NOVEMBER 7, 2013

FEATURE ARTICLES
Stockton, CA Approves Sales Tax Increase, Clearing Hurdle in Bankruptcy Exit
The green light for the bump to 9% from 8.25% clears a major hurdle on the city’s path to exiting bankruptcy. A no-vote could have ratcheted up pressure on bond insurers to renegotiate less favorable terms with the city.

RESEARCH HIGHLIGHTS
2 State HFA Delinquencies Continue to Grow
State Housing Finance Agencies continue to demonstrate solid financial performance, even as total delinquencies and foreclosures in their singlefamily whole loan programs are at an all-time, mid-year high of 7.29%.

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Patient Volume Declines Continue to Steer Higher Pace of Downgrades 3
In the third quarter of 2013, there were 10 rating downgrades and eight upgrades for not-for-profit hospitals resulting in a ratio of 1.3 to 1. Six of the 10 downgrades were primarily due to material declines in admissions.

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Scranton, PA $20 Million Budget Gap Increases Default Risk
Without an approved balanced budget, two financial institutions are likely to withdraw from planned debt financings. The resulting liquidity squeeze would leave few options, raising the threat of a city default or bankruptcy.

US Airport Medians for FY 2012 5
Enplanement medians for US airports point to growth at the major hub airports, but overall growth was weak. We view the large hubs as benefiting from industry re-consolidation around the traditional huband-spoke model

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Illinois’ Improved Pension Liability Does Not Outweigh Failure to Enact Reforms
Preliminary valuations for five Illinois retirement systems show reductions in Moody’s-adjusted net pension liability (ANPL) by $16.6 billion. Still, state inaction on benefit reforms leaves severe pension deficits as the main credit pressure for Illinois, the lowest-rated US state.

RATING CHANGE HIGHLIGHTS
7 Torrance Memorial Medical Center (CA) Downgraded to A3; Outlook Stable
The move affects $285 million in debt and reflects weak operating performance through the first eight months of fiscal year 2013.

Loss of Federal Education Grants Would Be Credt Negative for California School Districts
The US Department of Education has warned the California State Board of Education that state legislation suspending standardized testing violates federal law, potentially costing the state at least $3.5 billion in federal funds

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Sarasota County's (FL) GOLT Upgraded to Baa1; Outlook Positive 9
The upgrade, which affects $76.1 million in debt, reflects the county's recovering taxable values following several years of protracted losses.

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Virginia Supreme Court Ruling Is Credit Positive for the State
The court’s ruling that tolls to fund a $2 billion tunnel are a user fee, not a tax, looks to continue public-private partnerships to finance a massive infrastructure plan. A tax can only be levied by the state legislature and residents had used that as the basis for opposition to the financing plan.

Springfield, MO Board of Public Utility Upgraded to Aa2; Outlook Stable 11
The move affects approximately $715 million in debt and reflects the utility's prudent fiscal management.

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Monetization of University Property Can Benefit Both Town and Gown
North Carolina State is selling 79,000 acres for $150 million, the latest in a trend of universities looking to monetize land and real estate assets. The deals can bolster school finances and bring more tax dollars for local governments.

University of Tulsa's Outlook Revised to Stable
The move affects $159 million in debt and reflects management’s efforts to focus on the university’s core strengths to improve cash flow.

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Franciscan Alliance's Outlook Revised to Negative; Aa3 Affirmed
The move affects $1.1 billion in bonds and reflects our concern that thin operating cash flow may lead to a decline in unrestricted cash balances.

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CREDIT IN DEPTH
New Jersey Municipalities Benefit from Post-Sandy State and Federal Aid
Superstorm Sandy aftereffects continue to plague New Jersey’s coastline, but we expect the credit quality of the state’s affected municipalities to remain intact. Federal and state aid continues to alleviate liquidity constraints, while capital markets are receptive to impacted local governments and many have modest debt burdens.

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MOODYS.COM

Gregory W. Lipitz Vice President - Senior Credit Officer +1.212.553.7782 gregory.lipitz@moodys.com

