Moody's Investors Service said it has downgraded the city of Azusa, Calif.'s issuer rating to A3 from A2 and Series 2003 refunding COPs to Ba1 from Baa1.
Concurrently, Moody's has assigned these ratings negative outlooks. Both ratings were previously under review for downgrade.
The city's very weak general fund liquidity position, continued structural budget imbalance, and slow economic recovery are the primary factors in the downgrades.
The city continues to demonstrate little evidence that it will achieve and sustain structurally balanced general fund operations, which is of critical importance given its negative net cash and negative available reserves at fiscal 2011 year-end.
Citywide operations also remain imbalanced, reflected in the continued build-up of advances from enterprise funds to governmental funds; deficit spending in governmental funds; and deteriorating total liquidity.
The city has yet to convert land assets — which comprise substantially all of its total general fund balance — to more liquid reserves, leaving itself with very little short-term flexibility. The city faces additional pressures from challenging local economic conditions and a potentially adverse impact from state findings related to legacy RDA obligations.
The A3 issuer rating also incorporates the city's stabilizing property tax base, improving economic profile, and very low direct debt burden; as well as a recognition of the city's positive, though currently illiquid, total general fund balance.
The downgrade of the Series 2003 COPs to Ba1 reflects the city's general financial challenges and the significantly less secure nature of a California lease-backed obligation compared to a California local government GO.
The city's A3 issuer rating represents the rating that would likely be assigned to the city's GO bonds if the city had any such bonds outstanding. The 2003 COPs are secured by a standard, California local government abatable lease, conditioned on continued use of the leased asset, and payable from any legally available funds.
The lease is for essential purpose assets, has level lease payments with a moderately short term to maturity (in fiscal 2021), and represents a manageable 1.1% of general fund revenues on a gross basis.
Outweighing these positive factors are the increased risks to bondholders posed by the city's very weak financial position; the city's multiple years of imbalanced operations with limited evidence of having achieved structural stability in the general fund or in related governmental funds; a recovering though still pressured economy; and a modestly-elevated general fund burden when incorporating payment of the city's pension obligation bonds (NR) and combined pension ARC.
