Fitch Rates $145MM California Public Works Board Bonds 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to the following California State Public Works Board (SPWB) lease revenue bonds:

--$145.3 million lease revenue bonds (Department of Corrections and Rehabilitation) 2016 series E (RJ Donovan Correctional Facility: Various Buildings).

The bonds will be sold via competitive bid on Oct. 26, 2016.

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

APPROPRIATION MECHANISM: The 'A+' rating on lease revenue bonds, one notch below the state of California's Issuer Default Rating (IDR) of 'AA-', reflects the slightly higher degree of optionality associated with payment of appropriation debt. California's 'AA-' IDR reflects its large and diverse economy that supports strong, albeit cyclical revenue growth prospects, solid ability to manage expenses through the economic cycle, and a moderate level of liabilities. California is fundamentally better positioned to withstand a future economic downturn than has been the case in prior recessions due to numerous institutional improvements. The state has demonstrated strong budget management during this period of economic recovery and expansion, using temporary tax revenues to eliminate the overhang of budgetary borrowing that had accumulated through two recessions.

Economic Resource Base

California's economy is unmatched among U.S. states in its size and diversity and is generally stable despite a considerable presence in industries prone to cyclicality. Population and employment growth levels approximate the U.S. medians over time, but the state remains a magnet, including for immigrants. After severe, widespread recessionary conditions, growth in the recovery has been strong, including in California's housing market.

Revenue Framework: 'aaa' factor assessment

Tax revenues are dominated by personal income taxes, which are economically sensitive, particularly those related to capital gains. Growth prospects are strong, driven by the state's strong economic fundamentals. As with most states, California's legal ability to raise taxes is unlimited, although subject to legislative super-majority voting requirements.

Expenditure Framework: 'aa' factor assessment

California has a solid ability to reduce spending through the economic cycle although its flexibility is somewhat restricted than is true for most states due to constitutional requirements for funding education and voter initiatives that limit state discretion.

Long-Term Liability Burden: 'aa' factor assessment

Long-term liabilities, while above the median for U.S. states, are moderate. Pension funded ratios declined following the downturn; however, the state has instituted some benefit reforms and implemented a long-term plan to increase contributions to the teachers' system.

Operating Performance: 'aa' factor assessment

Institutionalized changes to fiscal operations, when combined with the ongoing economic and revenue recovery, have enabled the state to materially improve its financial position, enhancing its ability to address future fiscal challenges.

RATING SENSITIVITIES

CONTINUED FISCAL DISCIPLINE: The appropriation rating is sensitive to changes in the state's 'AA-' IDR to which it is linked. California's IDR is sensitive to the state's ability and willingness, both within the legislative and executive branches, to maintain fiscal discipline throughout the economic cycle.

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 is being issued under a separate indenture and will be incorporated under the master indenture, and thus benefits from access to the SPWB's $148 million master indenture reserve. As of Sept. 1, 2016 the master indenture reserve backs approximately $9.3 billion in outstanding SPWB lease revenue bonds issued under the master indenture and under incorporated indentures.

For further information on California, please see Fitch's press release dated Oct. 5, 2016, 'Fitch Rates California's $1.6B GOs 'AA-'; Outlook Stable', available at www.fitchratings.com.

Date of Relevant Committee: Aug. 11, 2016.

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012820

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Douglas Offerman
Senior Director
+1-212-908-0889
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Douglas Offerman
Senior Director
+1-212-908-0889
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com