Stockton, CA Approves Sales Tax Increase, Clearing Hurdle In Bankruptcy Exit
On November 5, Stockton, California (Ca negative) voters approved raising the city’s sales tax from 8.25% to 9%, clearing a major hurdle on the city’s path to exiting bankruptcy. The vote is credit positive for the California city as the additional sales tax revenue ($296 million over 10 years) increases the likelihood its reorganization plan will be approved by the bankruptcy court. It is also a credit positive for municipal bond insurers, National Public Financial Guarantee Corp. (Baa1 positive), Assured Guaranty Municipal Corp. (A2 stable) and Ambac (unrated), who could have faced increased pressure to renegotiate less favorable terms with the city. Stockton’s bond insurers are exposed to almost 90% of the city’s outstanding General Fund debt. Insurers of Stockton’s $121.8 million in series 2007 A and B pension obligation bonds (Ca negative) face losses we estimate to be as high as 60 cents on the dollar. Insurers of its $11.3 million in Series 2006 lease revenue bonds (Caa3 developing) stand to receive full repayment under the exit plan, and insurers of unrated lease revenue debt face losses ranging from 22% to 0%. The improved chances for a plan confirmation mean that adjusted net pension liabilities managed by the California Public Employees' Retirement System (CalPERS, Aa3 stable) will likely remain untouched. Stockton has opted not to pursue cutting pension liabilities as a way to ease its financial burden. Moody’s estimates Stockton’s adjusted net pension liability (ANPL) at approximately $500 million, or 285% of FY 2011 operating revenue. In contrast, total General Fund supported debt of $295 million is 169% of operating revenue. CalPERS, which manages Stockton’s pension plans, has aggressively litigated against potential adjustments to pensions in California local government bankruptcy cases. Stockton’s approach varies from another California city, San Bernardino (not rated), which stopped making payments to CalPERS for a period of time during its own bankruptcy proceedings. San Bernardino may make an effort to restructure these liabilities when it releases its reorganization plan later this month. By forgoing a chance to reduce its pension obligations, Stockton leaves open the possibility that the liabilities could continue to plague the city’s finances long after a bankruptcy exit. This seems to be happening to Vallejo, California (unrated), which is struggling to balance its budget. Stockton issued its plan of adjustment on October 3.The city estimates that when fully implemented, the sales tax revenues will begin generating approximately $28 million in fiscal 2015, giving it a surplus of $9 million and total General Fund balance of $18 million. The plan relies on the fund balance to finance projected operating deficits until fiscal 2023. For insurers of the city’s pension obligation and Series 2006 bonds, the passage of the referendum clears the way for court confirmation of the restructuring plan. A bankruptcy plan goes through if all parties agree on the plan. But if one creditor objects, the debtor (Stockton in this case) can move for a cram down. Then, in order to gain court approval, the debtor must show that its plan meets a “fair and equitable” standard and treats all similar classes of claims alike with no class receiving property or remuneration before another creditor senior to it does. Stockton had argued without the extra revenue from the sales tax it would have to undertake additional unspecified cuts to personnel and services. Its ability to make those cuts is questionable, however, given that the bankruptcy court has opined that the city is not only cash-flow insolvent, but “service” insolvent. The court could turn down a plan for further service cuts that would leave the city unable to provide core functions, like public safety.

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

SEPTEMBER 12, 2013

Michael D’Arcy Analyst +1.212.553.3830 michael.darcy@moodys.com

Scranton, PA $20 Million Budget Gap Increases Default Risk
With a November 15 deadline to introduce a fiscal 2014 budget, the Scranton, PA (unrated), faces a $20 million gap for the fiscal year beginning January 1, 2014. Without a balanced budget, two financial institutions, Janney Montgomery Scott (unrated) and Amalgamated Bank (unrated), are likely to withdraw from planned debt financings necessary for the city to maintain positive operating cash flow in 2014. The resulting liquidity squeeze would leave the city with few options to meet its financial obligations, raising the threat of default or bankruptcy. Oversight by Pennsylvania (Aa2 stable), under its Act 47 distressed municipalities program, has so far been ineffective in relieving the city’s financial woes several years after a similar failure in the city of Harrisburg, PA (unrated). Scranton had intended to complete a $28 million debt issuance by mid-2013 and use the proceeds to pay an arbitration award and fund increases to the city’s 2013 pension contribution. However, in July, Janney, the underwriter, opted to delay the sale, citing Scranton’s lack of progress in implementing its Act 47 recovery plan. Janney has made its participation in the financing contingent on the adoption of a balanced 2014 budget. Amalgamated Bank, currently the sole bidder for the city’s cash flow borrowing scheduled for January, has indicated its purchase of tax and revenue anticipation notes (TRANs) also depends on passage of a balanced budget. Amalgamated also wants the city to successfully borrow the $28 million via the now-delayed bond sale. Without the banks’ participation, Scranton will begin fiscal 2014 with effectively a zero cash balance, creating significant operational strain until the bulk of its property tax revenue comes in March. Scranton faced a similar liquidity crisis in June 2012 after it defaulted on guaranteed revenue bonds for its parking system. Although the city cured the default swiftly, it was unable to access the capital markets for several months and had to temporarily reduce city workers’ salaries. A second liquidity crisis could have more severe effects, including additional defaults. Scranton has $195 million of long-term debt outstanding, including direct obligations of the city, cityguaranteed debts of component units and $15 million of state loans. Of the $195 million, $16 million bears interest at a variable rate; the remainder is fixed rate (see Exhibit). Scranton also issues $14.5 million of TRANs annually. Outstanding Debt and Fixed Costs for Scranton, Pennsylvania
Scranton's Debt Burden as of 1 November 2012

