Fitch Rates California Public Works Board $1.3B Lease Revs 'BBB-'

• Press Release
• Source: Fitch Ratings
• On 3:19 pm EST, Friday November 6, 2009

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'BBB-' rating to $1.329 billion in lease revenue bonds of the State Public Works Board (PWB) of the State of California, expected to consist of:

--$1.17 billion lease revenue bonds, 2009 series I (various capital projects) subseries I-1 (tax-exempt bonds) and subseries I-2 (federally taxable Build America Bonds);

--$156.2 million lease revenue bonds (Trustees of the California State University) 2009 series J (J. Paul Leonard & Sutro Library) (tax-exempt bonds).

Precise par amounts will be finalized upon sale, expected via negotiation on or about Nov. 19. Final maturity of all three series will be Nov. 1, 2034; early redemption provisions will be determined upon sale. Fitch also affirms the 'BBB-' on outstanding State of California lease appropriation bonds as detailed at the end of this release. The Rating Outlook is Stable.

The 'BBB-' rating reflects California's underlying credit characteristics. The PWB is the state's primary means of financing state facilities, with bonds benefiting from a strong lease structure and the essential nature of leased assets. Debt service is paid from lease rental payments made pursuant to specific project leases. Lease rental payments are appropriated annually by the legislature, with the lessee required by law to use the first funds appropriated to it for lease payments along with other rental amounts supporting existing PWB debt. Abatement is possible, but projects require rental interruption insurance. The series are secured further by the PWB's master indenture reserve, which backs approximately $6.3 billion in outstanding PWB lease bonds prior to this sale.

The state's Stable Outlook and 'BBB' general obligation (GO) rating is based on the severe economic and fiscal challenges that confront the state despite resolution for the moment of budget and cash flow gaps. Budget revisions enacted in July 2009 closed a forecast $24.2 billion gap through the end of fiscal 2010 and provided sufficient cash flow flexibility, with moderate note issuance of $8.8 billion, to cover the state's cash commitments and repay $2.6 billion in outstanding IOUs. Fitch rated the notes 'F2' (see press release dated Sept. 15, 2009).

Although the immediate challenges have been resolved, further revenue underperformance or the failure of enacted budget solutions could reopen current year gaps and raise the prospect of a return to the prolonged and contentious deliberations that have marked the state's response to fiscal challenges. In Fitch's view, budgetary and cash pressures will continue through fiscal 2010 and beyond, even as the state's range of options to address those pressures is more limited given the extent of actions already taken to date.

The state's fiscal situation remains clouded due to the state's weakened economy, an uncertain revenue outlook, and a precariously balanced budget. The revenue outlook was lowered repeatedly over the last year for the period ending June 2010, reducing projected two-year collections by a total of $47.3 billion; the sum of gaps closed was $60 billion. Actual revenues through September are underperforming, down 4.6% from the May 2009 forecast, and risk of underperformance remains going forward. Other risks are tied to achieving and sustaining deep spending reductions, on which the budget plan relies heavily, as well as use of one-time measures that will challenge future budget balance. Several components of the plan are subject to legal challenge, such as the state's use of $1.7 billion in redevelopment agency funds for general fund purposes, and other assumptions in the plan, including the $1 billion sale of the state's compensation insurance fund, may not be realized by fiscal year end.

Employment losses accelerated through the first half of 2009, with September 2009 employment down 4.8% from September 2008, well in excess of the 4.2% figure national decline. Unemployment has soared to 12.2% in September 2009, from 7.8% a year earlier. Job losses are widespread, with construction down 18.6% in September year-over-year, trade, transportation and utilities down 5.7%, and professional and business services down 6%. Personal income declined 3.3% in California in the second quarter of 2009 compared to a 3% decline nationwide.

The state has a moderate but rising debt burden, with net tax-supported debt of approximately $76.7 billion as of Oct. 1, 2009, equal to 4.8% of 2008 personal income. The state's debt level will continue to rise with issuance for capital investment under recently authorized GO bond measures.

Fitch also affirms the 'BBB-' rating on the following outstanding lease appropriation bonds of the state. The Rating Outlook is Stable:

--Public Works Board (except for those issued for the Regents of the University of California);

--East Bay State Building Authority;

--Los Angeles State Building Authority;

--Oakland State Building Authority;

--Riverside County Financing Authority;

--Sacramento City Financing Authority;

--San Bernardino Joint Powers Financing Authority;

--San Francisco State Building Authority;

--Golden State Tobacco Securitization Corporation (series 2005A);

--California Infrastructure and Economic Development Bank state school fund apportionment lease revenue bonds;

--California Judgment Trust;

--Shafter Joint Powers Financing Authority;

--Taft Public Finance Authority.

Considerations for Taxable/Build America Bonds Investors:

The following sector credit profile is provided as background for investors new to the municipal market.

State Appropriation-Backed Bonds:

A U.S. state government's overall credit quality is reflected in the rating for its general obligation (GO) full faith and credit pledge, the broadest security that a state can provide to the repayment of its long-term borrowing. In cases where bond payment requires annual or biennial legislative appropriation, this lesser long-term commitment to repayment is reflected in a lower rating than the GO rating. Such debt is typically rated one notch below the GO rating. If concerns about non-appropriation are heightened, for example in cases where there is not clear essentiality for the project being funded, such debt can be rated two or more notches below the GO rating. Conversely, if the risk of non-appropriation is judged to be effectively eliminated, for example through a mechanism that traps substantial operating funds if appropriation is not made, the appropriation debt can be rated on par with the GO credit.

State GO ratings generally fall within the two highest rating categories of 'AAA' or 'AA', with a few outliers. The top tier ratings reflect states' inherent strengths: states generally have broad economic and tax base resources and all possess sovereign powers under a federal government system, with substantial, although varying, control over revenue raising and spending. Given these inherent strengths, in only a few instances have economic concentration and long-term structural decline or the inability or unwillingness to address large financial challenges led to ratings below the 'AA' category. For additional information on State ratings, see U.S. State General Obligation Bond Rating Criteria dated April 25, 2008.

Additional information is available at www.fitchratings.com.

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Fitch Ratings, New York
Douglas Offerman, +1-212-908-0889
Richard Raphael, +1-212-908-0506
Media Relations
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com