2008-05-28 04:56:18 -

- Fitch Ratings has assigned an 'F1+' rating to San Diego County, California's (the county) $75 million tax and revenue anticipation note (TRAN) program note participations, series 2008A. The notes are scheduled for negotiated sale on or about June 3. The notes will be dated July 1, 2008 and will mature in 12 or 13 months, with the maturity determined closer to pricing.

Additionally, Fitch affirms the county's 'AA+' implied general obligation (GO) rating and the 'AA' rating on the following outstanding obligations:

San Diego County, California

--$1.07 billion pension obligation bonds.

San Diego County Capital Asset Leasing Corporation

--$218 million certificates of participation.

San Diego Regional Building Authority

--$25.1 million certificates of

participation (COPs).

The Rating Outlook is Stable.

Fitch's 'F1+' short-term rating reflects the strong coverage of note repayment and set-asides provided by projected pledged revenue, substantial borrowable funds, and the county's strong long-term credit characteristics. The 'AA+' and 'AA' long-term ratings are based on the county's positive financial trend, strong management policies and practices (including disciplined pension funding and effective actions to limit retiree healthcare costs), and conservative debt management, which together provide protection against the current housing market weakness and its impact on the county's diverse economy. Fitch recognizes the fiscal uncertainty presented by the ongoing litigation regarding eligibility in the County Medical Service (CMS) program, but believes the impact to be modest in size. All ratings also consider the likelihood of state funding reductions.

The county's TRAN borrowing is well protected by the strong coverage of note principal and interest by pledged revenue as well as by the excess cash available as early as January 2009, and sizable borrowable funds if general county operations vary greatly from the projected cash flow. This note issuance continues the county's trend of reducing its external borrowing size, reflecting greater liquidity and internal funding of the Teeter Plan property tax payments to overlapping governments.

The fiscal 2009 projected cash flow shows that the county can comfortably make the January full principal and interest set-aside, with the ending cash balance covering the amount 5.2 times (x). Credit strength is added by the early nature of this set-aside, although the county's true set-aside structure will be determined at pricing. Total principal and interest is covered a sound 44.3x by projected general fund receipts and 21.3x by receipts excluding intergovernmental revenue. The cash flow holds up well under Fitch's stress scenarios which simulate revenue delays, state and federal funding reductions, and state assistance deferrals. All projected cash shortages under these severe scenarios are well below the county's non-general fund amounts that are available for borrowing to cover any cash flow variances. Identified borrowable resources have been at least $250 million in the months near note maturity in the last several years.

The general fund cash flow is based on the county's proposed fiscal 2009 budget, with general fund spending totaling $3.7 billion, a 3.9% increase from fiscal 2008 and smaller growth than the county has experienced in recent years. The budget is balanced using $203.6 million in prior years' fund balance, mostly for one-time items, although some will compensate for minimal projected gains in sales taxes. Fitch views this level as acceptable given the county's sizable reserves, the majority use for one-time expenses, and the county's history of showing better than budgeted performance.

The limited growth is based on a slowing economy and includes small spending increases in some areas such as public safety and health and human services that are partially offset by reductions in other areas. However, the budget does not incorporate the reduced social service funding included in the May revision to the state's proposed budget because of the significant negotiation and revision typical in the California budget process. The county will adopt a final budget including the state-driven adjustments once the state's budget is adopted, and officials have stated their intent to make program reductions equal to the state funding changes. Nonetheless, one of Fitch's stress scenarios models a reduction in state and federal funding as well as state payment deferrals. The county's proposed budget includes reserves that exceed policy targets totaling 17% of general purpose revenue, which equates to nearly 5% of total general fund appropriations.

The county's financial operations remain healthy and leave it well-positioned to handle an economic and revenue slowdown. Prior years benefited from the county's economic growth and related revenue generation as well as prudent spending and adherence to strong financial policies. Audited results for fiscal 2007 show the general fund running its sixth and largest operating surplus in the last eight fiscal years. The unreserved general fund balance rose to $744.8 million, a very high 25.2% of the year's nearly $3 billion in spending. The county expects fiscal 2008 to show a moderate operating deficit as the county used reserves to make up for weaker sales tax performance and for costs associated with last fall's firestorms. Nonetheless, the county projects retaining strong reserves that will exceed their reserve policies. Fitch expects the county's prudent management efforts to continue to contribute to its long-term fiscal stability.

The county's economy is performing reasonably well given the severe housing market downturn. The residential decline is evident in a variety of measures, including a 24% drop in the single family home median sales price from the first quarter-2006 (1Q'06) to 1Q'08, a more than four-fold increase in the number of foreclosures in 2007 as compared to 2006, and an equally dramatic rise in the number of taxpayers appealing their assessed value. Nonetheless, job growth continues, albeit at a slower pace, and the county's unemployment rate remains below that state average. The county's March, 2008 jobless rate rose to 5.3%, still below the state's 6.1%, but is above the nation's 5%. Tax base growth, generally a lagging indicator, has been considerable, 10.4% per year on average from fiscals 2002-2008, although the county expects a much smaller gain in fiscal 2009. Fitch expects that the county's solid economic underpinnings and good diversity will provide at least a partial offset to the housing sector's impact

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings, San Francisco
Amy S. Doppelt, 415-732-5612
Alan Gibson, 415-732-1752
or
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