Direct General Obligation Bonds, Fixed Rate Guaranteed Parking Authority Revenue Bonds State Infrastructure Loans Tax and Revenue Anticipation Notes Guaranteed Lease Revenue Bonds, Fixed Rate Guaranteed Lease Revenue Bonds, Variable Rate Direct General Obligation Bonds, Variable Rate Parking Authority note, Variable Rate Lease Revenue Bonds, Fixed Rate Total

$77,074,583 $49,450,000 $27,446,475 $14,500,000 $11,600,000 $5,885,000 $5,575,000 $2,800,000 $1,100,000 $195,431,058

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

NOVEMBER 7, 2013

Outstanding Debt and Fixed Costs for Scranton, Pennsylvania
Fixed Costs, 2011 Audited Financials

Debt Service Pension Contributions Retiree Healthcare Benefits Total Fixed Costs, Fiscal 2011 General & Debt Service Fund Expenditures, Fiscal 2011 Fixed Costs as a Percent of General Fund Expenses, Fiscal 2011
Note: 2011 audited financials are the most recent published by the city Source: City of Scranton, Pennsylvania, 2011 financial statements and 2012 Offering Statements

$7,512,196 $8,873,312 $8,994,457 $25,379,965 $64,018,280 39.64%

The continued crisis in Scranton underscores Act 47’s limitations in assisting financially distressed cities. In Harrisburg, the mayor and city council’s inability to agree on a recovery plan and city council’s attempt to file for bankruptcy in late 2011 (which was rejected by a court) resulted in the state appointing a receiver to manage the city’s finances via an amendment to Act 47. The receiver was unable to prevent further defaults on both guaranteed and direct general obligation debt, however, which had begun in late 2009. Under Pennsylvania law, local governments may only file for Chapter 9 bankruptcy protection with state consent. Act 47, which provides for outside advisors to assist distressed municipalities with their recovery plans, has been implemented 27 times since 1987. But it fails to give the state authority to compel local governments to follow specific courses of action, a weakness relative to other states’ distressed municipal oversight programs. That weakness has come into focus in both Harrisburg and Scranton, where acrimonious political climates have derailed recovery plans. Scranton’s inability to resolve its political disputes and execute a recovery plan has undercut its credibility with key lenders. But elected officials have consistently maintained that bankruptcy protection is not an option, raising the prospect that the state could, as with Harrisburg, become more deeply involved either through further Act 47 amendments or other actions not addressed in the statute.

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

NOVEMBER 7, 2013

Ted Hampton Vice President - Senior Analyst +1.212.553.2741 ted.hampton@moodys.com Thomas Aaron Analyst +1.312.706.9967 thomas.aaron@moodys.com

Illinois’ Improved Pension Liability Does Not Outweigh Failure to Enact Reforms
On October 25 and 29 , preliminary plan valuations for five Illinois (A3 negative) retirement systems showed that the plans had reduced their Moody’s-adjusted net pension liability (ANPL) by $16.6 billion, or 9%, for the year ended June 30. Still, inaction on benefit reforms more than outweighs the modest ANPL decline and leaves severe pension deficits as the main credit pressure for Illinois, the lowest-rated US state. The statewide pensions’ combined ANPLs as of 30 June, and after our adjustments, fell to $173.0 billion from $189.6 billion a year earlier (see Exhibit 1). This was the result of favorable investment performance and rising interest rates. Investment returns totaled 12.9% on an asset-weighted basis, exceeding a 7.9% blended return assumption. The gains accounted for 37% of the net ANPL decline. Rising interest rates between valuation dates had an even bigger effect. We derive ANPL figures by making adjustments to reported numbers, such as applying a market-based discount rate (the Citibank Pension Liability Index) to estimate the present value of liabilities. The index rose to 4.81% as of June 30 from 4.13% a year earlier. Factoring in a rise in the plans’ reported liabilities, the 68-basis-point increase was responsible for 63% of the ANPL reduction.
EXHIBIT 1

Moody’s-Adjusted Net Pension Liability for Illinois’ Five Pension Plans as of June 2013, $ Millions
2012 2013 Change

Teachers' Retirement System (TRS) State Employees' Retirement System (SERS) State Universities Retirement System (SURS) Judges' Retirement System (JRS) General Assembly Retirement System (GARS) Total

$108,209 $40,658 $38,037 $2,302 $380 $189,586

$98,854 $37,375 $34,240 $2,180 $365 $173,014

($9,355) ($3,283) ($3,797) ($122) ($14) ($16,571)

-9% -8% -10% -5% -4% -9%

Source: Preliminary pension valuation data and our pension adjustments, as explained in Adjustments to US State and Local Government Reported Pension Data.

