You may have heard that the credit rating agency Moody’s Investors Services had announced a couple of months ago that they were going to review a number of California cities for possible credit rating downgrades, and Sunnyvale was on the list. At the time they made this announcement, Sunnyvale was one of only eight of the 500+ California cities that had received an Aaa rating, and Moody’s had expressed concerns that the state’s shaky fiscal situation might warrant some municipal rating changes. Sunnyvale was an obvious target as one of those eight cities with a high rating.
At tonight’s City Council meeting, the City Manager announced that Moody’s has confirmed Sunnyvale’s Aaa rating, and they will not be issuing a downgrade. In issuing their finding, Moody’s stated the following about Sunnyvale:
“The confirmation of the Aaa Issuer Rating is driven by the city’s large, growing, and dynamic tax base that features a wealthy population and a strong recovery from the economic downturn. It also incorporates the city’s exceptionally strong budget management and financial profile, which notably includes paying pensions costs above its annually required actuarial contribution to more fully reflect what the city expects to be its actual long term costs.
…The stable outlook reflects our expectation that the city will continue to maintain an exceptionally strong fiscal profile, stable and wealthy economy and modest debt profile.”
Moody’s did downgrade “certificates of participation” (COP) associated with Sunnyvale’s now-dissolved redevelopment agency and the “rabbit hutch” offices. As part of their review of municipal ratings, Moody’s has decided to generally give a lower rating to certificates of participation than traditional municipal general obligation debt. So they are downgrading COP ratings everywhere, particularly COP debt associated with California RDAs. From the same press release:
“The downgrade creates a two-notch distinction between the COP rating and the city’s Issuer Rating and reflects our changed view of the pledge supporting COPs versus general obligation bonds.”
The COP downgrades actually have no impact on Sunnyvale whatsoever. We neither intended nor are capable of issuing COP debt related to our RDA, particularly since our RDA no longer exists. And likewise, we have no need to issue COPs related to the rabbit hutches. A rating like this only affects a city before it issues debt – once the debt is issued (bonds or COPs), the city is unaffected by a change in the rating. What really matters to Sunnyvale is its general obligation rating, and maintaining the Aaa rating is a huge benefit to us, should we ever decide to use our credit.
The rabbit hutch debt is actually interesting (and I may have this wrong, but I’ll take a shot). We used COPs to build the rabbit hutches as offices for city staff. But having more space than we needed just for ourselves (at that time), we allocated the extra space for renting out to private entities, and that rental revenue currently exceeds the cost to repay the COP debt. I heard it described as a “cash cow”. But that’s somewhat misleading. We’re getting more in rent than we need to repay the debt, but not enough to save for capital replacement of those buildings. So we’re making more than enough to repay the COP debt without spending general revenue, but that’s something of a minor fiscal cliff, with the declining state of those buildings (hence the repeated concerns about finding a solution to the civic center problem).
Anyway, what’s valuable to us is Moody’s independent affirmation that all of the hard choices we’ve made in recent years to solve our structural deficit and attack our unfunded liability is putting us on a strong and secure fiscal footing. We’ve made these decisions based on our belief in what was necessary to ensure our fiscal future. Having an independent, expert opinion that Sunnyvale is headed in the right direction is very gratifying.