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MARCH 20, 2014

FEATURE ARTICLES
California Pension Reform Proposal Will Not Appear on 2014 Ballot, a Credit Negative for Local Governments
Mayors in Anaheim, San Jose and other cities halted efforts for a statewide vote in November that aimed to help local governments with pension cost flexibility.

RATING CHANGE HIGHLIGHTS


2 Chicago Board of Education's (IL) GO Downgraded to Baa1; Outlook Negative
Affecting $6.3 billion, the downgrade to Baa1 from A3 reflects close ties to the City of Chicago, whose rating we recently downgraded.

Rising Ridership is Positive for US Transit Authorities


Transit authorities are boosted by the highest public transportation use in in 57 years and growing sales tax revenues that they rely on for capital and operating expenditures.

Chicago Park District's (IL) GO Downgraded to A3 from A1; Outlook Negative Impacting $826 million, we believe Chicago city officials influence on cost allocations and levy setting could indirectly affect the districts finances.

Court Ruling Upholding Nassau County (NY) Wage Freeze is Credit Positive
The ruling affecting police employees allows the county to avoid the reimbursement of $230 million (9.2% of budget) in lost wage increases from 2011 through 2013.

Orange County, NY's GO Downgraded to Aa2 from Aaa; Outlook Negative Affecting $268.5 million, the action incorporates operating deficits and declines in reserve levels, in combination with property value declines. University of San Diego, CAs Revenue Bonds Upgraded to A1; Outlook Stable The upgrade to A1 from A2 impacts $168 million and reflects excellent financial management, contributing to strong cash flow and debt service.

RESEARCH HIGHLIGHTS
Jefferson County, ALs Lower GO Leverage Fuels Higher Recovery than Sewer
The countys General Obligation Limited Tax creditors realized an overall recovery rate of 88%, ranging from 88%- 95% for warrant holders to 0% for parity interest rate swaps. The overall GO recovery rate is much higher than the overall recovery rate of 54% realized by county sewer warrant creditors and slightly higher than our previous expectations. Two-Midnight Rule Will Reduce Revenue for Most Hospitals We expect the two-midnight rule to reduce hospital operating profits in 2014 because it will lower Medicare reimbursement for many cases. Although the rule will affect all acute care hospitals, smaller community hospitals with shorter average lengths of stay and less complex cases are most at risk.

Newark, NJs A3 GO and Baa1 GO Limited Tax Ratings Placed Under Review for Downgrade Impacting $540 million, the action reflects the likelihood that the city will be late producing its 2014 budget, and the citys persistent structural deficit.

California Department of Water Resources' Power Supply Revenue Bonds Upgraded to Aa2; Outlook Stable 7
The upgrade to Aa2 from Aa3, affecting $6.6 billion, reflects an improved risk profile owing to support from the state public utility commission.

New Mexico State Universitys Bonds Downgraded to Aa3; Outlook Stable


The downgrade to Aa3 from Aa2, affecting $136 million, incorporates weakened operating performance and competitive enrollment pressures.

Access our moodys.com public finance landing page at moodys.com/UsPublicFinance

MOODYS.COM

Thomas Aaron Analyst +1.312.706.9967 thomas.aaron@moodys.com Eric Hoffmann Senior Vice President +1.415.274.1702 eric.hoffmann@moodys.com