Pension deficits have factored into all five Illinois downgrades since early 2009 and are still the state’s primary credit challenge. The state will remain an outlier despite the 2013 ANPL decline, in part because the three-year average ANPL used in our methodology actually rose by 7.2% to $165.8 billion. Also, other states will benefit from the same investment and discount-rate factors. Our most recent ranking, published June 27, showed Illinois with an ANPL/revenues ratio of 241% versus a 50-state median of 45%. Only legislative reforms reducing liabilities through cuts in benefits, or very substantial increases in contributions to boost assets, will reduce the state’s ANPLs closer to median levels. Illinois’ annual pension contributions are governed by state law that requires an annual determination of a level percentage-of-payroll contributions that, according to actuarial forecasts, will leave the plan with assets equal to 90% of liabilities by 2045. This framework, although lax compared with common standards targeting full amortization in 30 years, still squeezes the resources available for other budgetary needs (see Exhibit 2).

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

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EXHIBIT 2

Projected Budgetary Pressure from Pensions and Pension Debt, $ Millions
2013 2014 2015

POB Debt Service (2010-11 Bonds) POB Debt Service (2003 Bonds) Regular Contributions Total Expense Projected General Fund Revenues (State and Federal) Pensions' Share of General Fund Revenues

$974.6 $586.4 $5,867.1 $7,428.1 $34,281.0 22%

$1,051.6 $582.5 $6,833.0 $8,467.1 $35,081.0 24%

$1,219.3 $587.6 $7,033.2 $8,840.1 $33,432.0 26%

Source: Three-Year Budget Forecast, FY 2014 – FY 2016, Illinois Commission on Government Forecasting and Accountability, April 2013.

Including debt service on pension obligation bonds, the state legislature projected that the annual pension burden would rise to 26% of General Fund revenues in fiscal 2015 from 22% two years earlier, based on funding expected prior to the most recent valuations. The increased portion allocated to pensions and pension-related debt stems partly from the loss of 2011 income tax increases, which is expected to reduce 2015 revenues by $2.2 billion. The latest valuations appear to have little effect on the state’s statutorily required contributions, changing the combined 2014 and 2015 payments by only about $50 million. Illinois Governor Pat Quinn and other leaders have advocated benefit reforms to strengthen the retirement systems and limit associated budget pressure. Some observers had hoped legislators would enact reforms in a year-end session that runs through November 7, putting reforms in place for the new fiscal year. But consensus on how to cut liabilities while skirting legal challenges appears unlikely this week. Illinois has one of the few US state constitutions that explicitly bar reductions in pension benefits, so the state expects employees to sue shortly after legislators act, in any case. Without a special session, the legislature’s next chance will come in the January to May session, which could mean litigation will delay the reforms’ implementation beyond the start of the next fiscal year.

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

NOVEMBER 7, 2013

Eric Harper Analyst +1.415.274.1753 eric.harper@moodys.com

Loss of Federal Education Grants Would Be Credit Negative for California School Districts
On October 28, the US Department of Education (DOE) warned the California State Board of Education that state legislation suspending federally mandated standardized testing violates federal law, potentially costing California school districts at least $3.5 billion in federal funds. The DOE notice is credit negative for California school districts because of the significant amount of funding at risk for at least the 2014-15 fiscal year. California school districts are in the process of moving from traditional standardized tests to new student examinations under the multistate “Common Core” standards. In a transition to the new tests, which the state has scheduled to begin in spring 2015, the new law (AB 484) removes the requirement that school districts conduct the traditional mathematics and language arts exams. Instead, the law requires districts to conduct “field tests” of the new Common Core examinations in either mathematics or language arts, but not both. The DOE argues the move violates Title I of the Elementary and Secondary Education Act (ESEA) of 1965. Withholding various federal grants would mainly affect school districts with significant populations of lowincome, special education, migrant and English-learner students. Although California school districts are funded primarily through state aid and local property taxes, federal funding accounts for 10% of total school district funding. A loss of $3.5 billion in federal grants would have a disproportionate effect on districts receiving a larger share of federal funds, including Palmdale Elementary School District (A1), Fresno Unified School District (Aa3 negative) and San Bernardino City Unified School District (A2) (see Exhibit). Largest Recipients of Federal Aid in Rated California School Districts
Effects of a Loss of Federal Funds Would Vary Among Districts
Federal Revenue* ($000) Total Operating Revenue ($000) Federal Revenue* as Percent of Operating Revenue

California School District

Los Angeles Unified (Aa2 stable) Fresno Unified (Aa3 negative) San Diego Unified (Aa3 stable) Long Beach Unified (Aa2) San Bernardino City Unified (A2) Santa Ana Unified (Aa3 negative) Sacramento City Unified (A1 stable) Stockton Unified (A2) Palmdale Elementary (A1) Fontana Unified (Aa3) Garden Grove Unified (Aa2)

$553,268 $79,139 $69,701 $55,875 $42,943 $32,365 $28,812 $26,822 $26,405 $24,426 $23,261

$6,785,392 $669,585 $1,160,203 $689,539 $499,315 $505,857 $420,763 $325,011 $162,332 $314,762 $378,070

8% 12% 6% 8% 9% 6% 7% 8% 16% 8% 6%

* Federal revenue includes certain grants under Title I and III of ESEA and the Individuals with Disabilities and Education Act. Data as of fiscal year ended 30 June 2012. Source: California Department of Education and Moody’s

