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Announcement:

Moody's reviews certain ratings of 14 California counties and four special districts; 17 pension obligation and similarly-secured bonds placed on review for downgrade; two county lease-backed obligations also placed on review for downgrade

14 Nov 2012

NOTE: On November 14, 2012, the press release was revised as follows: Correction to the headline: Moody's reviews certain ratings of 14 California counties and four special districts; 17 pension obligation and similarly-secured bonds placed on review for downgrade; two lease-backed obligations also placed on review for downgrade. Correction to the first sentence of the opinion: Moody's Investors Service has placed under review for downgrade the pension obligation bonds (POBs) and similarly-secured obligations of 13 California counties and four special districts. Correction to the report: Butte county, its POBs and rating were removed from the report. These changes were made because Butte county’s POB rating was already under review.

New York, November 14, 2012 -- Moody's Investors Service has placed under review for downgrade the pension obligation bonds (POBs) and similarly-secured obligations of 13 California counties and four special districts. Moody's has also placed the lease-backed obligation ratings of two California counties on review for downgrade. These county and special district reviews follow our similar rating action on various California city obligations on October 9, 2012. We expect to complete these reviews by the end of December, 2012.

A full list of ratings affected follows below.

RATINGS RATIONALE

These rating actions reflect our changed view of the likely creditworthiness of a California county's unsecured general fund debt relative to that of its general obligation bonds (or GO equivalent "Issuer Rating"). California local governments' unsecured, general fund-backed debt is typically issued in the form of pension obligation bonds (POBs), judgment obligation bonds, and lease-backed obligations (lease rental bonds or certificates of participation). Currently, we typically rate POBs (and other unconditional obligations imposed by law such as judgment obligation bonds) one notch below an issuer's general obligation bond rating. Going forward, such debt is likely to be rated at least two notches lower than an issuer's general obligation bond rating, primarily because we think the expected loss, incorporating both probability of default and loss given default, for these obligations may also be materially higher than indicated by the current one-notch differential with the GO rating.

Our actions on the two lease-backed obligations reflect similar considerations. Our ratings for a California county's essential purpose, fixed asset lease-backed obligations are typically two notches lower than a county's GO rating. The lease-backed obligations placed under review are currently only one notch below the issuer's GO rating. While these lease-backed obligations are secured by recourse to an asset that may, in the event of default, be repossessed and re-let for the term of the lease, the lease payments are typically not secured by any specific, pledged revenue stream. Rather, they are simply legal obligations of the county as long as it has use and occupancy of the leased asset. As such, lease payments are typically made from the county's general fund. As with the POBs and other obligations paid from a municipal creditor's general operating funds, the expected loss on these lease-backed obligations, incorporating both probability of default and loss given default, may also be materially greater than currently indicated by the one-notch differential between the assigned rating and the county's GO rating.

The ratings assigned to the lease-backed debt of other California counties that do not have obligations rated just one notch below the counties' GO rating are not affected at this time. Like all Moody's ratings, the ratings on those counties are subject to review at least annually and may also change as credit developments warrant.

Moody's does not have public Issuer or GO ratings on three of the special districts affected by this action. The absence of such a rating does not alter the impetus of this review, which is our changed view of the likely, relative creditworthiness of an unsecured general fund obligation compared to a GO rating.

Economic & Structural Considerations Unique to California Prompt Review

California local governments have been more significantly affected by the economic downturn than their peers nationally. California counties operate under more rigid revenue raising constraints than most counties nationally. The state's constitutional prohibition against raising the ad valorem property tax rate for general operating purposes is the most significant of these constraints. But counties must also seek local voter approval to increase any tax, fee or charge to be used for general operating purposes. These constraints, combined with some California counties' relatively steeply rising costs, will likely result in their recovering more slowly than their peers nationally, even if the state's economic recovery tracks the nation's.

