San Jose Loses Its Last Triple-A After S&P Drops It to AA-Plus

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SAN FRANCISCO — Standard & Poor's said Wednesday it has downgraded San Jose's general obligation rating to AA-plus from AAA due to the city's weak finances.

"The rating change reflects our view of budget pressures that persist despite modest revenue growth, significant compensation reductions, and position eliminations," Standard & Poor's analyst Misty Newland said in the report.

The report said San Jose's budget has long-term problems that will be tough to mend in the short-term.

In addition to lowering the city's GO rating, Standard & Poor's also cut the rating for the city's financing authority and the city's lease revenue bond rating to AA from AA-plus.

The moves affect around $1 billion of debt. The ratings outlook remains negative.

The rating agency said the city's reserve ratios that measure coverage of the bonds remain strong despite four consecutive of years of general fund deficits.

City officials expect a budget surplus of $10 million for fiscal 2013. However, they also expects a shortfall the following fiscal year of $22.5 million out of a spending plan of roughly $680 million, according to S&P.

Standard & Poor's analysts said that the major driver of future deficits in San Jose would be the growth of retirement expenses.

According to the report, San Jose's general fund pension and health care costs are set to increase 26% between fiscal 2013 and fiscal 2017 to $233 million — $46 million for health care cost and $187 million for pensions.

The city hasn't negotiated any compensation contracts beyond fiscal 2013.

Last month, Moody's Investors Service downgraded San Jose's general obligation bond rating to Aa1 from Aaa.

The rating agency also downgraded various lease revenue bonds to Aa3 from Aa2.

San Jose officials said at the time that a downgrade by Moody's would increase the city's letter-of-credit costs because it was the second rating agency to lower its credit.

Last year, Fitch Ratings downgraded the city's general obligation bonds to AA-plus from AAA and its lease revenue bonds to AA from AA-plus.

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