California Pension Reform Proposal Not on 2014 Ballot, a Credit Negative for Local Governments
On March 14, proponents of a pension reform initiative, including the mayors of Anaheim (Aa2 stable) and San Jose (Aa1 stable), postponed their efforts to qualify the initiative for the 2014 California (A1 stable) general election. The initiatives supporters will now aim for 2016 instead of qualifying for the 2014 ballot. The delay is credit negative for California local governments because they face rapidly growing pension costs with few tools to address them. Adoption of this pension reform measure would have amended the states constitution and provided local governments with a significant measure of additional pension cost flexibility. The mayors sought to allow local governments to negotiate lower pension benefits for future work by current employees; benefits accrued prior to any such renegotiation would be unaffected. Currently, California law protects both current employees accrued pension benefits and those for future work, foreclosing any opportunity for renegotiation. Generally, pension benefits cannot be reduced once an employee has been hired. Proponents of pension reform postponed their push following a March 14 court ruling that turned aside their efforts to change the measures official summary. Their challenge contended the state attorney general used false, misleading, partial and/or argumentative phrasing and unnecessarily highlighted popular and sympathetic categories of public employees such as teachers, nurses and peace officers.1 Local government pension costs in California continue to rise, prompting San Jose Mayor Chuck Reed, Anaheim Mayor Tom Tait and several others to launch the initiative. For Moodys-rated local governments, pension costs increased by an average of 14% from fiscal 2011 to 2012,2 and absent pension reform, we expect this rate of increase to continue for the next several years. Costs are escalating particularly for the thousands of local governments that participate in the California Public Employees Retirement System (CalPERS), including Anaheim. For example, CalPERS projects Anaheims public safety pension contribution rates as a percentage of salaries will increase annually, reaching 44% by 2020, compared to 32% in 2014 (see Exhibit).
EXHIBIT

Anaheims CalPERS Pension Contributions Projected to Grow Significantly


Safety Contribution Rate 50% Misc Contribution Rate

Contributions as % of Covered Payroll

45% 40% 35% 30% 25% 20% 15% 10% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: CalPERS 6/30/2012 actuarial valuations for City of Anaheims Safety and Miscellaneous Plans. Does not reflect effects of CalPERS February 2014 rate increase or any offsetting savings due to Public Employees Pension Reform Act of 2013 (PEPRA).

1 2

Petition for Writ of Mandate. Reed, Kampe, Tait, Morris and Gomes (Petitioners) v. Bowen and Harris (Respondents). Superior Court of the State of California for the County of Sacramento. Source: Moodys Investors Service.

MOODYS WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

MARCH 20, 2014

For local governments with CalPERS plans, costs could increase further with the February announcement that the pension system will implement a third broad increase in plan contribution requirements since March 2012. The state retirement system notes the impact of higher contribution levels and their continuance for an extended period will be difficult for employers to bear.3 We are not able to quantify the reform proposals total potential savings had it become law, since the savings would depend on actions taken by local governments. However, the state Legislative Analysts Office estimated the savings across that state would have reached hundreds of millions of dollars each year or more in the near-term and billions more over the long-term. The proposed ballot initiative was spearheaded by San Joses Reed, whose city manages its own pensions. Local governments that do not participate in CalPERS, including large cities such as Los Angeles (Aa2 stable), San Diego (Aa3 stable) and San Jose, would still benefit from the flexibility to curb pension costs afforded by the proposed measure. If proponents are ultimately successful in gathering sufficient signatures to place it on the ballot, more than 50% of voters must approve the measure for it to go into effect. This years signature gathering effort ceased prior to achieving the required amount to qualify for the ballot. Reed has indicated efforts will be made to place it on the ballot two years from now.

CalPERS. Annual Review of Funding Levels and Risks as of June 30, 2012.

MOODYS WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

MARCH 20, 2014

Andrew Nowicki Associate Analyst +1.212.553.2846 andrew.nowicki@moodys.com John Lombardi Associate Analyst +1.212.553.2829 john.lombardi@moodys.com

Rising Ridership is Positive for US Transit Authorities


On March 10, the American Public Transportation Association (APTA) released data that show public transportation use increased in 2013 to 10.7 billion trips, outpacing population growth since 1995 and reaching the highest levels in 57 years. Strong ridership is credit positive for US mass transit authorities. Ridership increased by 1.5% in 2012, which contributed to a 4% increase in farebox revenues. Mass transit system revenues typically include a high level of external subsidization in the form of grants, transfers, and taxes from the local, state or federal government. Fare revenues cover only 36.5% of public transportation operating expenses, according to the US Department of Transportation, highlighting the low reliance on passenger fares. The portion of operating expenses paid by fare revenue, the farebox recovery ratio, estimates the degree that ridership fares covers costs. Systems with high farebox recovery ratios see the greatest benefits from increased ridership because rising fare revenues constitute a larger share of total revenue than in systems with low farebox recovery ratios (see Exhibit 1). In 2012, the 1.5% overall increase in public transit ridership resulted in a 4% overall increase in fare revenues, which also incorporates fare increases. Fare revenues likely rose in 2013 as ridership increased.
EXHIBIT 1

