Citing a “deteriorating financial position” due in part to a severe downturn in the local real estate market, Moody’s Investors Service Monday dropped Stockton’s issuer rating to A2 from A1.
The city of 290,000, located about 80 miles east of San Francisco and 50 miles south of Sacramento, experienced strong growth in the recent real estate boom but is now among those most affected by the current downturn, according to Moody’s.
The Stockton metropolitan area had the highest foreclosure rate in the nation in May, according to RealtyTrac, an online marketplace for foreclosure properties
According to Moody’s, Stockton’s financial reserves were narrow even as it entered the current downturn, and the city has not made sufficient adjustments to restore fiscal balance.
While the city’s debt levels are near the California median, Moody’s cites Stockton’s most recent debt issue as a credit risk — the city issued $40.7 million in variable-rate debt to purchase a building it eventually intends to use for city offices. In the meantime, officials expect rents from current tenants to exceed debt service.
“The potential basis risk associated with this transaction is a material credit concern given the narrowness of the city’s finances,” according to Moody’s.
In connection with the downgrade to Stockton’s issuer rating, Moody’s downgraded the city’s Series 2007A and B taxable pension obligation bonds to A3 from A2, and downgraded its Series A lease revenue refunding bonds to Baa1 from A3.