School districts receive a variety of federal aid. Just looking at certain grants under Title I and III of ESEA and Individuals with Disabilities and Education Act (the largest grants at risk under the notice from DOE), the Los Angeles Unified School District (Aa2 stable) received $553 million in fiscal 2012, more than any

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

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other district in the state by far. The second-largest recipient was the state’s fourth-largest school district, Fresno Unified, which received $79 million. In fiscal 2012, total K-12 school district funding was approximately $60 billion, so the loss of $3.5 billion would equal nearly 6% of statewide district funding. Some of the potential loss in federal funds would be offset by California’s recently adopted Local Control Funding Formula, which funnels additional aid to districts with populations of low-income and English-learner students. California was not blindsided by the DOE’s threat. Immediately before the passage of AB 484, the DOE warned the state about the potential cuts if the legislation passed. Legislators moved ahead anyway and Governor Jerry Brown signed the bill. We expect any loss of federal funds to be temporary. Because school districts are forward-funded by the federal government, the first loss of federal funds is unlikely to affect California school districts overall until fiscal 2015. Given that districts are set to implement Common Core testing in spring 2015 and come into compliance with federal requirements, we believe an ongoing loss of federal funding after fiscal 2015 is unlikely. Also, state education officials and school districts still have time to negotiate a resolution with the DOE that will avoid the multi-billion-dollar cuts.

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

NOVEMBER 7, 2013

Nick Samuels Vice President - Senior Credit Officer +1.212.553.7121 nick.samuels@moodys.com

Virginia Supreme Court Ruling Is Credit Positive for the State
On October 31, the Virginia Supreme Court ruled that tolls the state plans to use to construct a new tunnel under the Elizabeth River in the Hampton Roads region of Virginia (Aaa stable) are a user fee, not a tax, and thus do not violate the state’s constitution. The ruling is credit positive for the state, which has focused on public-private partnerships as a way to help finance its $13 billion transportation infrastructure plan. The Supreme Court ruled that the tolls drivers will start to pay in February 2014 for the $2 billion Elizabeth River Crossing are “in exchange for a particularized benefit” and are not compelled by the government, meaning that the tolls are fees for use. A lower court ruled the tolls were taxes because they were designed to raise revenue. Taxes can only be levied by the state when approved by the legislature, which was the basis of opposition by residents who sued the project in July 2012. Virginia has relied on similar public-private funding structures to finance transportation infrastructure more than other states. Upholding of the lower court’s ruling that the tolls are a tax would have impinged on the state’s ability to use such structures in the future. The state would then either have to cancel projects it viewed as necessary or find other resources to pay for them. Although Virginia this year enacted a major transportation finance reform that could raise as much as $3.5 billion of new revenue over the next five years, those funds are already programmed into its transportation capital and maintenance budgets.1 For several years, especially during the downturn when gas taxes dropped, Virginia had to delay transportation capacity expansion and congestion mitigation projects to dedicate scarce resources to required maintenance. Virginia completed five projects using the public-private structure; another seven are currently under construction. Outgoing Governor Bob McDonnell plans to introduce more funding structures in his final budget proposal next month, including “availability payments” that would allow construction for projects that currently do not have available funding. Tapping private financing allows the state to complete necessary infrastructure projects without issuing bonds itself. Of Virginia’s four largest transportation public-private partnership projects, state dollars accounted for one third of the financing, with the remainder coming through private contributions and federal funds (see Exhibit 1).
EXHIBIT 1

State Investment Accounts for One Third of Funding for Four Major Transportation Projects in Virginia
Project Cost $ Millions State Investment $ Millions Percent of Total Cost

495 Express Lanes 95 Express Lanes US Route 460 Corridor Elizabeth River Crossing Total

$1,900 925 1,393 2,100 $6,318

$409 71 1,150 420.5 $2,050.50

22% 7.60% 83% 20% 33.15%

Source: Virginia Office of Transportation Public-Private Partnerships

For the Elizabeth River project, tolls account for just 12% of the projected cost (see Exhibit 2).

1

See Virginia’s Robust New Transportation Funding Package Is Credit Positive, February 28, 2013.

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

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EXHIBIT 2

Private Investment Comprises Nearly 50% of Elizabeth River Cross Project Funding
Equity Commitments from Skanska & Macquarie 13% Project Revenue During Construction (Tolls) 12% VDOT Contributions to Reduce Tolls 20%

Private Activity Bonds 33%

Federal Highway Administration Loans 22%

Source: Elizabeth River Crossing Project

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

NOVEMBER 7, 2013

Susan Fitzgerald Senior Vice President +1.212.553.6832 susan.fitzgerald@moodys.com Ted Damutz Vice President - Senior Credit Officer +1.212.553.6990 ted.damutz@moodys.com

