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Related Issuers
ABAG Finance Authority for Nonprofit Corporations, CA, Variable Rate Demand Revenue Bonds (Public Policy Institute of California Project), Series 2001 A and 2001B (Taxable), $33.5MM
California (State of) CA,General Obligation Bonds, Series 2003, $900MM
California (State of), Variable Rate Demand Obligations Bonds, Series 2004 Subseries A-1 through Subseries 2004 B-6, $1Billion
California Department of Water Resources (Power sys.) Power Supply Revenue Bonds, Series 2008J-1 through Series 2008J-4, $625
California Department of Water Resources, Power Supply Revenue Bonds, Series 2002 B1- B6, 2002 C1, C4, C5,C8-C12,C14 - C18 $2.750 Billion
California Infrastructure & Economic Development Bank, Variable Rate Demand Revenue Bonds (Buck Institute for Age Research Projec), Series 2001, $56MM
California Public Employees Retirement System
California State Teachers' Retirement System
Chicago (City of) IL, Second Lien Water Revenue Refunding Bonds, Series 2004, $500MM
Hollister Redevelopment Agency, CA, Tax-Exempt Variable Rate Demand Revenue Bonds (San Benito County Community Development Corporation Project), Ser. 2004, $6.250MM
Irvine (City of) CA, Assessment District No. 05-21, Limited Obligation Improvement Bonds, Adjustable Rate Series A, $80MM
Irvine Assessment District No. 03-19, CA, Limited Obligation Improvement Bonds, Adjustable Rate Series A, $84 MM
Irvine Assessment District No. 03-19, CA, Limited Obligation Iprovements Bonds, Adjustable Rate Series B, $37.6MM
New York (City of) NY, General Obligation Variable Rate Demand Bonds, Fiscal 2006 Subseries I-3 through I-8, $425MM
Oakland-Alameda (Counties) CA, Coliseum Auth., Lease Revenue Bonds, 2000C-1, C-2, $153.7MM
Oakland-Alameda County Coliseum Auth., CA
Pasadena (City of) CA
Riverside City Industrial Development Authority, CA, Variable Rate Demand Industrial Development Revenue Bonds (Trademark Plastics, Inc. Project), Series 2002, $4.275MM
San Jose Financing Authority, CA, Lease Revenue Bonds (Civic Center Refunding Project), Series 2008A, $60.31MM
San Jose Financing Authority, CA, Lease Revenue Bonds (Hayes Mansion Refunding Project), Series 2008C & Series 2008D (Taxable
San Jose Financing Authority, CA, Lease Revenue Bonds, (Civic Center Garage Refunding Project), Series 2008B, $36.580MM
San Jose Financing Authority, CA, Taxable Lease Revenue Bonds (Ice Centre Refunding Project), Series 2008E
South Placer Wastewater Authority, Variable Rate Demand Refunding Wastewater Revenue Bonds, Series 2008A and Series 2008B, $1
Rating Action:

Moody's downgrades CalPERS, CalSTRS credit enhancement programs to Aa3

10 Dec 2009

New York, December 10, 2009 -- Moody's Investors Service today downgraded the long term ratings of the municipal credit enhancement programs of California Public Employees Retirement System (CalPERS) and California State Teachers Retirement System (CalSTRS) to Aa3 from Aaa. The outlook for these issuers is stable. These rating actions conclude reviews for possible downgrade that were initiated on July 17, 2009. Moody's short term ratings of Prime-1 for both systems were not affected by today's actions. These rating actions also have implications for various municipal bond transactions that benefit from credit enhancement under the programs as discussed later in this release.

MARKET DECLINES EXACERBATE PLAN FUNDING PRESSURES

"Today's rating action reflects our expectation that the cumulative back-to-back market value declines in the investment portfolios of both CalPERS and CalSTRS for the fiscal years ended June 2008 and 2009 will exacerbate long-term projected actuarial funding shortfalls, recent market gains notwithstanding," said Martin Duffy, VP and Senior Credit Officer. The funding shortfalls also increase the degree to which the credit quality of these pension plans is reliant on -- and therefore linked to -- the credit of the State of California, which had its global scale rating lowered to A2 earlier this year.

Moody's believes the level of unfunded liabilities will remain relatively high over the medium term, given anticipated investment returns and projected contributions. The plans' existing levels of funding and liquidity nevertheless provide meaningful capacity to absorb shocks, such as participating employers -- including even California -- delaying contribution payments, without immediate consequence to pension benefit payments or payments under the credit enhancement programs. This increased flexibility serves to elevate the credit enhancement program ratings above the rating of California despite the noted credit linkages between the two.

Moody's believes that efforts to accelerate remediation of funding gaps, such as modifying contributions from participating employers that are being contemplated would represent a constructive step in addressing funding shortfalls, though likely to have impact only over a long term horizon.

