Moody's Investors Service said it has downgraded the County of Santa Clara's pension obligation bond rating to A1 from Aa3 and affirmed the county's Aa2 general obligation bond rating and A1 rating on the county's outstanding certificates of participation and lease obligations.
The outlook is stable.
The downgrade creates a two-notch distinction between the POB rating and the county's GO rating. The rating change reflects Moody's changed view of the pledge supporting POBs versus general obligation bonds.
Moody's believes this pledge is relatively less secure than its prior estimates, both in terms of probability of default and likely losses in the event of default. Security for pension bonds is a pledge of all of the county's legally available resources.
This promise is notably in contrast to the stronger, voter approved general obligation pledge that provides a baseline for our estimate of the county's credit quality. Under California law, a GO pledge is an unlimited ad valorem property tax pledge.
A general obligation bond issuer must raise property taxes by whatever amount necessary to repay the obligation, irrespective of the issuer's general financial position. This distinction between a GO security and the narrower POB pledge is reflected in the current two-notch rating differential.
The affirmation of the county's other long term ratings reflects county's very strong tax base, solid long-term economic fundamentals, and above average socioeconomic profile.
The Ccunty's favorable debt position--which despite the county's aggressive borrowing in recent years, remains manageable—and its generally favorable pension and retiree health positions also figure positively in the ratings.
These favorable factors are counterbalanced with the county's below average financial position, following three consecutive years of General Fund deficits (2009-2011). Although in 2012 the county reversed the trend with a relatively small surplus, the prospects for rebuilding the county's balance sheet in the current economic environment remain limited.
