Anaheim’s Bond Rating Lowered

Citing concerns that the recently approved Proposition 218 will hamstring the ability of local government to raise tax revenues, Moody’s Investors Service on Thursday downgraded Anaheim’s bond rating.

Anaheim becomes the fifth California city hit with a lower rating from Moody’s since the passage of Proposition 218. Los Angeles, San Diego, Sacramento and Fresno also have seen their credit ratings decline since voters approved the anti-tax measure in November.

Thursday’s downgrade comes just as the city is preparing to sell $500 million in bonds for street improvements for the upcoming Disneyland expansion.

But analysts said Thursday that Moody’s downgrade of the city’s general obligation bonds from Aa1 to Aa2 won’t result in higher interest payments for the city in the upcoming sale. The bonds are slated to carry the highest possible credit rating because they are fully insured, partially backed by Walt Disney Co. and won’t rely on Anaheim residents’ property taxes for repayment.

“The city is not on the hook at all here,” said Jon Schotz, a financial advisor to Disney on the bond sale.

Still, the downgrade is a sign of Wall Street’s uneasiness with Proposition 218, which limits the authority of local governments to raise taxes. And it highlights a potentially costlier future awaiting California cities in the debt markets.

Standard & Poor’s, another major bond rating agency, also lowered San Diego’s credit rating in November, citing Proposition 218 as the reason.

Thus far, the downgrades have caused barely a ripple in the bond market. But critics of 218 say lowered credit ratings ultimately will lead to higher interest payments for cities and a cutback in essential services for their residents down the road.

“This is just the beginning,” said Deborah Thornton, spokeswoman for the League of California Cities in Sacramento. “The downgrades will eventually affect the cities’ finances.”

Moody’s downgrade of Anaheim’s general obligation bonds is part of a wholesale review of all state municipalities undertaken by the agency in the wake of 218.

Moody’s Vice President David Brodsly described Anaheim’s downgrade as a “minor adjustment” that shouldn’t have minimal impact on the city’s ability to raise funds in the bond market.

At present, Anaheim has about $9 million of general obligation bonds outstanding that are used to finance a storm sewer project, according to Anaheim finance director Bill Sweeney.

The rating downgrade will have no effect on the city’s cost to repay those bonds, but rather will only have an impact on future sales of general obligation bonds, which are funded through property taxes.