May 04, 2012 at 13:27 PM EDT
Fitch Rates San Luis Obispo County Financing Auth, CA's Lease Rev Rfdg Bonds 'AA'; Outlook Stable

Fitch Ratings has assigned an 'AA' rating to the following San Luis Obispo County Financing Authority, CA (the authority) obligations:

--$19.57 million lease revenue refunding bonds, series 2012A.

The lease revenue bonds are expected to price in mid-May. The proceeds will be used to refund series 2002A certificates of participation.

In addition, Fitch affirms the following San Luis Obispo County, CA (the county) ratings:

--$119.43 million pension obligation bonds (POBs) series 2003A, 2003C and 2009A at 'AA';
--$22.45 million certificates of participation (COPs) series 2002A at 'AA';
--Implied general obligation (GO) rating at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by lease payments made by the county to the authority under a covenant to budget and appropriate. The payments are subject to abatement. The authority is not authorized to issue any additional bonds under the indenture. A debt service reserve is expected to be cash funded. The COPS are secured by lease payments subject to annual appropriation by the county. The leased asset for the 2002A COPs is the three-building original County Government Center, which after construction of a new county government center, houses the Public Works, Planning, Courts, and District Attorney offices and was appraised at $30 million in 2002. The same leased assets will be used for the 2012A bonds. The estimated value of the premises based upon the 2012 insured replacement value is a combined $37.55 million.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: The county has consistently maintained a solid financial position benefiting from very strong management and conservative budgeting and planning.

STABLE LOCAL ECONOMY: The large state government, university and utility presences aid in the stability of the county's economy.

STABLE TAX BASE, LOW CONCENTRATION: The tax base has remained relatively flat and exhibits low concentration. The portion of AV attributed to PG&E, its largest taxpayer, continues to decline.

VERY LOW DEBT PROFILE: The county's low overall debt levels and limited capital needs are a credit positive.

GENERAL FUND OBLIGATIONS: The COPs and POBs are rated one notch below the GO bonds as they are payable solely from any legally available funds.

CREDIT PROFILE

STRONG FINANCIAL PERFORMANCE AND MANAGEMENT
San Luis Obispo County has demonstrated consistently strong financial performance due to conservative budgeting and planning. Management proactively established a five-year plan in 2007 to address expected budgetary pressures that was later extended to seven years due to the longer than expected economic recovery.

The county generated an operating surplus after transfers of $10.8 million in fiscal 2011 following two consecutive years of surpluses. As a result, the county's unreserved fund balance (committed/assigned/unassigned as per GASB 54) at fiscal year-end 2011 was a high 41.2%.

To address an expected $17 million gap in fiscal 2011, the county used reserves and eliminated additional vacant positions. The board's policy is to not backfill cuts in state funds, which would primarily impact health and human services and public works services. The county closed an $11 million gap in fiscal 2012 through $2 million in short-term use of reserves and $9 million in ongoing reductions, including elimination of positions and 1-3% reduction in general fund support for various departments. The county has a much smaller gap of only $2 million in fiscal 2013, and plans to close it mostly with long-term cuts, including matching any state cuts.

Liquidity is strong with cash increasing each of the last three years to $160 million at year end fiscal 2011; about $30 million of the increase in fiscal 2011 was due to reclassification of funds under GASB 54. In addition, the general fund can borrow $30 million from the combined insurance fund and $7 million from its tax loss reserve fund if necessary without board approval, though it has not done so in the past.

STABLE ECONOMY
The county is located along California's central coast about mid-way between San Francisco and Los Angeles. Government employment represents 23% of total employment, contributing to a stable economic profile. The county and California Polytechnic State University are the largest employers, each with about 2,500 employees.

The county also has a large utility sector (19%) primarily due to the presence of PG&E, which employs 1,700 people and operates the Diablo Canyon nuclear plant, whose twin reactor licenses expire in 2024 and 2025. Though PG&E had applied for a 20 year extension, more recently it asked that the application be put on hold in order to conduct new seismic studies. County unemployment rates have declined to 8.7% as of February 2012 from 9.8% year over year, well under the state average, and even with the national average. Per capita income levels are even with state and national averages.

STABLE TAX BASE AND LOW CONCENTRATION
The county's tax base has remained relatively flat through fiscal 2011 declining only a combined 2%. Following an additional 1.7% in fiscal 2012, management's expectations for a slight 0.5% increase in fiscal 2013 seem reasonable given low overall volatile demonstrated through the housing downturn. Concentration is low when considering the top 10 taxpayers, which comprise 7.6% of total AV, of which PG&E accounts for 6%. Notices of default and foreclosures have remained elevated through 2011, resulting in pressured home prices. According to Case-Shiller, prices have fallen about 40% from their peak in 2006 and are at 2002 levels. However, foreclosures as a percent of housing units for sale is fairly low compared to other counties in the state. Building permits valuations have fallen about half over the past five years.

VERY LOW DEBT PROFILE
The debt burden is very low, with overlapping debt totaling $1,500 per capita, or 1% of AV and net direct debt just $550 per capita, or 0.4% of AV. The county's unfunded liability related to other post-employment benefits is $13.4 million as of June 30, 2011. In 2010 the county established an irrevocable trust with a current balance of $8.2 million, and, as a result, its annual required contribution was lower in fiscal 2011. The county contributed more than 100% of ARC for both OPEB and pension in fiscal 2011. Carrying costs, including debt service on the COPs and POBs, and pension and OPEB payments, was a manageable 12% of expenditures and transfers in fiscal 2011. No additional debt is expected in the near term.

The San Luis Obispo County Employees Retirement Plan, which includes county employees as well as superior court and other agencies within the county, is 78% funded as of January 1, 2011. The county's combined average contribution rate is 20.66% in fiscal 2011, rising each subsequent year to a high of 26.8% in fiscal 2018. In order to address pension costs, the county recently implemented a tier II plan which raises the retirement age to 60 from 55 and limits the cost of living increase for the majority of employees.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

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