Fitch Rates California Public Works Board $238MM Bonds 'A-'; Outlook Stable

Fitch Ratings assigns an 'A-' rating to the following lease revenue refunding bonds of the California State Public Works Board (SPWB):

--$139.57 million lease revenue refunding bonds, (Department of Corrections and Rehabilitation) 2014 series G (California Substance Abuse Treatment Facility and State Prison at Corcoran [Corcoran II]);

--$79.065 million lease revenue refunding bonds, 2014 series H (Various Capital Projects);

--$19.68 million lease revenue refunding bonds, (Department of State Hospitals) 2014 series I (Hospital Addition at Atascadero State Hospital).

The bonds will be sold via negotiated sale on Nov. 6.

The Rating Outlook is Stable.

SECURITY

Lease rental payments made by state agencies to the SPWB from first lawfully available funds for use and occupancy of facilities, subject to annual state legislative appropriation.

KEY RATING DRIVERS

RATING LINKED TO STATE: The 'A-' rating on lease revenue bonds, one notch below the State of California's general obligation (GO) rating, reflects the appropriation required for debt service payment and solid program mechanics.

CALIFORNIA'S GENERAL CREDIT QUALITY: The rating incorporates the size and breadth of the state's economy and tax base, a moderate debt load, and the institutional improvements made by the state in recent years that have contributed to improved financial performance, offset by remaining accumulated budgetary and financial challenges.

TANGIBLE STRUCTURAL PROGRESS: Deep recurring spending cuts in recent adopted budgets and a restrained approach to restoring past cuts have significantly lowered the state's structural imbalance. The state has made significant progress in reducing the burden of budgetary borrowing from the last two fiscal crises; however, its historical difficulty achieving and sustaining budgetary solutions poses an ongoing risk.

RATING SENSITIVITIES

RATING LINKED TO STATE CREDIT QUALITY: The rating is sensitive to changes in the state's GO bond rating, to which this rating is linked.

CREDIT PROFILE

The SPWB is California'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 agency required to use the first funds lawfully available to it for lease payments on SPWB debt. Abatement is possible, but abatement risk is mitigated by a requirement to maintain rental interruption insurance.

The current series are being issued under series indentures pursuant to the master indenture, and thus benefit from access to the SPWB's $162 million master indenture reserve. Prior to this sale, the master indenture reserve backs approximately $10.398 billion in outstanding SPWB lease bonds issued under the master indenture and under incorporated indentures.

The SPWB's bond rating is linked to the state's GO bond rating, at 'A', Outlook Stable. The GO rating reflects the institutional improvements made by the state in recent years, its disciplined approach to achieving and maintaining structural balance in recent budgets, and the consequent fiscal progress made to date by the state as it recovers from the severe budgetary and cash flow crisis of 2008-2009. Fitch believes that these gains provide the state with a greater capacity to address future fiscal and budgetary cyclicality. However, California's credit standing is likely to remain lower than that of most states for the foreseeable future given the magnitude of the state's accumulated budgetary and financial challenges.

For further information on California's GO rating, please see Fitch's rating action commentary dated Sept. 10, 2014, 'Fitch Assigns 'A' Rating to $2.3 Bil California GOs; Outlook Stable', available at www.fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=904694

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