Fitch Rates San Diego County, CA's $95MM 2014 COPs 'AA+'; Affirms Outstanding

SAN FRANCISCO--()--Fitch Ratings assigns a 'AA+' rating to the following San Diego County, California (the county) issuance:

--Approximately $94.8 million certificates of participation (COPs), Edgemoor and RCS Refunding, series 2014A and 2014B (taxable).

In addition, Fitch affirms the following ratings:

--Implied San Diego County general obligation at 'AAA';

--$732.3 million in outstanding San Diego County pension obligation bonds (POBs) at 'AA+';

--$379.8 million in San Diego County and San Diego Regional Building Authority certificates of participation (COPs) and lease revenue bonds (LRBs) at 'AA+'.

The Rating Outlook is Stable.

The COPs are expected to sell via negotiation during the week of Aug. 18, 2014 and will refund outstanding debt for interest savings.

SECURITY

The COPs and LRBs are secured by the county's covenant to budget and appropriate lease rental payments for the use of various essential governmental properties, subject to abatement. The POBs are an obligation imposed by law and have been legally validated as such.

KEY RATING DRIVERS

LARGE AND DIVERSE TAX BASE: As the fifth largest county in the nation by population, San Diego benefits from a large and diverse tax base with substantial ongoing development. Taxable assessed values (TAV) have improved steadily since a small decline during the last recession and home values continue to register strong year-over-year increases.

STEADY RECOVERY CONTINUES: County unemployment rates have continued to decline and compare favorably to state and national averages. Employment levels have risen steadily since early 2010 and exceed pre-recession peaks.

STRONG FINANCIAL POSITION: The county's general fund remains stable, with healthy fund balances. Recurring positive operating results are supported by strong, institutionalized management policies and practices, including disciplined pension funding and effective actions to limit retiree pension and healthcare costs.

LOW DEBT: Debt management is very conservative, with significant cash financing and early debt retirements, resulting in low debt levels with above-average amortization.

RATING SENSITIVITIES

STRONG FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the county's substantial tax base and strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

San Diego County is the nation's fifth most populous county with over three million residents and 18 incorporated cities. The core industries of its diverse economy include manufacturing, the military and related defense industries, and tourism. Employment levels have risen at a steady pace since 2010, with 50 consecutive months of year-over-year growth. Unemployment rates have continued to decline and at 5.8% as of May 2014 compare favorably to state and national averages of 7.1% and 6.1%, respectively. Wealth and income indicators for the county remain above average.

LARGE AND DIVERSE TAX BASE

The county's substantial tax base retained much of its value during the recent downturn despite housing price declines that exceeded the national average. Fiscal 2015 TAV is projected to increase by a strong 6%. Home values have continued to recover in the county and Zillow.com reports year over year gains of 13.2% as of June 2014, which will likely support healthy TAV gains in 2016 as well.

STRONG FINANCIAL POSITION

The county has achieved consistently strong general fund results with positive operating margins. Results for fiscal 2014 appear likely to continue this positive trend, with a projected addition of $39 million to unassigned fund balance. Unrestricted fund balance at the end of fiscal 2013 was a healthy 36.9% of general fund spending.

The county's strong financial results are supported by forward-looking management policies and practices which include clear reserve targets, disciplined funding of capital needs and long-term obligations, and conservative budgeting. In addition, the county has instituted numerous expenditure controls over the past several years, reducing both near-term and future cost pressures through strategic reductions in spending on employee and retiree benefits.

LOW DEBT

The county benefits from its low debt burden as a result of a preference for cash financing of projects and early debt defeasance. Overlapping debt levels are moderate at $4,400 per capita and 3.4% of TAV. Amortization is above average with 59% of outstanding principal repaid within 10 years.

The county retains a substantial unfunded liability for retiree pension costs which is expected to increase over the next two years due to past investment losses. Pension funding levels are reported at 78.7%, or an estimated 73% under Fitch's assumption of 7% investment returns. In 2007 the county eliminated post-retirement healthcare benefits for active employees, capping its liability for other post-employment benefits.

Fitch notes as a credit positive the county's full funding of its actuarially required annual required contribution for both pensions and OPEB which together with debt service accounted for an affordable 11.4% of governmental expenditures in fiscal 2013.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope and Zillow.com.

Applicable Criteria and Related Research:

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=845914

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Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh, +1 415-732-7573
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor, San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson, +1 415-732-7577
Director
or
Committee Chairperson
Amy Laskey, +1 212-908-0568
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stephen Walsh, +1 415-732-7573
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor, San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson, +1 415-732-7577
Director
or
Committee Chairperson
Amy Laskey, +1 212-908-0568
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com