Together, these constraints weigh as negative credit factors, particularly for unsecured obligations such as POBs, and similarly-secured lease revenue bonds and lease-backed certificates of participation. Unlike a GO bond, which is a secured obligation with debt service payments derived solely from the local property tax levy, POBs and lease-backed obligations are typically unsecured and paid from the county's general fund, where their funding competes with other county priorities.

Pension Obligation Bonds, Lease Debt Have Higher Probability of Default than GO Ratings

Notwithstanding our view that counties have generally fared better than cities, we believe that as an asset class POBs, judgment obligation bonds and lease-backed debt likely have a higher probability of default and are more susceptible to losses than indicated by their previous ratings. This view is based in part on our observation of the treatment of POB securities in recent California city bankruptcy filings and creditor negotiations.

California Counties Have Generally Fared Better Than Cities

Unlike California cities, whose financial positions have generally declined since 2007, California counties have been able to maintain more balanced financial operations with consistent levels of reserves and liquidity. California county expenditures are more diverse and flexible than those of the cities, a credit strength. For example, while public protection accounts for more than half of cities' general fund expenditures, this burden is just over 30% for counties. Social services also account for approximately 30% of counties' expenditures, but these expenses are largely met with state and federal revenues. During recent economic cycles, as state and federal revenues have decreased, counties have actively reduced social services, thereby preserving their discretionary revenues and financial flexibility.

Our Reviews Will Consider The Total Financial Burden of POBs, Unfunded Pension Obligations and Other Fixed Debt Service Costs.

Significant portions of a county's financial operations are conducted outside of its general fund. As these operations are dominated by labor intensive services, significant portions of county POB debt service are paid from these non-general fund sources. Also, as large portions of county services are mandated by the state and federal governments, the associated POB repayments are often eligible for state and federal reimbursements. We will consider these various funding sources to measure the actual burdens presented by POBs on counties' overall financial operations.

POBs were issued to lower counties' unfunded pension liabilities. Yet many counties continue to face sizable unfunded pension obligations. We will consider the aggregate burden presented by debt service on POBs and the Actuarially Required Contributions (ARC) to amortize these unfunded liabilities.

While our evaluation of California municipalities' unsecured general fund ratings relative to their general obligation bond ratings is the impetus for these reviews, counties' fundamental credit factors, such as financial operations and debt burden, will also inform these reviews.

AFFECTED OBLIGATIONS

ALAMEDA (County of)

General Obligation Limited Tax

$523.02 million

Aa3 Rating under review for downgrade

CONTRA COSTA (County of)

Taxable Pension Obligation Bonds, Series 2003 A

$305.74 million

Aa3 Rating under review for downgrade

General Obligation limited Tax Taxable Pension Obligation Bonds, Refunding Series 2001

$94.11 million

Aa3 Rating under review for downgrade

MARIN (County of)

Taxable Pension Obligation Bonds, Series 2003

$110.19 million

Aa1 Rating under review for downgrade

Certificates of Participation (2010 Refunding Project)

$59.37 million

Aa2 Rating under review for downgrade

Certificates of Participation (2001 Capital Improvement Project), Series 2001

$11.92 million

Aa2 Rating under review for downgrade

MONTEREY (County of)

Judgment Obligation Bonds$870,000

Aa3 Rating under review for downgrade

ORANGE (County of)

Taxable Pension Obligation Bonds, 2012 Series A

$229.88 million

Aa2 Rating under review for downgrade

Taxable Refunding Pension Obligation Bonds Series '96

$29.188 million

Aa1 Rating under review for downgrade

RIVERSIDE (County of)

Taxable Pension Obligation Bonds, Series 2005-A (Fixed Rate)

$366.95 million

A1 Rating under review for downgrade

SACRAMENTO (County of)

