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Rating Action:

Moody's affirms Sunnyvale, CA's Aaa issuer rating and Aa1 and Aa2 COP ratings, revises outlook to stable from negative; assigns Aa1 to 2020 LRBs

13 Oct 2020

New York, October 13, 2020 -- Moody's Investors Service has assigned a Aa1 rating to the City of Sunnyvale, CA's $133.4 million in 2020 Lease Revenue Bonds (Civic Center Project) (Green Bonds). Concurrently, Moody's affirmed the City's Aaa issuer rating, the Aa1 rating on the city's outstanding 2009A certificates of participation (COPs), and the Aa2 rating on the outstanding 1998A COPs. The outlook on the City's ratings was revised to stable from negative. The Aa1 rating applies to $143.0 million in COPs and bonds and the Aa2 rating applies to $3.5 million in COPs.

RATINGS RATIONALE

The Aaa rating reflects a large tax base that is experiencing robust growth, which we anticipate will moderate amidst the current economic slowdown, as well as a very strong resident socioeconomic profile. It further reflects the City's very strong reserves resulting from revenue growth and tight expenditure control, as well as one-time revenues that are being committed entirely to capital projects and one-time expenses. Revenue increases have largely been driven by substantial property tax growth from new development and increased residential market values. The City's financial position is supported by its long history of strong reserve policies, performance management and twenty-year financial and capital planning.

The rating incorporates the increase in the City's net direct debt from very low to moderate with its current issuance, which will remain moderate and manageable due to a combination of cash- and limited debt-funding for capital projects. Notably, the lease burden on the general fund will not increase because most of the payments will be made from enterprise fund rent contributions. The rating also incorporates elevated unfunded liabilities for pensions and OPEB that are expected to grow. The city has taken steps to more aggressively fund these obligations, such as shortening amortization periods, setting up Section 115 trusts, and creating cost stabilization reserves. Management is conservatively forecasting near-term revenue declines and slowed revenue growth and has cut expenditures to address the current economic pressures. Unfunded liabilities and rising pension costs will remain balance sheet and budgetary pressures, but ones that the City is well-positioned to manage.

The Aa1 ratings for the 2009A COPs and 2020 Lease Revenue Bonds reflect a one-notch distinction from the City's issuer rating, our typical notching for an abatement lease of an asset we consider more essential. The leased asset for the 2009A COPs is a city office building. The leased assets for the 2020 bonds are the city's existing City Hall, Public Safety Building and Corporation Yard, which will be replaced with the new City Hall upon occupancy. The 2020 bonds will not have a debt service reserve fund (DSRF), which we consider a weakness offset by the over-collateralization and the facility being constructed to current seismic standards.

The Aa2 rating for the 1998A COPs reflects a two-notch distinction from the City's issuer rating, our standard notching for an abatement lease of an asset that we consider less essential, in this case, a commercial parking facility.

RATING OUTLOOK

The stable outlook reflects our view that the material increase in the City's tax revenue through fiscal 2019 combined with its substantial reserves have positioned the City to manage expected increase in balance sheet leverage from both direct debt and unfunded retirement liabilities and the associated increase in fixed costs. Recent rapid growth in property tax revenue, the city's largest revenue source, is expected to slow and sales tax and transient occupancy tax revenue, which declined in the current year due to the coronavirus pandemic, are likely to recovery slowly. While planned draws on substantial reserves for capital projects will lessen the city's financial flexibility, we expect the City will address planned capital investments and rising pension costs while maintaining its current credit profile.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Not applicable

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Material decline in the city's reserves and liquidity

- Material growth in unfunded pension liabilities relative to operating revenues

- Protracted deterioration of the tax base

LEGAL SECURITY

The 2020 lease revenue bonds will be secured by lease payments made by the city for use and occupancy of its current City Hall, Police Building and Corporation Yard, subject to a standard abatement lease. Upon completion of construction and occupancy, the new Civic Center will be substituted as the leased asset.

USE OF PROCEEDS

Proceeds of the bonds will be used to finance or refinance the acquisition and construction of the City's new Civic Center.

PROFILE

Sunnyvale, CA encompasses 22.7 square miles in northern Santa Clara County (Aa1 stable) and has a population of about 153,000. Located 44 miles south of San Francisco (Aaa negative), the city sits in the heart of Silicon Valley and is the home to numerous high tech employers. Sunnyvale is a charter city with 900 full-time equivalent employees and provides a full range of municipal services.

METHODOLOGY

The principal methodology used in the general obligation rating was US Local Government General Obligation Debt published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1230443. The principal methodology used in the lease ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1102364. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Lori Trevino
Lead Analyst
Regional PFG West
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Gera McGuire
Additional Contact
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Client Service: 1 212 553 1653

Releasing Office:
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JOURNALISTS: 1 212 553 0376
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No Related Data.
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