Moody's Investors Service said it has downgraded the rating on the city of Sacramento, Calif.'s master lease revenue bonds from Aa3 to A2.
Moody's has also downgraded the city's non-master lease revenue bonds to A2 from A1. The city's Aa2 issuer rating has been confirmed.
The outlook is stable.
The Aa2 issuer rating reflects the city's very large but still pressured tax base, narrowed but gradually improved fiscal position, and well above average lease burden, which is a key factor in the three-notch difference between the lease ratings and the Issuer rating.
The downgrade creates a three-notch distinction between the lease ratings and the city's issuer rating and reflects Moody's changed view of the pledge supporting lease versus general obligation bonds.
Moody's believes the lease 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 leases 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 its 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 a greater distinction between these different types of pledges than previously.