CREDIT QUALITY OF MAIN PLAN SPONSOR

Since Moody's initiated its rating review of the credit enhancement programs in July 2009, the credit profile of CalPERS' and CalSTRS' major plan sponsor, the State of California, has stabilized. After the downgrade of California's global scale rating to A2 in July 2009 and subsequent affirmation upon resolution of the state's budget impasse, Moody's also affirmed the state's other ratings, albeit at reduced levels.

At the outset of its rating review of the credit enhancement programs, Moody's cited a closer alignment between the credit profile of California and that of the defined benefit plans provided by CalPERS and CalSTRS, given the plans' heavy reliance on state contributions—either directly or indirectly—and also because California would likely face intense political pressure to cover any enduring funding gaps in the plans. In addition, while each retirement system is legally autonomous and independent from the State, Moody's observes that the State exerts significant influence on each system.

THE CREDIT ENHANCEMENT PROGRAMS

Moody's observes that each credit enhancement program provides credit enhancement for low risk municipal bonds in the domestic market, with the primary objective of earning incremental fee income on an opportunistic basis.

In Moody's view the credit profile of enhancements undertaken by CalPERS' and CalSTRS' credit enhancement programs represent low risk commitments given the quality of each program's underwriting guidelines and the relatively small proportion of assets dedicated to this activity. The maturity profile of both liquidity and credit commitments is less than 5 years for each plan and there is significant liquidity available to service draws as these may occur. Throughout the recent credit crisis, each fund had ample resources to meet all draws without realizing any losses. Another important consideration in Moody's analysis of these programs is that the credit enhancement obligations are well diversified. Additional credit enhancement of plan sponsor's obligations or exposure via direct investments in their debt would pressure these ratings.

AFFECTED MUNICIPAL BOND TRANSACTIONS

Under their respective credit enhancement programs, CalPERS and CalSTRS can provide credit and liquidity support for municipal bond transactions through the issuance of letters of credit. The ratings on variable rate demand bonds that are supported by a letter of credit under one of the programs can be based on either i) a direct pass through of the long and short-term rating assigned to the program providing the letter of credit, or ii) may be rated higher than the rating of the program providing the letter of credit or the obligor based on a joint default analysis ("JDA") of both the obligor and the applicable program. The JDA approach is utilized if (i) Moody's maintains an underlying rating on the affected series of bonds; (ii) the bond structure supports the timely payment of principal and interest on the bonds by both the obligor and the letter of credit provider; and (iii) there are no other structural elements within the transaction inconsistent with the application of the approach.

RATINGS BASED ON DIRECT PASS-THRU OF PROGRAM RATING DOWNGRADED TO Aa3

The following transactions carry ratings which are determined by a direct pass through of the long- and short-term rating of the applicable program. The long-term ratings on these transactions have been downgraded to Aa3. The short-term ratings are unaffected by today's actions.

Affected pass-through ratings under the CalPERS Credit Enhancement Program:

Chicago (City of), IL Revenue Refunding Bonds, Series 2004-1 and Series 2004-2 to Aa3/VMIG 1 from Aaa/VMIG 1

New York (City of), NY General Obligation Bonds Fiscal 2006 Subseries I-5 to Aa3/VMIG 1 from Aaa/VMIG 1

Affected pass-through ratings under the CalSTRS Credit Enhancement Program:

ABAG Finance Authority for Nonprofit Corporation, CA Variable Rate Demand Revenue Bonds Series 2001-A and Series 2001-B (Taxable) to Aa3/VMIG 1 from Aaa/VMIG 1

California Infrastructure & Economic Development Bank, CA Variable Rate Demand Revenue Bonds Series 2001 to Aa3/VMIG 1 from Aaa/VMIG 1

Hollister Redevelopment Agency, CA Variable Rate Demand Revenue Bonds Series 2004 to Aa3/VMIG 1 from Aaa/VMIG 1

Irvine (City of) CA, Assessment District No.05-21 Bonds Series A to Aa3/VMIG 1 from Aaa/VMIG 1

Irvine Assessment District No. 03-19, CA Adjustable Rate Bonds Series A and Series B to

Aa3/VMIG 1 from Aaa/VMIG 1

Mission Viejo Community Development Financing Authority Variable Rate Demand Revenue Bonds Series 1999-A to Aa3/VMIG 1 from Aaa/VMIG 1

New York (City of), NY General Obligation Bonds Fiscal 2006 Subseries I-6 to Aa3/VMIG 1 from Aaa/VMIG 1

Oakland-Alameda County Coliseum Authority, CA Industrial Revenue Bonds Series 1996-A1 to Aa3/VMIG 1 from Aaa/VMIG 1

