Rating Update: Moody's upgrades City of San Diego's (CA) Issuer Rating to Aa2

from Aa3 and upgrades its Lease Revenue Bonds to A1 from A2; the outlook is
stable
Global Credit Research - 12 Nov 2014
Approximately $294 million in lease revenue debt affected

SAN DIEGO (CITY OF) CA

Cities (including Towns, Villages and Townships)
CA
Opinion

NEW YORK, November 12, 2014 --Moody's Investors Service has upgraded the City of San Diego's Issuer
Rating to Aa2 from Aa3 and upgraded the city's outstanding Lease Revenue Bonds to A1 from A2. The outlook on
the ratings is stable.
RATING RATIONALE
The rating upgrade reflects the city's improved financial position, marked by growing cash and reserves over the
past five fiscal years; a growing local economy with sound long-term prospects; new, stronger financial policies;
and the city's continued commitment to addressing its pension and OPEB liabilities. The rating also incorporates
the city's strong fiscal management that maintained a stable, albeit limited reserve position through the economic
downturn with aggressive expenditure controls. The city's robust financial management has strengthened financial
policies and increased reserve targets since the economic turnaround and is on pace to achieve these goals as a
result of healthy growth in top revenue sources. Additionally factored in the rating is the large and diverse
economy which has shown positive trends in key economic indicators including declining unemployment and
improved socio-economic income and wealth measures. The city's debt burden is low and composed solely of
fixed rate debt.
The Issuer Rating is equivalent to what the city's general obligation bond rating would be if it had any such debt.
The difference between the city's Issuer Rating and its lease rating is based on the relative weakness of the
pledge on the leases compared to the city's theoretical general obligation promise as reflected by the Issuer
Rating. The city's pledge to repay its lease debt is a contractual obligation, on parity with the city's other
unsecured obligations. 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 lease pledges. Under California law, an issuer's
GO pledge is an unlimited ad valorem property tax pledge. The city must raise property taxes by whatever amount
necessary to repay the obligation, irrespective of the city's general financial position.
Key credit Strengths
-Growth in top revenue sources resulting in improved cash and reserve position
-Strong fiscal management with closely monitored budgets
-Reasonable and improving five year financial outlook
-Large and diverse local economy
-Above average wealth and income levels for a large city
-Pension reform enacted
Credit Challenges
-Significant portion of budget attributed to fixed costs

-Exposure to economically sensitive revenue sources

-While reserves have improved, overall reserve position falls below the median for the current rating category
DETAILED CREDIT DISCUSSION
GROWTH IN TOP REVENUE SOURCES AND STRONG FINANCIAL MANAGEMENT HAVE IMPROVED
OVERALL FINANCIAL POSITION; HOWEVER, RESERVES STILL FALL BELOW NATIONWIDE MEDIANS
The city has grown General Fund net cash and reserves in three of the last four fiscal years and is expected to
post additional growth according to unaudited FY 2014 results. Dynamic growth in city revenues as the economy
emerged from the Great Recession combined with the city's continued expenditure controls has driven this
increase in cash and reserves. The city has strong management that exercised aggressive expenditure controls
in the depths of the recession, and these were carried through to subsequent years.
General Fund reserves grew to a total of $222 million or 18.4% of revenues in FY 2013 and cash grew to $242
million or 20% of revenues in the same year. The augmentation of reserves and cash were fueled by significant
growth in the city's top revenue sources, of property taxes, sales taxes and transient occupancy taxes (TOT).
Property taxes, which comprise a significant 34% of GF revenues, grew at an average rate of 2.12% annually to
$408.8 million in FY 2014, and city management reports better than the 4.8% budgeted growth is expected in the
current fiscal year. Sales tax revenues, which make up 20% of revenues, grew at an average annual rate of 7.2%
from 2010 to 2014 and are reported to be on track to exceed the budgeted 4.5% growth in the current year. Lastly,
TOT grew an average 8.4% annually over the same time frame and comprises 7% of GF revenues. While city
reserves have steadily grown over the past six years, it is important to note that the total GF reserve position is
relatively weakness as it falls below the national median level of 32% for Aa2 rated cities in the US.
Fixed costs comprise a significant portion of the city's budget, with lease payments, pension and other post
employee benefit (OPEB) contributions making up 25% of expenditures in FY 2013 and increasing to 29.8% of
expenditures in FY 2014. While these costs make up a significant portion of the city's budget and limit financial
flexibility, it is of positive note that part of the increase is due to the city's aggressive approach to address its long
term pension and OPEB liabilities. The city's pension annually required contribution (ARC) increased to $277
million in FY 2014 from $231 million in FY 2013, however, $27 million of this increase is due to the city's paying
down the closed, defined benefit portion of the pension program over a shorter 15 year amortization schedule.
Pension reform was enacted with the voter approval of Proposition B in 2012, which closed the city's defined
benefit program to new hires, excluding police, after June of 2012. The reform additionally required the city to
negotiate non-pensionable pay increases with labor groups. The bulk of these reforms reduced the long term
unfunded pension liability by $194.9 million (on a $2.2 billion liability) in 2013. While Proposition B and the resulting
pension reform is currently the subject of litigation, Moody's believes that the city has garnered some financial
flexibility in the current and future budgets to address an unfavorable outcome.
Strong fiscal management has been exercised by the city and enabled it to preserve its financial position through
significant cost reductions including staff reductions, and reductions to overall pension and OPEB benefits. The
strength of fiscal management has also been exemplified through the recent turnaround and growth years where
management has increased its comprehensive reserve target to 14% of General Fund from 8%. The improvement
to the city's reserve target was made in 2014 and according to unaudited results this target was achieved at the
end of FY 2014.
LARGE AND DIVERSE LOCAL ECONOMY WITH ABOVE AVERAGE INCOME LEVELS FOR CITY OF ITS
SIZE
The city's economy is highly diverse with tourism, the military, higher education, trade and biotechnology playing
important roles. The population benefiting from this economy has historically boasted above average wealth and
income levels and Census 2010 income indicators show further income gains with a per capita income at 119% of
the nation and median family income at 120% compared to 109% and 106%, respectively in 2000. The
unemployment rate for the city has also improved from its high of 12.4% in 2010, when unemployment exceeded
national levels by nearly 3%. In 2013 unemployment levels declined and started to approximate national levels.
The unemployment level was 6.2% as of August 2014, compared a 7.4% state rate and 6.3% for the US.
Assessed value in 2014 reached $166 billion and exceeded the pre-recession high of $163.7 billion in 2009. The
city's 5 year average annual growth in assessed value was 0.3% in 2014. Assessed value per capita is strong at
$125,466 and comfortably exceeds the $110,939 US median for Aa2 rated cities. Recent home price data also

