Moody's Investors Service said it has downgraded the issuer rating of the city of Glendale, Calif., to Aa2 from Aa1 and has downgraded to A1 from Aa2 the rating of the city's variable rate demand certificates of participation, Series 2000C (2000 Police Building Project).
Approximately $50.7 million of debt is affected by this rating action. The outlook on these ratings is stable.
The one notch issuer rating downgrade reflects some of the city's inherent economic weaknesses and the city's potential financial challenges going forward, notwithstanding the city's economic expansion in some areas and relatively strong operating performance and management throughout the recent economic downturn. In addition to the elimination of the city's redevelopment agency (RDA) with the passage of AB 1x 26 and the financial advances due to the city, increasing employee costs and Liability and Workers' Compensation payments will be the city's primary cost pressure points.
The two notch rating distinction between the A1 rating on the city's lease-backed obligations and its Aa2 issuer rating represents the weaker security pledge for lease-backed obligations and reflects the additional risk to bondholders from the city's financial, operational, and economic conditions over the more secure general obligation pledge. A "lease pledge" is a contractual obligation, conditioned on use and/or occupancy of the leased asset, effectively on parity with a city's other unsecured obligations. The city's issuer rating reflects what its secured, general obligation rating would be if the city issued such debt.
The outlook on the ratings is stable. The city's economic indicators and financial performance are relatively stable, and the local and regional economy are improving sufficiently to support projected fiscal 2013 expenditures. While the city's general fund ending fund balance is not as strong as prior years, it remains healthy for the rating level.
Both the issuer rating and the lease obligation rating primarily reflect the credit strength of the city's large and diverse tax base and the city's location in the Los Angeles area economy.
The city's population appears to have benefited from the size and diversity of the region's economy given the stability in income levels as of the 2010 census results, though Moody's notes that the city's socioeconomic indicators remain low for the rating category.
The city's unemployment rate has been stubbornly high at 9.0% as of October 2012, a rate slightly below the state average, though down from 10.4% in October of 2011.
The housing sector for the city is relatively stable with recent data indicating a rise in single family housing prices while condominium prices continue to decline from the previous year. Foreclosure rates for the city are comparable to national averages.
Reflecting some of the city's economic challenges, the city's financial operations have varied in recent years with periods of large to modest deficit spending and similarly large to modest operating surpluses, but total ending fund balances have remained healthy and relatively stable.
With the elimination of the city's RDA, Moody's notes that the city's total fund balance levels are significantly different from historical levels, though comparable to the national and state median for the Aa2 rating.
The city's ending cash balances have declined somewhat though remain healthy and consistent with Aa2-rated cities. Glendale maintains a modest lease burden as a percentage of expenditures. With the inclusion of the city's annually required pension contribution, the city's lease and pension burden as a percentage of general fund operating expenditures is comparable to other cities of similar size.
Finally, the city's public safety costs as a percentage of total general fund operating expenditures are below-average and will likely remain so for the foreseeable future. The city recently restructured its paramedic service delivery to reduce costs and improve service delivery.