NEW YORK - Moody's Investors Service said it has downgraded to Aa2 from Aa1 Anaheim's general obligation rating and to A1 from Aa3 the rating on the city's 2008 lease supported obligations. The outlook on these ratings is stable.

The downgrade is primarily based on the city's weakening financial position, combined with a long-term negative trend in the city's socioeconomic profile. Since 2007, the city's general fund has suffered three annual declines, and the sole surplus in 2009 was due to additional transfers from the city's electric enterprise.

Although estimates for 2012 show stabilization of the general fund balance, the current balance is less than half of its peak in 2007 and amounts to less than one sixth of similarly rated cities in the state and less than one third of similarly rated cities in the nation.

As the city's fund balance has declined, its general fund cash position has also weakened. The ratings continue to benefit from the city's fundamental credit strengths.

These strengths notably include the city's still fundamentally strong and diverse economy, driven by nationally significant tourism and entertainment sector and a moderate and rapidly retiring direct net debt burden, resulting from the city's consistently conservative debt management practices.

The city's location in the large and diverse Los Angeles economy also figures favorably in the rating. The stabilizing finances are also key to the rating.

Significant growth in sales tax and transient occupancy tax, coupled with additional cuts in services and salary concessions from employees are the reasons for stabilization of the fund balance is 2012. The 2013 proposed budget assumes continued growth in these economically sensitive revenues.

The two notch rating distinction between the A1 on the city's lease supported rating and the Aa2-rated general obligation bonds represents Moody's standard notching differential for fixed asset leases relative to a California issuer's general obligation rating. Broadly speaking the two notches reflect the risk of abatement and the narrower, general fund security pledge for leases compared to the very strong, voter-approved unlimited property tax pledge securing California general obligation bonds.

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