SAN FRANCISCO — Standard & Poor's and Moody's Investors Service downgraded Sacramento County yesterday, as California's eighth-most populous county prepared to sell $129 million of certificates of participation.
Standard & Poor's cut the county's issuer credit rating to A from A-plus, and dropped the COP rating to A-minus from A.
Moody's cut the county's ratings for the second time in less than a year. It reduced the issuer rating to A3 from A1, its pension obligation bond rating to Baa1 from A3, and its COP rating to Baa2 from Baa1. The agency also reduced its global scale rating on the county's 2008 POBs to A2 from A1. Both agencies gave the county a negative outlook.
Sacramento County, which had about $1.1 billion of pension obligation bonds and $328 million of COPs outstanding at the end of fiscal 2009, was still awaiting new ratings from Fitch Ratings at press time yesterday.
Fitch cut both the COPs and pension obligation bonds to A from A-minus last June.
"The downgrades reflect our opinion of the county's unreserved [fund balance] levels," Standard & Poor's analyst Bea Chiem said in a report. "We also revised the outlook to negative from stable, reflecting our view of the county's budget, which remains structurally imbalanced, and its rising fixed costs."
The housing bust and cuts in state aid have reduced the county's revenue in recent years, while debt service, public safety, health, and sanitation costs continued to push general fund expenditures higher. The result is persistent structural budget deficits that the county has yet to tame.
"The downgrade reflects the county's sizable deficit in fiscal 2009, its third in a row, which has resulted in a negative unreserved fund balance," Moody's analyst Dari Barzel said in a report.
Sacramento County's unreserved fund balances declined from a "strong" 11.2% in fiscal 2006 to a negative 2.1% in 2009, Standard & Poor's said. Its unreserved fund balance was negative $41.5 million at the end of fiscal 2009, when it posted an operating deficit of $129 million.
"We believe the county is likely to face continued financial pressure," Chiem said.
The county currently projects a $10 million budget shortfall this year, absent mid-year budget cuts, and it expects a $122 million budget gap next year.
Standard & Poor's warned it may downgrade the county again if it fails to restore budget balance and rebuild an adequate general fund reserve balance.
The current COP issue, which is backed by lease payments on the county jail, will reduce debt-service costs this year and over the next few years by pushing the costs further into the future, extending maturities as much as 10 years.
The deal — which is being underwritten by De La Rosa & Co. and Bank of America Merrill Lynch — will also fix out variable-rate COPs that were supported by an expiring letter of credit, replace sureties on several bond issues with cash debt-service reserve funds, and finance a $9 million swap termination payment on the outstanding variable-rate debt.
"The main goal of this refunding is to reduce the county's risk," said county debt officer Chris Marx. She said the deal is scheduled to price March 3.
After the refunding, all of the county's COPS will be fixed-rate debt. But it will continue to carry a significant amount of variable-rate exposure among its POBs, including $134 million with a letter of credit that expires next month.
"Failure to replace the LOC in a timely manner could put substantial downward pressure on the county's rating, which could be exacerbated by the fact that a downgrade would put the county's ratings very close to the termination event on its various POB swaps," Barzel said.
The swaps had a negative mark-to-market value of $97.1 million at the end of calendar 2009.
