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���������ֳ� - San Francisco - 27 Mar 2023: ���������ֳ� has affirmed the following ratings:

--San Jose's Issuer Default Rating (IDR) at 'AA+';

--$582.1 million San Jose GO bonds at 'AAA';

--$384.7 million San Jose Financing Authority (SJFA) LRBs, series 2013B, 2020A, and 2021A at 'AA';

--$146.5 million San Jose Financing Authority LRBs, series 2020B (ice center) at 'AA-';

--$165,715,000 taxable lease revenue bonds (LRBs), series 2022A (convention center refunding project) at 'AA';

--Up to $175 million San Jose Financing Authority lease revenue commercial paper (CP) notes at 'AA'.

The Rating Outlook is Stable.

SECURITY

The 2022A LRBs as well as the outstanding SJFA LRBs series 2013B, 2020B and 2020A are payable from city lease payments to the trustee for the use of various city assets, subject to abatement. Lease provisions are standard with a covenant to budget and appropriate for use and occupancy of a variety of assets. The assets carry standard insurance coverage, but lack earthquake insurance.

The CP notes are secured by lease payments from the city for the use of various assets.

GO bonds are payable from an unlimited ad valorem property tax on all of the city's taxable properties.

ANALYTICAL CONCLUSION

The city's 'AA+' IDR reflects the city's strong economy and concomitant revenue growth, adequate expenditure flexibility, moderate liability burden and consistently strong reserves relative to its revenue volatility and budget flexibility. Concerns about the city's relatively high carrying costs for debt service and pension liabilities are partially offset by management's focus on fiscal balance, including a multi-year forecast, and demonstrated flexibility in other spending categories.

The 'AAA' rating on the GO bonds reflects the application of California's statutory lien on GO bonds. The 'AA' rating on most of the city's outstanding LRBs reflects the slightly higher optionality associated with appropriation debt. The 'AA-' rating on the 2020B LRBs reflects the additional risk associated with transactions in which an issuer expects to pay debt service from project revenues derived from sports and entertainment venues. For more information on the 2020B LRBs, see "���������ֳ� Rates San Jose Fin Auth, CA's $356MM 2020A LRBs 'AA' & $147MM 2020B LRBs 'AA-'; Outlook Stable", dated Sept. 1, 2020 and available at .

The Stable Outlook reflects ���������ֳ�'s expectation that the city will manage through economic cycles while maintaining the highest gap-closing capacity.

Economic Resource Base

San Jose's population of nearly one million residents makes it the San Francisco Bay Area's most populous city and the third-largest in California. The city's location at the southern end of the San Francisco Bay and in Silicon Valley ties its economy to the technology sector. The San Jose-Sunnyvale-Santa Clara MSA has 16% of its workforce employed in high-tech-related manufacturing compared to 9% nationally. Personal income from this sector makes up over 30% of the total compared to just 9% nationally. The sizable high-tech workforce concentration with related strong wages has boosted the city's affluence and moved per-capita personal incomes and education levels to well above state and national averages; however, this also exposes the economy to the cyclicality inherent in the sector.

KEY RATING DRIVERS

Revenue Framework: 'aa'

San Jose benefits from a strong and growing economy that, on average, supports revenue growth in line with the level of national economic expansion. However, like all local governments in California, the city lacks the ability to raise taxes without voter approval. The city did receive voter approval for a 15-year, one-quarter-of-one-cent sales tax increase that began in fiscal 2017; a permanent business tax increase that began in fiscal 2018; and a real property transfer tax starting in fiscal 2021.

Expenditure Framework: 'a'

Expenditure growth is expected to be marginally above revenue gains as salary and benefit costs increase. Expenditure flexibility is judged as adequate due to elevated fixed costs related to debt and retiree liabilities and a moderately flexible labor negotiating framework, offset by a demonstrated ability to cut spending during recessionary periods.

Long-Term Liability Burden: 'aa'

Overall debt and direct net pension liabilities are moderate relative to the city's large and growing resource base.

