UPDATED: Moody's Downgrades San Juan Capistrano's Credit Score

EDITOR'S NOTE: Article updated to include comment from the city. Originally posted at 11:20 a.m., Dec. 5, 2013. 

Looking at the recent financial and political environment, Moody’s credit rating service downgraded Wednesday San Juan Capistrano’s ability to pay off its water-related debts by two steps, edging the city closer to being labeled a moderate credit risk.

Specifically, Moody’s is looking at the certificates of participation – basically a loan – the city issued to help build the water system. Installment payments come from water bill proceeds.

The credit rating has dropped from A1 to A3, a tier that means upper-medium grade and low credit risk. A3 is the bottom of that tier just above a moderate credit rating, and there are two other tiers, AA and AAA, that are considered better.

In a brief report issued Wednesday, Moody’s took note not only of volatile and below-average debt service coverage levels but also a recent lawsuit that successfully challenged the way the city issues bills for water (the city is appealing) and “pressure from some local taxpayers over water rates.”

Other reasons include:

• “Severe depletion of water system unrestricted reserves that management expects to remain weak for several years”
• “Higher-than-expected operational costs related to the system's ground water production”
• “The water system's diminished ability to respond to future needs for large rate increases due to large prior year rate increases”

"Moody’s announcement does not come as a surprise to the city, since no action was taken by Moody’s in 2011," said spokeswoman Catherine Salcedo. In 2011, two credit-scoring agencies, Fitch and Standards & Poors, downgraded San Juan Capistrano after officials revealed the water department was millions in debt.

Still, city officials have reason for optimism, Salcedo said. 

"The city has made significant progress since 2010," she said. "The city’s strengths listed in Moody’s report noted the relatively large size of the water system and the system’s access to significant level of local groundwater. 

"Also noted is the city’s increased and consistent production from the groundwater recovery plant along with effective management of operations, which reflect the system’s ability to maintain stability in operating costs over several recent years," Salcedo added.

The city is taking a new look at its water rates and has scheduled a forum next week to answer community questions and gather input about the upcoming water and sewer rate study. It’s scheduled for 5:30-7:30 p.m. Tuesday at the San Juan Capistrano Community Center. Also, information stations will be set up to discuss how water is delivered, the current water supply, the role the groundwater recovery plant plays and the upcoming water rate study.

Just last month, City Attorney Hans Van Ligten warned councilmen that rhetoric on water controversies could impact the city’s credit rating. He was responding to a request by Mayor Sam Allevato to have staff study the impacts of closing down the groundwater recovery plant. Allevato, a staunch supporter of the plant, wanted the report to quiet the critics.

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