Los Gatos, which boasts a Rolls-Royce dealership, is among 30 California cities on the list for a possible credit downgrade from ratings agency Moody's. So are Santa Clara and Sunnyvale, home to high-tech titans, and the East Bay's tony Danville.

So how did cities hosting Fortune 500 companies and plenty of rich folks get tagged for review as potential welchers? Moody's says California cities face more limits on their ability to raise taxes and control costs of employee pensions and other perks than others. And a small but growing number of California city bankruptcies has caused Moody's and other credit agencies to take another look at what was once considered a rock-solid investment risk.

"What we've not seen elsewhere in the country is the use of bankruptcy to the extent it has been used in California," said Robert Kurtter, Moody's public finance managing director, adding that doesn't mean the agency thinks the cities under credit review are in danger of default.

"These ratings may not be as strong as we once thought they were," Kurtter said. "That doesn't mean they're going down the tubes and are fiscal basket cases."

The upshot for residents of a credit downgrade is that it may raise future city borrowing costs to taxpayers, whether for cash-flow purposes or to build, say, a new library.

Moody's sweeping review announced this week stunned some Silicon Valley cities on the list.


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"It was a complete surprise to us that we would even be mentioned," said Sunnyvale City Manager Gary Luebbers. "We're in good condition, and relatively speaking to the rest of the state, we're in very good condition."

Other Bay Area cities also expressed confidence in their credit.

"Our finances and our creditworthiness are very strong," said Joe Calabrigo, town manager of Danville. "But Moody's has concerns over the state's overall creditworthiness. Because they have concerns about the state of California, they are going to look at all types of debt."

Alan Shear, assistant city manager of Martinez, said the city is about to pay off the last $250,000 of $2.2 million in debt issued to pay for a City Hall rehabilitation project.

"We're going to pay it off, and we'll be done with it," Shear said, adding that the city isn't planning on issuing more bonds in the near future, so any downgrade won't cost the city anything. Berkeley officials also felt their credit would withstand scrutiny.

San Jose, Silicon Valley's big kahuna, wasn't among the 30 cities Moody's listed Tuesday as under review for possible credit downgrades.

Moody's had already dunned San Jose's credit in March, citing a "multi-year erosion of the city's general fund reserves," the "weakened revenues resulting from the economic downturn" and city management being "significantly challenged to manage retirement costs."

City officials said the Moody's downgrade would cost San Jose an additional $350,000 a year in short-term borrowing fees because it followed another credit ding by Fitch Ratings last year. San Jose has since seen several credit downgrades on various debt by Standard & Poor's, Fitch Ratings and Moody's. The city's general fund is currently under another review by Fitch Ratings.

San Jose officials have noted that their general-obligation bond ratings, now Aa1 with Moody's and AA+ with Fitch and Standard & Poor's, have merely returned to the very high levels from a decade ago after being bumped up to sterling triple-A levels from 2008 to 2010.

Kurtter noted that San Jose's credit is still better than the state of California's.

"Aa1 is still an exceptionally high rating," Kurtter said.

Moody's said a couple of cities under review -- San Francisco and Los Angeles -- may see upgrades in their general-obligation bond credit due to "significant tax bases that have demonstrated relative resiliency during the economic and property market downturns." San Francisco's rating is now Aa2 and Los Angeles' is a bit lower at Aa3.

Moody's expects to complete its review in about 90 days.

Kurtter said a key concern driving the credit review is the bankruptcies of Stockton, San Bernardino and Mammoth Lakes this year, on the heels of Vallejo in 2008. Though Standard & Poor's said municipal bankruptcies will continue to be rare due to the high cost, ratings agencies fear more cities are thinking about it.

Stockton's case was particularly worrisome because like many cities, it faced revenues not keeping pace with growing pension costs, but the city has effectively suggested it will pay pensions before making bondholders whole.

Greg Larson, town manager of Los Gatos, thinks the credit review has more to do with Moody's being more cautious than his town's financial health.

"I think this is more about a policy change by Moody's," Larson said, "not a change in our financial situation in Los Gatos."

Bay Area News Group reporters Jason Sweeney, Doug Oakley and Lisa White contributed to this report. Contact John Woolfolk at 408-975-9346. Follow him on Twitter at Twitter.com/johnwoolfolk1.

Cities Under Review
Here are the cities under review by credit ratings agency Moody's.
Azusa, Berkeley, Colma, Danville, Downey, Fresno, Glendale, Huntington Beach, Inglewood, Long Beach, Los Gatos, Martinez, Monterey, Oakland, Oceanside, Palmdale, Petaluma, Rancho Mirage, Redondo Beach, Sacramento, San Leandro, Santa Ana, Santa Barbara, Santa Clara, Santa Maria, Santa Monica, Santa Rosa, Sunnyvale, Torrance and Woodland.