Rating Action Commentary
ֳ Rates City of San Jose Financing Authority, CA's Lease Rev CP Bank Notes 'AA'; Outlook Stable
Tue 13 May, 2025 - 6:20 PM ET
ֳ - San Francisco - 13 May 2025: ֳ has assigned a 'AA' underlying rating to bank notes associated with the City of San Jose Financing Authority, CA's $175 million lease revenue commercial paper (CP) notes, series 1 (tax exempt) and lease revenue CP notes, series 1-T (taxable.)
On or about May 20, 2025, the San Jose Financing Authority will enter into a direct-pay letter of credit (LOC) with TD Bank, N.A. The CP notes are expected to be delivered on or about May 20, 2025, the effective date of the LOC. The notes are periodically remarketed, and if market demand for the product diminishes (i.e. in the event of a failed remarketing), the bank providing the LOC would be obligated to purchase the notes.
The Rating Outlook is Stable.
The 'AA' underlying rating on the bank notes is one-notch below San Jose's 'AA+' Issuer Default Rating (IDR), reflecting the slightly higher optionality associated with lease payments subject to annual appropriation by the city. San Jose's 'AA+' IDR reflects the combination of its 'aaa' financial resilience, underpinned by its 'limited' budgetary flexibility typical of California cities, and ֳ's expectations for available unrestricted reserves to be maintained at or above 25% of general fund spending. The city has consistently maintained reserves above the 25% threshold for a 'aaa' financial resilience assessment given the city's budgetary flexibility, ending fiscal 2024 with an unrestricted fund balance of $674.8 million, or about 49% of expenditures and transfers out.
The city's fiscal 2025 adopted budget projects modest budget deficits over the next five fiscal years (through 2029) as a result of slowing revenues, growing costs, and the increasing need for certain city services. However, the city is taking steps to address these projected deficits, including identifying cost savings, eliminating vacant positions, reducing or eliminating services, identifying new revenue sources, and maintaining a budget stabilization reserve. ֳ expects the city will continue to take the necessary steps to maintain relative balance and keep reserves in line with a 'aaa' resilience assessment.
The rating also incorporates the city's declining population trend, which is assessed as 'Weakest' relative to the ֳ local government rating portfolio. It also incorporates the city's 'Strong' demographic and economic level metrics, which include high educational attainment and median household income (MHI), and a slightly elevated unemployment rate relative to the pre-pandemic years due to layoffs in the information technology (IT) sector.
The rating includes a +1 notch Additional Analytical Factor (economic and institutional strength) that recognizes the city's role within a major metropolitan statistical area (MSA) and the vital contributions it makes to the national economy. The city's concentration of leading technology firms solidifies its economic importance, but also contributes to a 'Weakest' assessment for economic concentration, which partially offsets the +1 notch Additional Analytical Factor.
ֳ assesses the city's long-term liability burden composite as 'Weak'. A material improvement in the city's long-term liability burden, particularly a reduction in carrying costs, may place positive pressure on the rating.
For more information on the long-term ratings, see "ֳ Affirms San Jose, CA's IDR at 'AA+'; Outlook Stable; Removed from UCO" dated Sept. 25, 2024, and available at .
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-- A decline in unrestricted general fund balance sustained at or below 25% of spending, which would reduce the financial resilience assessment to below 'aaa'.
-- Over time, an inability to manage sizable and growing carrying costs for debt and retiree benefits, which increases the city's long-term liability burden.
-- A notable slowdown in economic and revenue growth that challenges the city's ability to sustain the above-average carrying costs.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
-- A sustained, approximately 25% decrease in long-term liabilities associated with debt and net pension liabilities assuming current levels of personal income, governmental revenue and expenditures.
-- Improvements in underlying demographic and economic performance, including but not limited to a reversal of population losses and declining unemployment relative to the national average.
SECURITY
The lease revenue CP notes are secured by lease payments from the city for the use of various assets, subject to annual appropriation.
ֳ’s Local Government Rating Model
The Local Government Rating Model generates Model Implied Ratings, which communicate the issuer's credit quality relative to ֳ's local government rating portfolio. (The Model Implied Rating will be the IDR, except in certain circumstances explained in the applicable criteria.) The Model Implied Rating is expressed via a numerical value calibrated to ֳ's long-term rating scale that ranges from 10.0 or higher (AAA), 9.0 (AA+), 8.0 (AA) and so forth, down to 1.0 (BBB- and below).
Model Implied Ratings reflect the combination of issuer-specific metrics and assessments to generate a Metric Profile and a structured framework to account for Additional Analytical Factors not captured in the Metric Profile that can either mitigate or exacerbate credit risks. Additional Analytical Factors are reflected in notching from the Metric Profile and are capped at +/-3 notches.
Ratings Headroom & Positioning
San Jose Model Implied Rating: 'AA+' (Numerical Value: 9.77)
-- Metric Profile: 'AA' (Numerical Value: 8.77)
-- Net Additional Analytical Factor Notching: +1.0
Individual Additional Analytical Notching Factors:
-- Economic and Institutional Strength: +1.0
San Jose's Model Implied Rating is 'AA+'. The associated numerical value of 9.77 is at the upper end of the 9.0 to 10.0 range for a 'AA+' rating.
Key Rating Drivers
Financial Profile
Financial Resilience - 'aaa'
San Jose's financial resilience is driven by the combination of its 'Low' revenue control assessment and 'Midrange' expenditure control assessment, culminating in a 'Limited' budgetary flexibility assessment.