Operating Performance: 'aaa'

Financial resilience through downturns is exceptionally strong. The city maintains a very robust reserve safety margin relative to moderate expected cyclical revenue volatility, and it performs periodic budget reviews to maintain balance. Budget management in times of recovery is very strong, with consistent attention to long-term fiscal sustainability.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Improved flexibility of spending, as evidenced by lower carrying costs for debt and retiree benefits, in conjunction with a sustained reduction in long-term liability burden to materially below 10% of personal income;

--Sustained higher ability to independently raise revenues resulting from lower revenue volatility or higher controllable revenues relative to total revenues.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--Over time, an inability to manage sizable and growing carrying costs for debt and retiree benefits while maintaining balanced operations;

--A notable slowdown in economic and revenue growth that challenges the city's ability to sustain the above average carrying costs.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit /site/re/10111579.

CURRENT DEVELOPMENTS

San Jose's financial performance remained strong in fiscal 2022 as it emerged from the pandemic. Revenues across all major categories outperformed expectations. In particular, property tax revenue increased by 5.9% yoy due to higher assessed valuations as a result of the strong real estate market, and sales tax revenue increased nearly 14% yoy due to favorable economic conditions.

Business taxes and transit occupancy taxes also experienced strong growth due to recovery from the pandemic. The city also experienced savings due to competitive labor market conditions that made it challenging to hire for vacant positions. The city ended the year with a net operating surplus of $159.7 million, increasing its unrestricted general fund balance to $572.7 million or approximately 46% of spending.

The city's adopted budget for fiscal 2023 includes a sizable increase of about 21% revenue growth over the prior year's budget and a projected surplus. The city's fiscal 2023 mid-year budget report notes that despite well publicized layoffs in the technology sector, economic performance through the first half of the fiscal year remains strong, with robust employment, rebounding hotel occupancy rates, and growing sales tax activity. The report indicates year end revenues will come in 2% over budget due to increases in key revenue streams. Expenditures are estimated to be $15 million below budgeted levels. The budget also incorporates modest increases in staffing levels.

The city's five-year forecast has been revised to incorporate the effects of a potential mild recession. It estimates a general fund surplus in fiscal 2024, followed by a minor shortfall in fiscal 2025 due to less favorable economic conditions, and essentially no or very small surpluses for the remainder of the forecast. The city's 11 bargaining units all have labor contracts expiring in fiscal 2023 and fiscal 2024. The city has initiated discussions with the bargaining units with June 30, 2023 agreement expiration dates in April. Higher than anticipated salary increases may result in imbalances in the forecast.

The city has been allocated $766.5 million in pandemic-related funds, including Coronavirus Aid, Relief, and Economic Security Act funding, American Rescue Plan Act (ARPA), and FEMA reimbursements. Nearly $95 million in remaining ARPA funding was budgeted for use in fiscals 2022 and 2023. This funding is being used for a variety of purposes including food distribution, sheltering the unhoused community, providing direct outreach and assistance to the small business community, and providing community WiFi and device access, among other permitted uses across the city. City officials have noted that while the city will stretch any remaining pandemic aid to support critical needs, one-time programs funded by this aid will need to be assessed for continued need and potentially scaled back if maintained.

The city faces challenges as a result of a significant amount of remote work and softness in the technology sector in which the city's growth has been concentrated. Kastle Systems estimates the rate of occupancy of offices in the San Jose metro for the week ending March 15 at roughly 38%, compared to their 10-city average of about 47%. While assessed valuations for office buildings are expected to decline, office buildings comprise only 6.9% of assessed value and represent less than 10% of the secured property tax roll. The city's five-year forecast projects a prolonged period of lower growth in property taxes in fiscals 2025 and 2026, before slowly rebounding in the final two years of the forecast.

Construction on Google's mixed-use development in the city is proceeding, although the company is reassessing its timeline for the project.

CREDIT PROFILE

For more information on San Jose's IDR, see the report titled, "���������ֳ� Rates $165.7MM San Jose Fin Authority LRBs 'AA'; Affirms IDR; Outlook Stable" published March 29, 2022 on .

In addition to the sources of information identified in ���������ֳ�'s applicable criteria specified below, this action was informed by information from Lumesis.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on ���������ֳ�'s ESG Relevance Scores, visit .

Additional information is available on

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• FAST Econometric API - ���������ֳ� Analytical Stress Test Model, v3.0.0 (1)

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