Rated Transit Authorities with Highest Farebox Recovery Ratios


Transit Authorities Farebox Recovery Ratio Rating Pledged Revenues Primary Area

San Joaquin Regional Rail Commission, CA Port Authority of Allegheny County, PA Bi-State Development Agency, MO Western Contra Costa Transit Authority, CA Massachusetts Bay Transportation Authority, MA
Source: Moodys Investors Service

64% 46% 46% 42% 41%

A2 A1 Aa3/A2 Aa3 Aa2

General revenue Sales tax Sales tax General revenue Sales tax

San Jose/Santa Clara Pittsburgh Saint Louis Contra Costa County Boston

Other positive trends, including an overall improvement in the economy that has driven up sales tax revenues that most transit authorities rely on for capital and operating expenditures, have helped the sector. Overall, increased ridership reflects economic improvement, in particular post-recession employment growth (see Exhibit 2). Stronger employment results in increased disposable income and consumer demand, which in turn leads to increasing sales taxes. Systems that issue debt secured by dedicated local or statewide sales taxes, 29 of Moodys 50 rated US transit systems, reported a median sales tax revenue growth of 5.4% in 2013. The Rockefeller Institute of Governments reports state sales taxes increased by 5.5% in the fourth quarter of 2013, with only six of the 45 states with sales taxes reporting declines.

MOODYS WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

MARCH 20, 2014

EXHIBIT 2

US Economic Improvements Bolster Transit Ridership


Total Ridership - left axis 11 10 9 8 7 6 5 4 3 2 1 0 Total Employment - right axis 140 120 100

60 40 20 0

Source: American Public Transportation Association; Moody's Economy.com

Strong ridership indicates positive public sentiment towards public transportation, which can lead to increased political support and help advance broad based transportation initiatives. The 2013 ridership results prompted APTA to request $100 billion from Congress over a six-year period for transit-related grants, citing increased consumer demand. These grants are typically dedicated for capital expenditures, but they also expand operations and free up other revenues. If the request is approved, additional grant revenue will result in positive credit pressure in addition to increased and fare revenue.

MOODYS WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

MARCH 20, 2014

Millions

Billions

80

Valentina Gomez Analyst +1.212.553.4861 valentina.gomez@moodys.com

Court Ruling Upholding Nassau County (NY)Wage Freeze is Credit Positive


On March 12, a New York State Supreme Court judge ruled that a wage freeze on Nassau County (NY) (A2 stable) police employees imposed by the Nassau County Interim Finance Authority (NIFA, Aa1 stable) in 2011 was legal. With the ruling, the county will now avoid the reimbursement of $230 million (9.2% of budget) in lost wage increases from 2011 through 2013, a credit positive. NIFAs authorizing legislation gives the state-appointed financial oversight board the power to freeze Nassau Countys labor contracts during a hard control oversight period. In previous years, unions representing Nassau County employees had successfully argued, most recently in a US District Court ruling in February 2013, that NIFAs power to freeze contracts ended in 2008. The US Second Circuit Court of Appeals vacated the lower federal court decision, ruling that New York State court should interpret state law. Costly employee contracts have contributed to Nassau Countys financial deterioration, along with aggressive budgeting of economically sensitive sales taxes. As a result of operating deficits and a reliance on cash flow notes, the countys 2011 net cash balance (unrestricted plus restricted cash, net of outstanding cash flow notes) dwindled to negative 13% of 2011 revenues from 0.9% in 2006 (see Exhibit). Nassau County Net Cash as Percent of Revenues
10%