Oakland-Alameda County Coliseum Authority, CA Revenue Bonds Series 2000-C1 (Tax-Exempt) and Series 2000-C2 (Tax-Exempt) to Aa3/VMIG 1 from Aaa/VMIG 1

Pasadena (City of), CA Participation Certificates Series 1987 to Aa3/VMIG 1 from Aaa/VMIG 1

Riverside City Industrial Development Authority, CA Variable Rate Demand Revenue Bonds Series 2002 to Aa3/VMIG 1 from Aaa/VMIG 1

South Placer Wastewater Authority, CA Variable Rate Demand Revenue Bonds Series 2008A and Series 2008B to Aa3/VMIG 1 from Aa2/VMIG 1

JOINT DEFAULT ANALYSIS TRANSACTIONS PLACED ON WATCHLIST

The long-term ratings on the transactions that were assigned ratings based on the JDA approach have been placed on Watchlist for possible downgrade, pending a review of the level of default correlation between the program providing the letter of credit and the obligor.

Affected transactions under the CalPERS Credit Enhancement Program:

California Department of Water Resources (Power System) Power Bonds Series 2008J-1 and Series 2008J-2 to Aaa (on Watchlist for Possible Downgrade)/VMIG 1 from Aaa/VMIG1

Affected transactions under the CalSTRS Credit Enhancement Program:

California (State of) General Obligation Bonds Series 2003 B-1 through B-4 to Aaa (on Watchlist for Possible Downgrade)/VMIG 1 from Aaa/VMIG 1

California (State of) Variable Rate Demand Obligation Bonds Series 2004 Subseries A-1 through A-10 to Aaa (on Watchlist for Possible Downgrade)/VMIG 1 from Aaa/VMIG 1

California Department of Water Resources (Power System) Revenue Bonds Series 2002 B-1 and Series 2002 C-4 to Aaa (on Watchlist for Possible Downgrade)/VMIG 1 from Aaa/VMIG 1

San Jose Financing Authority, CA Revenue Bonds Series 2008A, Series 2008B, Series 2008 C, and Series 2008D (Taxable) to Aaa (on Watchlist for Possible Downgrade)/VMIG 1 from Aaa/VMIG 1

San Jose Financing Authority, CA Taxable Revenue Bond (Ice Center Refunding) Series 2008E (Taxable) to Aaa (on Watchlist for Possible Downgrade)/VMIG 1 from Aaa/VMIG 1

LIQUIDITY AND COMMERCIAL PAPER RATINGS NOT AFFECTED

The credit enhancement programs can also provide liquidity support to variable rate demand bonds and credit and/or liquidity support to commercial paper transactions. The ratings assigned to these transactions consider the short-term rating of the applicable program and are unaffected by the rating actions taken on the programs.

PRIOR RATING ACTIONS

Moody's placed on review for possible downgrade the Aaa long-term ratings of the credit enhancement programs of CalPERS and CalSTRS on July 17, 2009. At the time of the review, the short-term, Prime-1 ratings were affirmed. The previous rating action for CalPERS was in January 2005, when Moody's assigned issuer ratings of Aaa/Prime-1 applicable to its credit enhancement program. The previous rating action for CalSTRS was on October 15, 1999, when Moody's upgraded the long term issuer rating applicable to its credit enhancement program to Aaa from Aa2.

THE CALIFORNIA PENSION PLANS

CalPERS is the largest public pension fund in the United States with assets totaling $200 billion as of October 2009. It manages retirement benefits for more than 1.6 million California public employees, retirees, and their families. As of June 30, 2008, it provided pension benefits to 1,126,133 active and inactive members and 476,252 retirees. CalPERS membership is divided approximately in thirds among current and retired employees of the state, schools, and participating public agencies.

CalSTRS is the largest U.S. teacher's retirement fund and second largest US public pension fund. It provides retirement related benefits and services to teachers in public schools and community colleges in California. With assets of $128 billion as of October 31, 2009, the system has a membership of 833,000.

RATING METHODOLOGY

Moody's ratings of the credit enhancement programs of CalPERS and CalSTRS reflect its evaluation of factors we believe are relevant to the credit profiles of the issuers, such as the funding status of the pension plans, the concentration and credit profiles of the various plan sponsors, the implications of a sponsor's failure to make contributions for the plan's ability to meet its own obligations, and other factors which contribute to the issuer's ability and willingness to honor senior obligations. Other methodologies and factors that may have been considered in the process of rating the programs can also be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory.

New York
Martin Duffy
VP - Senior Credit Officer
Global Managed Investments Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Paris
Yaron Ernst
Managing Director
Global Managed Investments Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades CalPERS, CalSTRS credit enhancement programs to Aa3
No Related Data.
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