Taxable Pension Obligation Bonds, Series 2011A

$183.37 million

A3 Rating under review for downgrade

Taxable Pension Obligation Bonds, Series 2011B

$73.88 million

A3 Rating under review for downgrade

Taxable Pension Funding Bonds, Refunding Series 2008

$ 354.62 million

A3 Rating under review for downgrade

Taxable Pension Funding Bonds, Series 2004 C-3

$92.03 million

A3 Rating under review for downgrade

Taxable Pension Refunding Bonds, Series 2003B

$126.08 million

A3 Rating under review for downgrade

General Obligation Limited Tax (Taxable) Pension Obligation Series 1995A

$241.22 million

A3 Rating under review for downgrade

SAN BERNARDINO (County of)

Pension Obligation Refunding Bonds, Series 2008

$ 158.66 million

Aa3 Rating under review for downgrade

Taxable Pension Obligations, Series 2004A (Fixed Rate Bonds)

$ 148.70million

Aa3 Rating under review for downgrade

Taxable Pension Obligations, Series 2004C (Index Bonds)

$125.0 million

Aa3 Rating under review for downgrade

SAN DIEGO (County of)

Taxable Pension Obligation Bonds, Series 2008A

$ 315.545 million

Aa2 Rating under review for downgrade

Taxable Pension Obligation Bonds, Series 2004 A, B & C

$ 400.99 million

Aa2 Rating under review for downgrade

Taxable Pension Obligation Bonds Series 2002A, B & C

$51.99 million

Aa2 Rating under review for downgrade

SANTA CLARA (County of)

Taxable Pension Obligation Bonds, Series 2007

$386.03 million

Aa3 Rating under review for downgrade

SOLANO (County of)

Taxable Pension Funding Bonds, Series 2005A

$37.115 million

Aa3 Rating under review for downgrade

Taxable Pension Funding Bonds, Series 2004A (Current Interest Bonds)

$26.765 million

Aa3 Rating under review for downgrade

SONOMA (County of)

Pension Obligation

$2.53 million

Aa2 Rating under review for downgrade

TUOLUMNE (County of)

2006 Judgment Obligation Bonds

$6.2 million

A1 Rating under review for downgrade

VENTURA (County of)

2009 Certificates of Participation

$72.66 million

Aa3 Rating under review for downgrade

2003 Certificates of Participation (Public Financing Authority II)

$13.730 million

Aa3 Rating under review for downgrade

SAN BERNARDINO COUNTY FLOOD CONTROL DISTRICT

Judgment Obligation Refunding Bonds, Series 2008 (Tax Exempt Variable Rate Ref. of 2007 Series B ARB JOBs)(LOC) (Bank Bonds)

Aa2 Rating under review for downgrade

Judgment Obligation Refunding Bonds, Series 2008 (Tax Exempt Variable Rate Ref. of 2007 Series B ARB JOBs)(LOC)

$37.30 million

Aa2 Rating under review for downgrade

Judgment Obligation Bonds, Series A 2007 (Auction Rate)- converted to fixed

$49.565 million

Aa2 Rating under review for downgrade

Refunding Bonds Series 2007

$20.72 million

Aa2 Rating under review for downgrade

SOUTH COAST AIR QUALITY MANAGEMENT DISTRICT

Pension Obligation Bonds, Series 2004

$ 35.78 million

Aa3 Rating under review for downgrade

Installment Sales Revenue Refunding Bonds, Series 2002 (Headquarters Facilities)

$ 15.13 million

Aa3 Rating under review for downgrade

CONTRA COSTA COUNTY FIRE PROTECTION DISTRICT

Taxable Pension Obligation Bonds, Series 2005

$116.24 million

Aa2 Rating under review for downgrade

SACRAMENTO METROPOLITAN FIRE DISTRICT

Taxable Pension Funding Bonds, Series 2004A, 2004B and 2004C

$ 78.02 million

A1 Rating under review for downgrade

RATING METHODOLOGY

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, and confidential and proprietary Moody's Analytics' information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Kevork Khrimian
Vice President - Senior Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Eric S Hoffmann
Senior Vice President
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's reviews certain ratings of 14 California counties and four special districts; 17 pension obligation and similarly-secured bonds placed on review for downgrade; two county lease-backed obligations also placed on review for downgrade
No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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