SAN FRANCISCO — Moody’s Investors Service downgraded the San Pablo Redevelopment Agency’s Tenth Township Project Area tax-allocation bonds to Baa2 from Baa1, citing a sharp decline in property tax revenue and high exposure to variable-rate debt.

The rating change affects $6.5 million of fixed-rate bonds sold in 1999. Moody’s affirmed its Baa2 rating on the SPRA’s 2001 tax-allocation revenue bonds, which are secured by taxes from the Tenth Township Project Area and the Legacy Project Area. The agency has about $88.5 million of municipal bonds outstanding.

“The downgrade reflects the potential for additional assessed valuation declines in the Tenth Township project area after two years of successive declines aggregating to 26%,” Moody’s analyst Eric Hoffmann said in a report published late Monday. He also cited the SPRA’s “relatively thin” overall debt service coverage ratios and “relatively unusual” exposure to variable-rate debt.

Redevelopment agencies finance economic development projects with municipal bonds, which are repaid by the incremental growth in tax revenues spurred by the projects. California RDAs have been hit hard in recent years by declines in property values and state legislation that takes $2.05 billion of their tax revenues over two years to help balance California’s budget.

San Pablo’s Tenth Township project area grew rapidly during the housing boom, doubling its assessed valuation to almost $1.4 billion between 2001 and 2008, but assessed values fell 4% in fiscal 2009 and 23% in fiscal 2010, forcing the city to curtail its redevelopment efforts this year.

San Pablo is an ethnically diverse Contra Costa County town of 29,400, located in a swathe of blue-collar communities in the northeastern San Francisco Bay Area. It borders Richmond and is about 14 miles south of Vallejo.

Contra Costa County grew rapidly in recent years, but it has been hard hit by real estate foreclosures. About 44% of Contra Costa County home sales were foreclosures last month, according to a report by MDA DataQuick. That’s down from about 60% a year ago.

“Home prices in San Pablo have continued to decline,” Moody’s said. “We note that some stabilization in the housing market has been seen in recent months, likely limiting future declines to a manageable level.”

Moody’s also cited the risk the San Pablo agency faces from its debt portfolio, about 40% of which is in daily variable-rate demand obligations. The bonds have performed well, but like other municipalities, it must periodically renew liquidity agreements and faces higher costs and limited supply in the liquidity market.

“It is unusual for a redevelopment agency to face the risks associated with variable-rate debt,” Hoffmann said. “A particular near-term challenge may be the economic replacement of the liquidity facility on these variable-rate bonds when it expires in June 2011.”

The SPRA’s variable-rate 2006 subordinate tax-allocation bonds are backed by a letter of credit from Union Bank of California and have reset with rates of just 0.1% to 0.35% over the past month, according to data from the Municipal Securities Rulemaking Board’s EMMA Web site.

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