Moody's Investors Service said it has downgraded to Aa3 from Aa2 the rating of the San Bernardino County Flood Control District, Calif.'s judgment obligation bonds, Series 2008 (bank bonds); judgment obligation bonds, Series 2008 (LOC); judgment obligation bonds, Series 2007A; and refunding bonds, Series 2007.
The district's rating outlook is stable. Approximately $108.2 million in debt has been affected by this rating action.
The downgrade of these bonds represents Moody's changed opinion on the pledged security of the bonds. The underlying security for the judgment obligation bonds and the refunding bonds, Series 2007 is a pledge of all discretionary revenues received by the district including property tax revenues.
The district's judgment obligation refunding bonds, Series 2008 are enhanced by a letter of credit from Bank of America. The pledged revenues are notably in contrast to the stronger, voter approved general obligation pledge that provides a baseline for Moody's estimate of the credit quality of bonds supported by the general fund.
Under California law, a general obligation pledge is an unlimited ad valorem property tax pledge where property taxes must be raised by whatever amount necessary to repay the obligation, irrespective of the entity's general financial position.
The pledged revenues are therefore a weaker security pledge and result in additional risks to bondholders from the district's financial, operational, and economic conditions over the more secure general obligation pledge.
The district's pledge to repay its debt is a contractual obligation. 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 Moody's had previously.
The rating on these bonds also reflects the district's large and diverse tax base that is stabilizing and showing some signs of improvement; average resident wealth levels; healthy balance sheet, characterized by ample fund balances and strong ending cash position and expenditure flexibility to limit any capital projects depending on the district's financial position; and low debt levels that include strong debt service coverage ratios for the district's outstanding debt, though notable is the district's relatively high debt service burden as a percentage of operating revenues.