By one-notch, Moody's Investors Service downgraded on Monday nearly $88 million of Santa Monica lease revenue bonds but confirmed the triple A rating of its general obligation bonds, crediting the city for its healthy tax base, but citing the need for a two-notch distinction between the two types of bonds.
The downgrade to Aa2 effects $87.6 million of outstanding debt.
"This brings us to the standard rating," said the city's Finance Director Gigi Decavalles-Hughes. "It’s still a good rating."
The credit agency said general obligation bonds, which are backed by property taxes, are more secure than lease revenue bonds paid from the city's general fund.
"There's a dedicated revenue stream to pay off those general obligation bonds that does not go through the city's revenue funds," said Moody's spokesman David Jacobson.
Moody's looked at more than $117 million in bonds issued by Santa Monica in the past decade to fund construction of the main library, the public safety station and three parking structures in downtown. Before the review, they were all graded AAA and Aa1, meaning they were high quality and subject to very little credit risk.
With a lower rating, the city would expect to pay higher interest rates on future lease revenue bonds, Decavalles-Hughes said. "It would a little bit more expensive," she said.
The downgrade is part of a major review of bonds in 32 cities across the state that began this summer. In all, 27 cities' lease-backed obligations were being considered for downgrades.
"With everything that's going on in California, there's a lot of financial demands on cities' general funds," said Jacobson. "We wanted to make sure that they were rated correctly."
The leading credit rating agency said Santa Monica is challenged by "sensitive" tax revenues based on tourism and the local economy and resident wealth levels falling below the median for Aaa-rated U.S. cities. Still, it credited the city for its "exceptionally strong" financial operations and "sizable" reserves.
The confirmation of Santa Monica's Aaa general obligation bond reflects the city's "large and diverse tax base that has undergone minimal declines throughout the economic downtown," "moderate general obligation debt and lease-obligation burden," and "relatively small annual required pension and other post-employment benefit contributions as a percentage of general fund operating expenditures," Moody's said in a statement.
The outlook on the ratings is stable, according to Moody's.