Moody’s Investors Service on Monday downgraded the lease revenue bond rating of the City of Santa Monica from to Aa2 from Aa1.
The one notch lease revenue bond downgrade reflects Moody’s opinion that a two notch rating distinction between the city’s Aaa general obligation bond rating and the Aa2 lease-backed obligation rating reflects the weaker security pledge for lease-backed obligations and reflects the additional risk to bondholders from the city’s financial, operational, and economic conditions over the more secure general obligation pledge.
Under California law, a city’s general obligation pledge is an unlimited ad valorem pledge of the city’s tax base.
According to Moody’s, the city must raise property taxes by whatever amount necessary to repay the obligation, irrespective of its underlying financial position.
“A lease pledge is a contractual obligation, on parity with a city’s other unsecured obligations, backed by all of the city’s available financial resources. Moody’s holds this opinion notwithstanding the dedicated revenue sources for the city’s Lease Revenue Bonds, Series 2011A; Lease revenue Bonds, Series 2004; and the Parking Authority Lease Revenue Bonds, Series 2002,” Moody’s said Monday.
Moody’s said the confirmation of the city’s Aaa general obligation bond rating reflects a number of factors:
— the city’s large and diverse tax base that has undergone minimal declines throughout the economic downturn and that has increased in value over the past two fiscal years;
— strong socioeconomic profile that that has strengthened as of the 2010 census; a healthy balance sheet, characterized by robust reserves that have continued to increase despite the recent economic recession and strong ending cash position; moderate general obligation debt and lease-obligation burden;
— and relatively small annual required pension and other postemployment benefit (OPEB) contributions as a percentage of general fund operating expenditures.
Moody’s said the outlook on the ratings is stable.
“After several years of operating surpluses, the city’s unaudited general fund performance was again positive in fiscal 2012, and the local and regional economy are improving sufficiently to support projected fiscal 2013 expenditures,” Moody’s said.
Moody’s states the City’s large and diverse tax base and exceptionally strong financial operations featuring sizeable reserves as its strengths.
It states the City’s challenge was economically sensitive tax revenues based on tourism and the local economy and resident wealth levels below the medians for Aaa-rated U.S. cities.