Fitch Rates Riverside County, California's $60.5MM Lease Revs 'AA-'; Outlook Negative

SAN FRANCISCO--(Business Wire)--
Fitch Ratings assigns an 'AA-' rating to approximately $17.5
million Southwest Communities Financing Authority's (authority) 2008
lease revenue bonds series A (county of Riverside Capital Project) and
$43 million County of Riverside certificates of participation (public
safety communications prepayment) 2008 series A. The bonds and the
COPs are preliminarily scheduled to price on the week of Nov 3rd. In
addition, Fitch affirms the 'AA-' rating on various outstanding lease
obligations and COPs as well as the 'AA' implied general obligation
(GO) bond rating. The Rating Outlook on all obligations was revised to
Negative on August 27, 2008.

The Negative Outlook reflects Fitch's concern that the effect on
the economy of the real estate market's severe deterioration will
stress Riverside County's (the county) traditionally well-managed
finances. Reserve levels remain strong but are declining according to
fiscal 2008 estimates. Average home sale prices have declined each
quarter from September 2006 to June 2008, falling 25% in total so far.
Based on Fitch's residential mortgage backed securities (RMBS) data,
which includes only a subset of mortgage activity, delinquencies and
foreclosures in the county have increased dramatically since their
previous peaks in January 2003 and March 2002, respectively. Creating
further pressure on the overall credit is the recent increase in
unemployment, and a reduction in property and sales tax collections.
The county believes that the final California budget, which was
enacted in September, does not contain the expected level of cuts.

Despite these challenges, the county's ratings reflect its current
financial flexibility which is the result of strong fiscal management
focused on conservative budgeting, reserve designations and structural
balance. Continued credit strength will depend on the county's ability
to control spending and maintain its above average reserves throughout
the economic downturn. Further deterioration of the strong, currently
well-diversified economy could also pressure the rating.

The bonds are being issued by the authority to finance the
construction of a 32,362 square foot animal care facility. The
facility will be operated by Animal Friends of the Valley (AFV), a
non-profit organization, under an operating agreement with the county.
AFV currently operates the existing animal shelter which is being
replaced. The county will make lease payments to the authority for use
and occupancy of the facility and the four other members of the
authority (cities of Riverside, Lake Elsinore, Murrieta, Temecula and
Canyon Lake) will pay the county annually for their proportionate use
of the facility. Construction is scheduled to be completed in January
2010 and capitalized interest is funded through April 2010. The debt
service reserve fund will be cash funded and lease provisions are
standard and typical of California leases, including two years of
rental interruption insurance.

The COPs are being issued to refinance the county's 2007 series B
auction rate certificates and to fund a cash funded reserve fund. The
certificates were originally issued in 2007 to finance a portion of an
800 MHz public safety radio communications system and to refinance
outstanding 1997 COPs. The COPs are secured by lease payments made by
the county for use and occupancy of the County Administrative Center
and several facilities financed with the 1997 COPs. Once completed,
the project may be substituted into the lease. Lease provisions are
standard and typical of California leases, including two years of
rental interruption insurance. To date, the project is proceeding on
budget.

Since 2000, the county experienced rapid population and economic
growth, increasing in population by over 30% from 2000-2007. Job and
labor force growth was likewise strong, increasing by 3.6% and 3.7%
annually, respectively on average from 1999-2006. However, employment
growth slowed in 2007 to 1.4% and unemployment increased to 6.2%,
compared to 5.0% in 2006, rising to 7.7% in May 2007. The construction
and real estate-related sectors have seen significant job losses in
the Riverside-San Bernardino MSA, shedding 13% and 4% respectively, in
2007.

The population and job growth fueled residential and commercial
construction, resulting in extraordinary assessed value (AV) gains
averaging 15.5% annually from fiscal 2002-2008. For fiscal 2009 AV
growth slowed dramatically to just 1.5%, with gains from new
construction and property sales ($20 billion) largely offset by the
county assessor's reduction of the AV of over 200,000 properties ($16
billion). The county is projecting no AV increase through fiscal 2011.
Residential construction in recent years was further supported by the
availability of subprime mortgages and other new loan products, which
are defaulting at record levels and pressuring home prices. Commercial
and industrial real estate development has mitigated the decline in
the housing market somewhat, but that sector is starting to soften as
well, exhibiting lower absorption rates and rising vacancy rates.

On a positive note, several years of strong economic and tax base
growth coupled with good cost controls enabled the county to steadily
add to its fund balance while also building flexibility into its
budget. Audited results for fiscal 2007 show a remarkable third year
of a general fund surplus over $100 million, bringing the total fund
balance to $571 million, or 26% of expenditures and transfers out. The
county's 2007 fiscal year-end unreserved fund balance rose to $483
million, a strong 22% of expenditures and transfers out (up from 13%
in fiscal 2005), providing an important financial cushion as the
county adjusts to slower or negative revenue growth. As the outlook
for the county's economy changed throughout fiscal 2008, the county
took action to limit the long-term impact on its financial position.
Fitch notes that the county's sound budgetary achievement while also
including substantial capital and other one-time spending, also
avoided incorporating unusually strong tax performance into recurring
expenditures.

For fiscal 2008, the county projects a drawdown on reserves and
designations of about $100 million, and the budget for fiscal 2009
includes the use of a net amount of about $63 million in reserves or
designations. At these reduced levels, Fitch believes the reserve
levels remain consistent with the rating category, although
deterioration beyond the budgeted level could lead to a rating
downgrade. Departments have already been directed to reduce their
spending targets for fiscal 2010 by at least 8%. Fitch views the
county's budget policies, which include a reserve for economic
uncertainties sized at 15% of discretionary revenues and a contingency
reserve at 4% of discretionary revenues, as positive and effective in
retaining sound finances. Both are fully funded in its fiscal 2009
budget.

The county's tax base is diverse. The top 10 taxpayers contribute
just 1.9% of property tax revenues; however, four of the top 10
taxpayers are homebuilders reflecting their important role in the
economy. In spite of the current housing downturn, long term prospects
for economic growth remain positive in the county due to the
availability of affordable land and the county's location along major
transportation corridors and near major seaports and a cargo-oriented
airport.

The county's direct debt burden is low, equaling just $534 per
capita and 0.45% of market value. Including overlapping debt, debt
ratios remain moderate, with issuance offset by population and AV
gains. Overall debt totals about $3,896 per capita and is about 3.3%
of market value.

The county's pension system is well funded and the county took
action in August 2007 to reduce its exposure to other post employment
benefits (OPEB), eliminating the implicit subsidy to retirees and
reducing its OPEB liability to about $50 million (with a $1.5 million
annual required contribution (ARC)) from $237 million (with a $16
million ARC). In addition, the county has prudently set up an OPEB
Trust with CalPERS and budgeted $10 million in fiscal 2008 and $5
million in fiscal 2009 to begin funding its OPEB liability.

Fitch issued an exposure draft on July 31, 2008 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'.) At this time, Fitch is deferring its final
determination on municipal recalibration. Fitch will continue to
monitor market and credit conditions, and plans to revisit the
recalibration in the first quarter of 2009.

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
Karen Ribble, 415-732-1756
Amy Doppelt, 415-732-5612
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com

Copyright Business Wire 2008