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Fitch Affirms California Public Works Board Bonds at 'BBB+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns a 'BBB+' rating to the following lease revenue bonds of the State Public Works Board (PWB) of the state of California (the state):

--$458.89 million lease revenue bonds, 2012 series G (various capital projects);

--$53.485 million lease revenue bonds (Department of Education) 2012 series H (Riverside Campus Projects);

--$67.195 million lease revenue refunding bonds (Department of Corrections and Rehabilitation) 2012 series I (California State Prison - Lassen County, Susanville);

--$20.6 million lease revenue refunding bonds (Department of Public Health) 2012 series J (Richmond Laboratory Project).

The bonds will be sold via negotiated sale on or about Oct. 18.

In addition, Fitch affirms the following ratings:

--Approximately $9 billion in outstanding state appropriation bonds of the PWB and certain other agencies at 'BBB+'.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

--RATING LINKED TO STATE: The 'BBB+' rating, one notch below the state's general obligation (GO) rating, reflects the appropriation required for debt service payment and solid program mechanics.

--WEALTHY, DIVERSE ECONOMY: The state economy is wealthy and unmatched among U.S. states in its diversity and breadth. Growth has resumed after severe, widespread recessionary conditions.

--HISTORY OF BUDGET AND CASH STRESS: State finances are subject to periodic, severe budget and cash flow crises due to structural imbalances, revenue cyclicality and institutional inflexibility.

--VOLATILE REVENUES: Revenues are volatile, notably the component tied to personal income. Modest revenue growth has resumed since the downturn although the course of future collections is uncertain.

--TANGIBLE STRUCTURAL PROGRESS: Deep spending cuts in the last two adopted budgets have significantly lowered the state's structural imbalance. Among many challenges to maintaining structural progress is the state's historical inability to achieve and sustain budgeted expenditure reductions.

--VOTER INITIATIVES LIMIT FLEXIBILITY: Constraints imposed by voter initiatives and a partisan policy-making environment have repeatedly hindered timely, effective action on fiscal challenges.

--MODERATE DEBT BURDEN: Tax-supported debt is moderate, but has grown in the last decade for infrastructure needs and budgetary borrowing.

CREDIT PROFILE

The PWB 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 PWB debt. Abatement is possible, but projects require rental interruption insurance.

Each series in the current sale is being issued under separate series indentures either pursuant to or incorporated into the master indenture, and thus they benefit from parity access to the PWB's $164.5 million master indenture reserve. Prior to this sale, the master indenture reserve backs about $10 billion in outstanding PWB lease bonds issued under the master indenture and under incorporated indentures.

California's 'A-' GO bond rating and Stable Outlook, to which the PWB rating is linked, reflect its persistent budgetary and cash challenges and limited fiscal flexibility tied to ongoing structural deficits and institutional constraints to sustainable budget-making. These credit weaknesses are offset in part by the size and breadth of the state's economy and tax base and the strengths inherent in a state's broad powers.

Fiscal uncertainty has diminished as California's economic recovery has strengthened and the state has taken repeated, material steps to narrow structural gaps. Despite clear progress, credit uncertainties remain considerable, including the strength of the state's nascent economic and revenue recovery, whether voters consent to budgeted temporary tax rate increases or reject them, triggering offsetting cuts, and the state's ability to fully achieve and sustain budgeted gap-closing solutions. Voter consent on a tax increase package in November could leave the state poised for further structural gains, allowing it to begin repaying the sizable budgetary borrowing accrued in the last decade, but would likewise expose the state to further tax revenue volatility.

For further information on the California's GO rating, please see Fitch's press release from Sept. 14, 2012, 'Fitch Affirms $1.55 Billion California GO Bonds at 'A-'; Outlook Stable', available at 'www.fitchratings.com'.

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 IHS Global Insight.

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

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Fitch, Inc.
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Douglas Offerman, +1-212-908-0889
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New York NY 10004
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Secondary Analyst
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Senior Director
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Source: Fitch Ratings