Fitch Rates California Public Works Board's $820MM Lease Revs 'BBB-'

Fitch Ratings assigns a 'BBB-' rating to approximately $820 million in lease revenue bonds of the State Public Works Board (PWB) of the State of California. The bonds are expected to consist of $789.4 million, to be sold either as 2009 series G (various capital projects) subseries G-1 (tax-exempt bonds) or 2009 series G (various capital projects) subseries G-2 (federally taxable Build America Bonds). The sale will also include $31.2 million (Department of Corrections and Rehabilitation) 2009 series H (California State Prison - Monterey County (Soledad II)) (tax-exempt bonds).

Final par amounts will be determined upon sale, expected via negotiation on Oct. 22. Series G and H will consist of serials and terms; final maturity of series G will be June 30, 2034, and final maturity of series H will be June 30, 2029. Early redemption provisions remain undetermined. 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'.

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 August are underperforming, down 1.3% from the May 2009 forecast, and considerable risk of underperformance remains going forward. Other risks are tied to achieving and sustaining deep spending reductions, which the budget plan relies heavily on, 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.

Since employment losses began in early 2008, losses have accelerated, with August 2009 employment down 5% from August 2008, well in excess of the 4.4% figure national decline. Unemployment has soared to 12.2% in August 2009, from 7.6% a year earlier. Job losses are widespread, with construction down 18.6% in August year-over-year, trade, transportation and utilities down 6.4%, and professional and business services down 6%. Personal income declined 0.2% in California in the first quarter of 2009 compared to a 0.8% growth nationwide.

The state has a moderate but rising debt burden, with net tax-supported debt of approximately $77.4 billion as of Sept. 1, equal to 4.9% 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 with a Stable Rating Outlook on the following outstanding lease appropriation bonds of the state:

--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.

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

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