suggest that among large cities throughout the country the city's home values are recovering from their lowest
values in 2009 at a greater pace than their large city peers.
FAVORABLE DEBT POSITION
The city's direct and overall debt ratios of 0.4% and 4.1%, respectively, are in line with other cities in the state, and
compare to most large cities in the country. The city's $533 million of direct debt is composed of lease supported
obligations. The resulting lease burden of approximately $50 million represents a manageable 4.1% of 2013 GF
revenues. The city expects to issue approximately $120 million in lease obligation debt in the near term for capital
upgrades. All of the city's outstanding debt is fixed rate.
Moody's adjusted net pension liability (ANPL) for the city, under our methodology for adjusting reported pension
data, is a high 3.11 times operating revenues, compared to less than 1 times on average in the sector as of 2011.
Moody's ANPL reflects certain adjustments we make to improve comparability of reported pension liabilities. The
adjustments are not intended to replace the city's reported liability information, but to improve comparability with
other rated entities.
WHAT COULD CAUSE THE RATING TO GO UP
-Significant growth in city reserve position
-Significant growth in overall wealth and income levels
WHAT COULD CAUSE THE RATING TO GO DOWN
-Depletion of city reserve position or material challenges to the city's ability to generate structurally balanced
budgets
-Significant contraction in the property tax base or overall economy
Outlook
The outlook on the ratings is stable. Moody's expects the city will continue to operate with strong fiscal discipline
resulting in a stable financial position and reserves. We also expect continued improvement in the city and regional
economy contributing to growth in the city's important revenue sources.
KEY STATISTICS
Assessed value, 2014: $166.4 billion
A.V. per capita: $ 125,466
Estimated Median family income, 120.1% of national median
General Fund balance, FY 2013: 18.4% of total General Fund revenues
Net General Fund Cash balance, FY 2013: 20.9% of total General Fund revenues
Institutional framework: A
5 -year average operating revenues/operating expenditures: 1.0x
Net direct debt/full value: 0.4%
Net direct debt/ operating revenue: 0.5x
3-year average adjusted net pensions liability/full value: 2.52%%
3-year average adjusted net pensions liability/operating revenues: 3.26x
The principal methodology used in the issuer rating was US Local Government General Obligation Debt published
in January 2014. The principal methodology used in the lease rating was The Fundamentals of Credit Analysis for
Lease-Backed Municipal Obligations published in December 2011. Please see the Credit Policy page on
www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory
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Analysts

Kristina Alagar Cordero

Lead Analyst
Public Finance Group
Moody's Investors Service
Alexandra J. Cimmiyotti
Backup Analyst
Public Finance Group
Moody's Investors Service
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