Moody's Investors Service affirmed Santa Barbara, Calif.'s Aa2 issuer rating, but downgraded to A1 from Aa3 the ratings for the city's 2002 certificates of participation and its 2009 airport revenue bonds. The ratings changes affect $49 million in debt.

The one-notch downgrade of the 2002 COPs and the 2009 airport revenue bonds reflected the change in the rating agency's opinion of the relative security of lease-backed obligations compared to a California city's general obligation pledge.

Moody's cited the city's large tax base, strong fiscal position and the likelihood it will continue to manage operations to maintain an overall sound credit profile in its rating decisions. The COPs are secured by lease payments made by the city, and by the city's covenant to annually budget and appropriate the lease payment for the use and occupancy of the leased asset, the Public Works/Community Development building.

The airport revenue bonds are secured by base rental payments pursuant to a lease between the city and the Santa Barbara Financing Authority and are derived from a pledge of general fund revenues, according to the report. The bonds are also secured by installment payments derived from the airport's net revenues.

The two-notch rating distinction between the city's A1 lease ratings and the Aa2 issuer rating reflect the difference in the level of security between the bonds. Issuer ratings are the equivalent of a general obligation bond rating; GO bonds are backed by a dedicated tax and a pledge to raise that tax if necessary to pay debt service. A lease pledge is a contractual obligation, on parity with a city's other unsecured obligations, the report said.

Analysts said in the report that notching between the issuer rating and lease rating could widen further if the city's financial situation worsens.

Moody's analysts put 56 California credits on review for downgrade in early October when it announced it planned to draw more of a distinction between local California GO debt and obligations that are paid from general fund revenues.

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