Monetization of University Property Can Benefit Both Town and Gown
On October 29, the Board of Trustees for the Endowment Fund for North Carolina State University (Aa1 stable) announced the sale of 79,000 acres of Hofmann Forest for $150 million. The agreement is expected to bolster the endowment of the university’s College of Natural Resources (CNR). It is also expected to increase property tax revenue in two counties slightly. The deal speaks to the trend of US universities exploring the monetization of land and real estate assets that can benefit both the schools and local governments. It also marks a very modest credit positive for both NC State and the local governments. For a university, the sale of non-essential real estate can increase endowments and financial reserves; generate additional income to advance its mission; and reduce operating costs for the asset. For a local government, the addition of previously tax-exempt property to the tax rolls can bolster its budget. Over the longer term, the local governments also benefit economically from increasing property, sales and fee revenues as the properties become developed or redeveloped. Historically, universities have been loath to part with real estate, but many are now reexamining the importance of retaining non-core assets following multiple years of constrained revenue growth. With that approach and an improving real estate market in certain areas, we expect more transactions in 2014. We anticipate this more for urban universities than for rural universities given the stronger buyer’s market and opportunities for alternative uses. More than 30% of the Moody’s-rated public university portfolio experienced a decline in operating revenue in 2012, a significant increase over the prior year (see Exhibit). A smaller, but still significant 16% of private universities also had declining operating revenues in 2012, with another 17% having revenue growth of under 2%. Universities reassessing monetization of assets shows prudent fiscal management, if proceeds are used to support longer-term strategic objectives. Selling real estate to compensate for financial imbalance, however, is a non-recurring event that does not address underlying problems. Revenue Is Pressured at Both Public and Privates
Decline in operating Revenue 60% 0%-2% change in operating revenue

% of Sector-specific Rated Portfolio

50% 40% 30% 20% 10% 0% Public Universities Private Universities Public Universities Private Universities Public Universities Private Universities 2010 2011 Fiscal Year 2012

Source: Moody’s MFRA

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In the case of the Hofmann Forest, the sale agreement contains provisions that would enable NC State to continue to use a portion of the property for academic needs. The $150 million purchase price will be added to an endowment supporting the CNR. Hofmann Forest has historically been carried in the endowment at $117 million, so the balance sheet impact is limited. However, the sale is expected to result in increased revenue generation. Under the university’s 4% spending policy, the $150 million endowment is expected to provide $6 million of support annually, compared to less than $1 million of net income derived from the land in 2012. This is material to CNR, but not the university overall, which has a $1.2 billion operating budget. The transaction has not yet closed, and a group is seeking injunctive relief to stop the sale. Onslow (Aa2) and Jones counties (unrated), which include portions of the forest, are expected to realize slight increases in assessed valuation after the sale with new residential and commercial developments. Onslow County officials estimate an additional $116,000 in annual property tax revenues to a $160 million budget. In another recent sale, St. John’s University (A3 positive) sold a building in Manhattan for $219 million, prompting us to revise the university’s outlook to positive from stable in August. The university doubled its unrestricted financial resources and increased its operating flexibility. With an assumed 5% spending rate, should the university hold the funds from the sale in an endowment, the operating impact would add $10 million, a positive but not substantial increase, to the university’s $470 million-plus of operating revenues. In response to declining enrollment, Brooklyn Law School (Baa1 stable) has placed six of its no-longerneeded residential buildings on the market. The school has other marketable real estate in Brooklyn, which could be sold over time without materially impacting core operations.

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

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CREDIT IN DEPTH
Josellyn Yousef Assistant Vice President - Analyst +1.212.553.4854 josellyn.yousef@moodys.com Dan Seymour Analyst +1.212.553.4871 dan.seymour@moodys.com

New Jersey Municipalities Benefit from Post-Sandy State and Federal Aid
Just over a year ago, Superstorm Sandy wreaked unprecedented damage along New Jersey’s (Aa3 stable) coastline. Today, we expect the credit quality of the state’s affected local governments to remain intact because they receive state and federal aid, and the state provides effective help in applying for federal assistance. Additionally, most local government issuers in the state have low debt burdens and access to bond markets.2 Government aid is flowing. Both federal and state money continue to alleviate liquidity constraints and capital needs that the storm created. Last June, the Federal Emergency Management Agency (FEMA) approved an additional $81.5 million for New Jersey local governments to augment the $408 million originally promised (see Exhibit 1). The added money raises FEMA’s contribution to cover damage-repair costs to 90%, up from the original 75%. The June-approved funds add to $125 million already distributed by federal Community Disaster Recovery Loans to affected municipalities to help offset property tax revenue declines. The added funds will boost the economies of a multitude of communities in Ocean County (Aaa negative) and other hard-hit areas (see Exhibit 1).
EXHIBIT 1

Largest Savings for New Jersey Municipalities as a Result of 90% FEMA Match
Municipality 75% FEMA Match 90% FEMA Match Savings