5%

0%

-5%

-10%

-15% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 2014**

Notes: Fiscal Years 2001-12 based on a modified accrual basis of accounting; *fiscal 2013 on a cash basis, actuals through October; **fiscal 2014 projected on a cash basis. Source: Nassau County CAFRs 2001-11

The wage freeze helped the county achieve an operating surplus in the fiscal year ended December 2012, and net cash improved to a still-negative 8.4% of revenues. Although the county expects liquidity to improve, reducing cash flow borrowing, its financial position remains strained. The county would likely have bonded for any payment of lost wages, which would have further pressured the budget as debt service would have increased from an already above average 13.5% of fiscal 2012 operating expenses. The county is currently in the process of negotiating the restructuring of its employee contracts, but no resolution has been reached.

MOODYS WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

MARCH 20, 2014

RESEARCH HIGHLIGHTS
Jefferson County, ALs Lower GO Leverage Fuels Higher Recovery than Sewer On December 3, 2013, Jefferson County, AL (Baa3 stable) completed its exit from bankruptcy by restructuring its outstanding sewer revenue warrants and certain general obligation limited tax warrants. Jefferson Countys General Obligation Limited Tax creditors realized an overall recovery rate of 88%, ranging from 88%- 95% for warrantholders to 0% for parity interest rate swaps. The overall GO recovery rate is much higher than the overall recovery rate of 54% realized by Jefferson County sewer warrant creditors and slightly higher than our previous expectations. Two-Midnight Rule Will Reduce Revenue for Most Hospitals The two-midnight rule for acute care hospitals classifies most hospital visits under 48 hours as outpatient cases. Previously, inpatient status was largely determined by medical necessity. We expect the rule change, effective since October 2013, will weaken hospital operating profitability in calendar year 2014 because it will lower Medicare reimbursement for these cases. Although the rule change will affect all acute care hospitals, the impact will not be uniform across the not-for-profit hospital sector. Smaller community hospitals with shorter average lengths of stay and less complex cases are most at risk.

MOODYS WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

MARCH 20, 2014

RATING CHANGE HIGHLIGHTS


Chicago Board of Education's (IL) GO Downgraded to Baa1; Outlook Negative Mar. 14 - We downgraded the rating on the Chicago Board of Education's (IL) general obligation debt to Baa1 from A3, affecting $6.3 billion. The outlook remains negative. The downgrade reflects the Chicago Public Schools (CPS) close governance ties to the City of Chicago, whose rating we recently downgraded, as well as CPSs highly leveraged tax base resulting from significant debt and pension obligations of overlapping governmental entities. The negative outlook reflects CPS's budget pressures, particularly those related to funding the district's single-employer pension plan. It also incorporates the likelihood of continued growth in unfunded pension liabilities among overlapping governmental entities. Chicago Park District's (IL) GO Downgraded to A3 from A1; Outlook Negative Mar. 14 - We downgraded the general obligation rating of the Chicago Park District (CPD) (IL) to A3 from A1, affecting $826 million. The outlook remains negative. The downgrade reflects the district's close governance ties to the City of Chicago, whose rating we recently downgraded. Given the nature of the district's mission and the extreme pressures facing the city, we believe city officials influence on cost allocations and levy setting could indirectly affect CPD's financial operations and position. The negative outlook reflects the negative outlook on the City of Chicagos GO rating. Orange County, NY's GO Downgraded to Aa2 from Aaa; Outlook Negative Mar. 14 - We downgraded Orange County's (NY) outstanding general obligation debt rating to Aa2 from Aaa, affecting $268.5 million. The downgrade reflects an ongoing trend of operating deficits and declines in reserve levels, in combination with recent property value declines. The negative outlook reflects our expectation that operating deficits and reserve draws will continue in the near term. University of San Diego, CAs Revenue Bonds Upgraded to A1; Outlook Stable Mar. 17 - We upgraded the long-term rating on University of San Diego's (USD) outstanding revenue bonds to A1 from A2, affecting $168 million. The outlook is stable. The upgrade reflects USD's excellent financial management, which contributes to consistently strong cash flow and debt service. It also reflects the universitys robust operating performance that has led to increasing reserves, with total cash and investment growing by nearly 70% over the past five years. Newark, NJs A3 GO and Baa1 GO Limited Tax Ratings Placed Under Review for Downgrade Mar. 17 - We placed under review for downgrade the City of Newarks (NJ) A3 general obligation unlimited tax bond rating and Baa1 general obligation limited tax rating, affecting $540 million. The rating actions reflect the fact that the city will introduce its fiscal 2014 budget late, continues to operate with a structural deficit and is likely to increase the size of its tax anticipation note borrowing this year. It also reflects the citys estimated 2014 structural gap in financial operations for which the city could need financial aid. The review will examine if the city's financial position has weakened and if the 2014 budgeting process will be delayed significantly with a material budget gap. Outlook on Westchester County Health Care Corporation's (NY) A3 Rating Revised to Negative Mar. 14 - We revised the outlook to negative on Westchester County Health Care Corporation's (WCHCC) A3 rating, affecting $429 million of outstanding bonds. The outlook change reflects significant operational and financial risks associated with WCHCC's acquisition of a bankrupt hospital in Poughkeepsie, NY. We also confirmed the A3 rating, reflecting WCHCC's continued financial and operational stability over the last several years and the hospital's long-standing relationship with Westchester County.

