Moody's Investors Service said it has downgraded the rating of San Bernardino County, Calif.'s pension obligation bonds to A1 from Aa3.

Concurrently, Moody's has affirmed the county's Aa2 issuer rating and A1 ratings on its lease obligations. The county's stable outlook has also been affirmed. Approximately $964 billion in debt has been affected by this rating action.

The downgrade of the pension obligation bonds is driven by Moody's changed view of the pledge supporting the underlying payments by the county. This pledge is relatively less secure than Moody's prior estimates, both in terms of probability of default and likely losses in the event of default.

Security for the underlying certificate of participation and pension obligation payments is a contractual pledge of the county of all of its available financial resources. This promise is notably in contrast to the stronger, voter approved general obligation pledge that provides a baseline for our estimate of the credit quality of pension obligation bonds and lease pledges. Under California law, a county's GO pledge is an unlimited ad valorem property tax pledge. The county must raise property taxes by whatever amount necessary to repay the obligation, irrespective of the county's general financial position.

The county's pledge to repay its debt issued to refinance pension liabilities or to honor its lease obligations, however, is a contractual obligation, on parity with the county's other unsecured obligations. The relative performance of California municipalities property tax bases and their financial profiles through the recent economic cycle, and likely continued divergence going forward, has resulted in Moody's creating a greater distinction between these different types of pledges than it had previously.

The affirmation of the county's issuer rating at Aa2 and its lease obligations at A1 is based on the county's large and diverse, although weakened, tax base and lower than average income levels of its residents.

Also incorporated into the rating is the county's sound financial position and management through the downturn, as is its moderate and notably simplified debt portfolio.

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