Toms River (Aa3 stable) Atlantic Highlands Middletown (Aa2) Sayreville (Aa3) Seaside Heights (A3) Brick (Aa2) Union Beach (A2) Freehold (Aa2) Monmouth Beach Jersey City (A2 positive) Total for All NJ Local Governments
Source: New Jersey Office of Recovery and Rebuilding

$87,363,820 $15,640,890 $11,346,286 $10,383,977 $8,133,735 $7,976,802 $7,143,497 $6,909,296 $6,866,597 $6,884,001 $407,980,852

$104,836,584 $18,769,068 $13,615,543 $12,460,773 $9,760,482 $9,572,162 $8,572,196 $8,291,155 $8,239,916 $8,250,401 $489,481,748

$17,472,764 $3,128,178 $2,269,257 $2,076,796 $1,626,747 $1,595,360 $1,428,699 $1,381,859 $1,373,319 $1,366,400 $81,500,896

FEMA is delivering on its initial promises and has distributed substantial portions of the reimbursements to affected communities. Seaside Heights (A3) has already collected $5.7 million of the approximately $9.7 million promised by the federal government, and Point Pleasant Beach (A1) has received $2.7 million of $6.1 million promised. FEMA will disburse the remaining funds over the next few years, although in areas where dollars are flowing more slowly, local governments may need to roll larger portions of their notes than originally planned.

2

See Hurricane Sandy Unlikely to Threaten Public Finance Issuers’ Credit, November 13, 2012 and US Public Finance Issuers Transition to Recovery state in the Aftermath of Hurricane Sandy, December 19, 2012.

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

NOVEMBER 7, 2013

The state has aided local communities with additional operating funds, including the $1.8 billion received in Community Disaster Block Grant Disaster Recovery (CDBG-DR) funds, which the Department of Housing and Urban Development (HUD) allocated to New Jersey as part of its initial fund allocation. These CDBGDR funds must be used to satisfy “unmet needs” -- financial needs not satisfied by other public or private funding sources such as FEMA funds, Small Business Administration disaster loans or private insurance. HUD also requires that CDBG-DR programs focus predominantly on the state’s most affected counties and on the state’s low- and moderate-income populations. Capital markets remain accessible. Following the storm, many issuers passed special emergency resolutions to spend unbudgeted money on rebuilding and repairs, funded through temporary notes. In a few cases, issuers paid interest rates on these notes above market levels,3 but not to a degree that would impair financial operations. A receptive capital market for bonds and notes helps New Jersey communities manage liquidity disruptions or fund capital needs arising from the storm. Sandy-affected New Jersey issuers typically expect to repay the temporary notes with their FEMA reimbursements. Most local governments in New Jersey have small debt burdens. Modest debt burdens (see Exhibit 2) are fundamental credit strengths of the state’s local governments. Small debt burdens have allowed many governments to issue bonds or notes to fund post-storm expenditures without debt reaching unduly high levels.
EXHIBIT 2

Median Net Direct Debt as a Percent of Full Real Estate Valuation for New Jersey Cities and US Cities
New Jersey Cities Median Debt Burden 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% Aaa Aa1 Aa2 Aa3 A1 A2 US Cities Median Debt Burden

Source: Moody’s

The state is playing a crucial oversight role. We expect the New Jersey Division of Local Government Services to remain active in helping recovery efforts and advising issuers on how to apply for federal loans and aid. In some instances, the division has completed federal Community Development Block Program Essential Service Grant applications for communities. The division also actively helps issuers develop plans for refinancing notes issued in 2012, including facilitating discussions with banks, to ensure timely and proper execution of financings. Challenges remain, despite these positive efforts. Communities must still identify funding sources to rebuild storm-eroded sand dunes, which, if not rebuilt, could leave them exposed to another storm and lower property values.
3

For example, following Sandy, the Borough of Lavallette (General Obligation Aa3 negative) issued short-term notes with an interest rate of 1.4%, which was well higher than prevailing short-term rates.

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

NOVEMBER 7, 2013

Some communities still have significant damage. Many residents could not start rebuilding their homes until FEMA guidelines were released during the summer. It is unclear how quickly property values and seasonal revenues such as beach fees will rebound, but we will learn more as governments adopt their 2014 budgets in the first quarter of next year.

