Fitch U.S. Muni Surveillance: San Luis Obispo, California POBs & COPs Affirmed at 'AA-'

NEW YORK--(BUSINESS WIRE)--In the course of routine surveillance, Fitch Ratings has affirmed the 'AA-' ratings on the following outstanding debt for San Luis Obispo County, California (the county):

--$129 million taxable pension obligation bonds (POBs);

--$47 million certificates of participation (COPs).

The taxable POBs are secured by an absolute and unconditional pledge of the county imposed by law. The COPs are secured by lease rental payments made by the county for the use and occupancy of various essential county assets. The Rating Outlook is Stable.

The 'AA-' rating reflects the general credit characteristics of the county, which include a historically stable economy, solid financial performance marked by strong fund balances, and very low debt burden, as well as continuing uncertainty surrounding state budget appropriations. The county is well positioned to withstand the state impact and additional challenges resulting from a weakening economy, including slowing property tax revenues; spending discipline is evidenced through midyear budget action to reduce expenditures.

San Luis Obispo County is located on the central California coast midway between San Francisco and Los Angeles. The local employment base has grown steadily over the past three years and the unemployment rate remains well below the state's average. However, the county remains susceptible to volatility in the tourism and agriculture sectors. A deteriorated housing market could ultimately pressure financial operations, as notices of defaults and foreclosures are on the rise. Additionally, the median home price has reportedly fallen by roughly 18% since its 2006 high.

The county's financial operations are historically solid, with above-average reserve levels providing financial flexibility. Management budgets an annual contingency equal to 5% of the county's total budget, which helps mitigate concerns over a contracting housing market and state budget tightening. Officials expect an $8 million general fund deficit in fiscal 2008, which would bring the unreserved fund balance to $67 million, or a still healthy 20% of spending. An approximately $13 million tax reduction reserve provides additional flexibility.

Fitch issued an exposure draft on July 31 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').

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