MOODYS WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

MARCH 20, 2014

California Department of Water Resources' Power Supply Revenue Bonds Upgraded to Aa2; Outlook Stable Mar. 17 - We upgraded the rating on the California Department of Water Resources (CA DWR) power supply revenue bonds to Aa2 from Aa3, affecting $6.6 billion. The outlook is stable. The upgrade reflects the improved risk profile of the CA DWR power supply revenue bonds, owing to substantially reduced operations coupled with a long history of California Public Utility Commission (CPUC) support of full and timely cost recovery in compliance with a rate agreement with CA DWR. The stable outlook reflects our view that the CPUC will continue to adhere to its rate agreement and annually approve all rate filings to ensure full cost recovery through debt maturity in 2022. It also reflects our expectation that CA DWR will maintain its indenture required reserves for a liquidity cushion. New Mexico State Universitys Bonds Downgraded to Aa3; Outlook Stable Mar. 17 - We downgraded the ratings on New Mexico State University's revenue bonds to Aa3 from Aa2, affecting $136 million. The outlook is stable. The downgrade reflects the university's weakened operating performance and competitive enrollment pressures, which have led to limited prospects for financial resource growth in line with Aa2-rated public universities. The stable outlook reflects our expectation that the university will take the necessary steps to operate in equilibrium while maintaining or gradually building flexible reserves.

MOODYS WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

MARCH 20, 2014

CREDIT RATINGS & ANALYSIS


Michel Madelain President and Chief Operating Officer Michael Rowan Managing Director, Global Public, Project & Infrastructure Finance Gail Sussman Managing Director, US Public Finance John Nelson Director of Research, Global Public, Project, Infrastructure Finance Christopher Holmes Director of Research, US Public Finance

State Government Ratings


Robert Kurtter Managing Director, US Public Finance Tim Blake Managing Director, US Public Finance

EDITORIAL CONTENT
Crystal Carrafiello Senior Vice President, Rating Communications Robert Cox Senior Editor, Rating Communications

Healthcare, Higher Education, Not-for-Profits


Kendra Smith Managing Director, US Public Finance

MARKETING & PRODUCT STRATEGY


John Walter Director, Senior Product Strategist Sara Harris Assistant Director, Product Strategist

Housing
Kendra Smith Managing Director, US Public Finance

PRODUCTION
Jason Lee Vice President, Production

Local Government Ratings


Jack Dorer Managing Director, US Public Finance Naomi Richman Managing Director, US Public Finance

Public Infrastructure
Chee Mee Hu Managing Director, Project Finance

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