San Francisco and Los Angeles - after reviewing all of the 95 California cities it assesses.
The review was inspired by the bankruptcy filings of Stockton and San Bernardino, California, to understand the risk of future bankruptcy filings and the cities' current budget conditions, Moody's said.
Stockton neighbor Fresno suffered a raft of downgrades. Its taxable pension obligation bonds were knocked down three notches to Ba2 with a negative outlook, as 10 of its lease revenue refunding bonds were cut two notches to Ba1 with a negative outlook. Some revenue bonds issued by nearby Sacramento were also downgraded.
The median rating for California cities' general obligation bonds "remains relatively high" at Aa2, Moody's said, a reflection of "their fair success, so far, in adapting to the new fiscal reality: moderate revenue growth compared to pre-recession levels and continuing cost pressures."
"After some initial optimism for a quick economic recovery, most cities adopted more realistic economic expectations and implemented significant budget cuts, reestablishing, for the most part, structural budget balance and stable credit quality," it added.
The revenues of inland cities, which grew during the housing bubble will likely not return to pre-recession levels "in the next few years," Moody's said. San Bernardino is the anchor of the part of the state known as "The Inland Empire," while Stockton sits in the Central Valley.
Coastal cities, meanwhile, are recovering faster.
Across the most populous state in the country, though, pent-up spending demands will likely eat up improving revenues.
"After declining for two consecutive years, expenditures picked up again in 2012, and on average this increase in expenditures more than offset the modest revenue gains," Moody's said.
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