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

NOVEMBER 7, 2013

RESEARCH HIGHLIGHTS
State HFA Delinquencies Continue to Grow State Housing Finance Agencies (HFAs) continue to demonstrate solid financial performance. However, total delinquencies and foreclosures in their single-family whole loan programs reached an all-time, mid-year high of 7.29%. The sustained high level of delinquencies challenges management and growth of the programs since the higher percentage of delinquent loans translates into reduced loan revenue. However, we do not expect to take any rating actions because of mitigating factors such as the HFAs’ strong balance sheets, rising home prices and the continued solid performance of mortgage insurers helped by the federal government. US Not-For-Profit Healthcare Quarterly Ratings: Patient Volume Declines Continue to Steer Higher Pace of Downgrades In the third quarter of 2013, there were 10 rating downgrades and eight upgrades for not-for-profit hospitals resulting in a ratio of 1.3 to 1. This is an increase from six downgrades and three upgrades in the prior quarter. The par amount of debt downgrades impacted was $2.7 billion, compared to $2.4 billion of upgraded debt. Reduced patient volumes continued to be a key driver of rating downgrades. In line with second-quarter results, six of the 10 downgrades were due primarily to material declines in admissions. US Airport Medians for FY 2012 Enplanement medians for US airports point to growth at the major hub airports, but overall growth was weak, with the median growth in enplanements at 0.2%. The large hub airports experienced strong growth in connecting traffic, but enplanement levels at the medium and smaller hubs continued multi-year declines. We view the large hubs as benefiting from industry re-consolidation around the traditional hub-and-spoke model, largely at the expense of medium-sized hubs and limiting point-to-point travel between smaller markets. Tepid economic growth was not able to compensate for airline industry consolidation and the reduction of point-to-point service at medium hub airports.

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

NOVEMBER 7, 2013

RATING CHANGE HIGHLIGHTS
Torrance Memorial Medical Center (CA) Downgraded to A3; Outlook Stable Nov. 4 – We downgraded Torrance Memorial Medical Center's rating to A3, affecting $285 million, because of weak operating performance through the first eight months of fiscal year 2013 and several years of declining margins. The weaker margins result from falling patient volumes and investments in physician practices. The lower performance comes as Torrance is entering the final year of construction on a new patient tower and is in the midst of a large equity contribution to that project. The outlook is stable. Sarasota County's (FL) GOLT Upgraded to Baa1; Outlook Positive Oct. 31 – We upgraded the rating on Sarasota County's (FL) Limited Ad Valorem Tax Bonds, Series 2008 and 2005, to Baa1 from Baa2, and revised the outlook to positive from stable, affecting $76.1 million. The upgrade reflects the county's recovering taxable values following several years of protracted losses, which, together with defeased debt, has improved coverage levels. These bonds were originally issued to finance the acquisition and protection of environmentally sensitive lands and parkland. Springfield, MO Board of Public Utility Upgraded to Aa2; Outlook Stable Oct. 31 – We upgraded Springfield, MO's MO Board of Public Utility's senior lien revenue bond rating to Aa2 from Aa3 and subordinate lien 2006 lease obligation rating to Aa3 from A1, affecting approximately $715 million. The rating outlook is stable. The upgrade reflects the utility's prudent fiscal management and demonstrated willingness to proactively advance approval of multi-year base rate increases to adequately fund capital investments while it also maintains strong and stable financial metrics and competitive retail rates. The upgrade also reflects the utility's successful commissioning of its 300 MW dual fuel capable coal/gas fired unit since January 2011. University of Tulsa's Outlook Revised to Stable Oct. 30 – We changed the outlook on the University of Tulsa’s A3 rating, affecting $159 million, to reflect how we expect the university’s management team to engage in the university’s core strengths and transformative campus community to improve cash flow and balance sheet metrics. The A3 rating and stable outlook incorporate the very large total financial resources supporting TU, steady student demand and strong gift support, offset by thin operating margins and liquidity. Franciscan Alliance's Outlook Revised to Negative; Aa3 Affirmed Oct. 30 – We changed the outlook on Franciscan Alliance’s (f.k.a Sisters of St. Francis Health Services, Inc) $1.1 billion in bonds to negative from stable because of our concern that persistently thin operating cash flow may lead to a decline in unrestricted cash balances, exacerbating already modest debt measures. While the system is implementing cost reductions to improve performance, we believe progress may be slower than projected given competitive and general industry-wide challenges. A rating downgrade will be considered in the absence of operating improvement as projected for fiscal year 2014.

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MOODY’S WEEKLY CREDIT OUTLOOK: US PUBLIC FINANCE EDITION

NOVEMBER 7, 2013

CREDIT RATINGS & ANALYSIS
Michel Madelain President and Chief Operating Officer Michael Rowan Managing Director, Global Public, Project & Infrastructure Finance Gail Sussman Managing Director, US Public Finance John Nelson Director of Research, Global Public, Project, Infrastructure Finance Christopher Holmes Director of Research, US Public Finance

State Government Ratings
Robert Kurtter Managing Director, US Public Finance Tim Blake Managing Director, US Public Finance

EDITORIAL CONTENT
Crystal Carrafiello Senior Vice President, Rating Communications Robert Cox Senior Editor, Rating Communications

Healthcare, Higher Education, Not-for-Profits
Kendra Smith Managing Director, US Public Finance

MARKETING & PRODUCT STRATEGY
John Walter Director, Senior Product Strategist Sara Harris Assistant Director, Product Strategist

Housing
Kendra Smith Managing Director, US Public Finance

PRODUCTION
Jason Lee Vice President, Production

Local Government Ratings
Jack Dorer Managing Director, US Public Finance Naomi Richman Managing Director, US Public Finance

Public Infrastructure
Chee Mee Hu Managing Director, Project Finance

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