-- Revenue control assessment: Low
-- Expenditure control assessment: Midrange
-- Budgetary flexibility assessment: Limited
-- Minimum fund balance for current financial resilience assessment: >=25.0%
-- Current year fund balance to expenditure and transfers out ratio: 49.2% (2024)
-- Lowest fund balance to expenditure and transfers out ratio for the fiscal-year period 2020-2024: 32.5% (2021)
Revenue Volatility - 'Midrange'
San Jose's weakest historic three-year revenue performance has a modest negative impact on the Model Implied Rating.
The revenue volatility metric is an estimate of potential revenue volatility, based on the issuer's historical experience relative to the median for the ֳ-rated local government portfolio. The metric helps to differentiate issuers by the scale of revenue loss that would have to be addressed through revenue raising, cost controls or utilization of reserves through economic cycles.
-- Lowest three-year revenue performance (based on revenues dating back to 2005): 3.7% decrease for the three-year period ending fiscal 2010
-- Median issuer decline: -4.3% (2024)
Demographic and Economic Strength
Population Trend - 'Weakest'
Based on the median of 10-year annual percentage change in population, San Jose's population trend is assessed as 'Weakest'.
Population trend: -0.2% 2023 median of 10-year annual percentage change in population (6th percentile)
Unemployment, Educational Attainment and MHI Level - 'Strong'
The overall strength of San Jose's demographic and economic level indicators (unemployment rate, educational attainment, median household income [MHI]) in 2024 are assessed as 'Strong' on a composite basis, performing at the 71st percentile of ֳ's local government rating portfolio. This is due to very high education attainment levels and median-issuer indexed adjusted MHI offsetting elevated unemployment rate.
-- Unemployment rate as a percentage of national rate: 107.5% 2024 (39th percentile), relative to the national rate of 4.0%
-- Percent of population with a bachelor's degree or higher: 46.5% (2023) (84th percentile)
-- MHI as a percent of the portfolio median: 157.7% (2023) (91st percentile)
Economic Concentration and Population Size - 'Midrange'
San Jose's population in 2023 was of sufficient size to qualify for ֳ's highest overall size category but this is offset by the highly concentrated economy.
The composite metric acts asymmetrically, with most issuers (above the 15th percentile for each metric) sufficiently diversified to minimize risks associated with small population and economic concentration. Downward effects of the metric on the Metric Profile are most pronounced for the least economically diverse issuers (in the 5th percentile for the metric or lower). The economic concentration percentage shown below is defined as the sum of the absolute deviation of the percentage of personal income by major economic sectors relative to the U.S. distribution.
-- Population size: 969,655 (2023) (above the 15th percentile)
-- Economic concentration: 71.9% (2024) (from 0th to 2.5th percentile)
Demographic and Economic Strength Additional Analytical Factors and Notching: +1.0 notch (for Economic and Institutional Strength)
A 1.0-notch uplift has been applied under the demographic and economic strength Additional Analytical Factor, reflecting ֳ's view of San Jose's economic importance and resilience, as the city center of the San Jose-Sunnyvale-Santa Clara, CA MSA. The MSA plays a vital role in the national economy, accounting for 2.2% of U.S. GDP in 2022, according to BEA data. The city is home to leading technology firms such as Google, Cisco Systems, Adobe Inc. and Zoom Video Communications.
Long-Term Liability Burden
Long-Term Liability Burden - 'Weak'
San Jose's carrying costs to governmental expenditures and liabilities to governmental revenue remain weak while liabilities to personal income remain midrange. The long-term liability composite metric in 2024 is at the 29th percentile, indicating a somewhat elevated liability burden relative to the ֳ's local government rating portfolio.
-- Liabilities to personal income: 4.3% (61st percentile)
-- Liabilities to governmental revenue: 231.0% Analyst Input (27th percentile) (vs. 234.0% 2024 Actual)
-- Carrying costs to governmental expenditures: 25.1% Analyst Input (6th percentile) (vs. 25.1% 2024 Actual)
Analyst Inputs to the Model
The city's direct debt was adjusted to reflect scheduled principal amortization on outstanding debt in fiscal 2025.
PROFILE
San Jose, with a population just under 1 million, is the most populous city in the San Francisco Bay Area, and the third largest in the state of California. The city encompasses approximately 180 square miles and is the county seat of Santa Clara County. It is located at the southern end of the San Francisco Bay and in Silicon Valley, which ties its economy to the IT and advanced manufacturing sectors. Personal income from the IT sector in Santa Clara County makes up nearly 19% of the total, compared with just 3.8% 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.
The City of San Jose Financing Authority was formed pursuant to a Joint Exercise of Powers Agreement, dated December 8, 1992, by and between the city and the former Redevelopment Agency of the City of San Jose.
Date of Relevant Committee
24 September 2024
Sources of Information
In addition to sources of information identified in ֳ's applicable criteria specified below, this action was informed by data from DIVER by Solve.
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
ֳ does not provide ESG relevance scores for San Jose (CA) [General Government].
In cases where ֳ does not provide ESG relevance scores in connection with the credit rating of a transaction, programme, instrument or issuer, ֳ will disclose any ESG factor that is a key rating driver in the key rating drivers section of the relevant rating action commentary. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- U.S. Local Government Rating Model, v1.2.0 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| San Jose Financing Authority (CA) | EU Endorsed, UK Endorsed |