San Diego May Suffer Drop in Bond Rating

San Diego may have its bond credit rating lowered by Moody’s Investors Service because of its obligations to pensioners and the possibility that it may lose revenue from the cash-strapped state, Moody’s said Monday.

The rating firm changed the outlook on the city’s rating to negative from stable -- a warning that the rating could be cut.

A drop in the city’s credit grade could force it to pay higher interest rates to borrow money.

San Diego, the second-largest California city, after Los Angeles, currently has a rating of Aa1 from Moody’s, its second-highest investment-grade rating.

Los Angeles is rated one notch lower, at Aa2. San Francisco and Long Beach are a notch below L.A., at Aa3. The ratings apply to the cities’ general-obligation-bond debt.

Gov. Arnold Schwarzenegger’s plans for closing the state’s budget deficit, if enacted, would affect the finances of many municipalities. San Diego stands to lose $9.5 million in annual property taxes under the governor’s proposed budget, Moody’s said.

What’s more, the firm said, San Diego for eight years has contributed less to the pension plans of city workers than it would be required to under “more conventional methods” of funding retirement plans.

To keep pensions at current levels of funding, Moody’s said, the city’s payments would have to increase from $55 million this year to $90 million in 2005 and rise by 20% a year through 2009.

“While most California cities have seen the unfunded liability of their pension systems increase over the last few years because of investment losses and increases in benefits, San Diego’s system has weakened to a more significant degree,” Moody’s said.