Oakland’s Credit Rating Cut by Fitch as California City Tries to Plug Budget Gaps

(Bloomberg) -- Oakland, California, had its credit rating cut two levels by Fitch Ratings, which cited the challenge of plugging budget gaps amid a change in political leadership.

The city of about 440,000 on the east side of San Francisco Bay had its issuer default rating lowered to A from AA- last week. At the same time, its outlook was revised to negative from stable, indicating the possibility for future cuts. The city’s projected deficit for the fiscal year that ended in June is $79 million, while the preliminary anticipated gap for the current fiscal year is $93 million, according to the ratings company.

Oakland’s mayor lost a recall vote last month, about two years after winning office, and Fitch said pressure to improve public safety was a contributor to the result. Public safety now consumes more than half of the city’s main spending account, with growing costs for staff and overtime, according to Fitch.

“Fitch expects the significant expenditure reductions will be difficult to implement in the near term and will take time due to the city’s changing elected leadership,” the company said in a release dated Nov. 27.

The Oakland downgrade came about a month after San Francisco lost its top credit rating from Moody’s Ratings, which cited a weaker economy and depressed commercial real estate in the technology hub after the pandemic drove out workers.

One fiscal complication that Oakland has grappled with involves the sale of the city’s share of the Oakland-Alameda County Coliseum, which it was counting on to avoid budget cuts. The sale wasn’t finalized at the time of the fiscal 2025 budget adoption, requiring a contingency budget, according to Fitch.

Delays in payments “have caused the contingency budget to be enacted, freezing positions across all departments, lowering spending, and halting new contract and grant agreements,” Fitch said.

However, some aspects of the contingency plan involved cuts to the police and fire departments and thus faced political headwinds, according to the ratings company. The city will come up with additional cuts this month to plug the gap, Fitch said.