Moody's Downgrades Sunnyvale, Calif., COPs to Aa2

Moody's Investors Service said it has downgraded to Aa2 from the Aa1 the rating on the city of Sunnyvale, Calif.'s certificates of participation.

The agency also confirmed the city's Aaa issuer rating.

The downgrade creates a two-notch distinction between the COP rating and the city's issuer rating and reflects the agency's changed view of the pledge supporting COPs versus general obligation bonds. This pledge is relatively less secure than its prior estimates, both in terms of probability of default and likely losses in the event of default.

Security for the underlying COP payments is a contractual pledge by the city backed by all of their available financial resources assuming the use and occupancy of the leased assets. This promise is notably in contrast to the stronger, voter approved general obligation pledge that provides a baseline for Moody's estimate of the city's credit quality.

Under California law, a city's GO pledge is an unlimited ad valorem property tax pledge. The city must raise property taxes by whatever amount necessary to repay the obligation, irrespective of the city's general financial position. The relative performance of California cities' property tax bases and their financial profiles through the recent economic cycle, and likely continued divergence going forward, has resulted in the agency creating a greater distinction between these different types of pledges than it had previously.

The city's issuer rating reflects what the city's secured, general obligation rating would be if the city issued such debt. The confirmation of the Aaa issuer rating is driven by the city's large, growing, and dynamic tax base that features a wealthy population and a strong recovery from the economic downturn.

It also incorporates the city's exceptionally strong budget management and financial profile, which notably includes paying pensions costs above its annually required actuarial contribution to more fully reflect what the city expects to be its actual long term costs.

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