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Standard & Poor's: Stability Expected For Most California Cities in 2013

LOS ANGELES — The three city bankruptcy filings in California last year will come to be viewed as the product of individual cities’ decisions rather than the start of a pervasive trend, Standard & Poor’s analysts predicted in a report released Tuesday.

Even though a majority of its rating actions involving California cities in 2012 were downgrades, S&P analysts said that only a small percentage of the cities it rates experienced downgrades and it expects the same for 2013.

S&P rates the general obligations of 202 of the state’s 482 cities, including 36 of the 40 most populous cities. It affirmed the ratings or outlook on all but 30 credits in 2012.

The majority of the 202 California cities that Standard & Poor’s rates are likely to experience improved credit quality in 2013 as their economies recover and revenues continue to strengthen, the report said.

“Although we witnessed a trio of California cities file for Chapter 9 bankruptcy protection during 2012, we believe that the sector is stable overall,” S&P analysts said in the report.

S&P analysts added that they believe “the efforts of local government management teams will likely mean that the recent bankruptcy filings will be viewed as the product of individual cities’ decisions rather than the start of a pervasive trend.”

Stockton and San Bernardino are the only two California cities currently in bankruptcy. The small town of Mammoth Lakes, which was driven into Chapter 9 bankruptcy in 2012 by losing a court case, emerged after settling the litigation.

The S&P forecast reflects similarities to what analysts said they found in 2012 with the credit quality of most cities remaining unchanged despite fiscal challenges.

A minority of the state’s issuers could experience downgrades to their credit quality this year, according to the report.

While the majority of rating changes made by analysts in 2012 were downgrades, analysts only took rating or outlook actions on 30 cities.

Out of 26 rating changes, 22 were downgrades, with four ratings lowered to speculative grade from investment grade. Outlook changes have also trended negative with nine out of 15 outlook changes in a negative direction.

“Given the harsh impact of the Great Recession on city revenues, we believe the small number of municipal bankruptcies is a testimony to the resilience of local governments and their ability and willingness to scale back expenditures and align them with lower revenues,” analysts said.

This willingness by most cities to make tough budget cuts has preserved their credit quality, analysts said.

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