TEXT-Fitch affirms California GOs at 'A-'

Aug 3 - Fitch Ratings affirms the 'A-' rating on approximately $73.1 billion
in general obligation (GO) bonds of the state of California.

Fitch also affirms the ratings of lease appropriation and other related bonds of
the state as detailed at the end of this release.

The Rating Outlook is Stable.

SECURITY

General obligations, for which the state pledges its full faith and credit,
subject to the prior application of moneys to the support of public education;
funds for education represent approximately half of state spending.

KEY RATING DRIVERS

--WEALTHY, DIVERSE ECONOMY: The economy is wealthy and unmatched among U.S.
states in its diversity and breadth. Growth has resumed after severe, widespread
recessionary conditions.
--HISTORY OF BUDGET AND CASH STRESS: State finances are subject to periodic,
severe budget and cash flow crises due to structural imbalances, revenue
cyclicality and institutional inflexibility.
--VOLATILE REVENUES: Revenues are volatile, notably the component tied to
personal income; voter consent to temporary tax rate increases would further
expose the state to personal income tax cyclicality. Modest revenue growth has
resumed since the downturn although the course of future collections is
uncertain.
--TANGIBLE STRUCTURAL PROGRESS: Deep spending cuts in the last two adopted
budgets have significantly lowered the state's structural imbalance. Among many
challenges to maintaining structural progress is the state's historical
inability to achieve and sustain budgeted expenditure reductions.
--VOTER INITIATIVES LIMIT FLEXIBILITY: Constraints imposed by voter initiatives
and a partisan policy-making environment have repeatedly hindered timely,
effective action on fiscal challenges.
--MODERATE DEBT BURDEN: Tax-supported debt is moderate, but has grown in the
last decade for infrastructure needs and budgetary borrowing.

CREDIT PROFILE

California's 'A-' GO bond rating and Stable Outlook reflect its persistent
budgetary and cash challenges and limited fiscal flexibility tied to ongoing
structural deficits, and institutional constraints to sustainable budget-making.
These credit weaknesses are offset in part by the size and breadth of the
state's economy and tax base and the strengths inherent in a state's broad
powers.

Fiscal uncertainty has diminished as California's economic recovery has
strengthened and the state has taken repeated, material steps to narrow
structural gaps. Despite clear progress, credit uncertainties remain
considerable, including the strength of the state's nascent economic and revenue
recovery, whether voters consent to budgeted temporary tax rate increases or
trigger offsetting cuts, and the state's ability to fully achieve and sustain
budgeted gap-closing solutions. Voter consent on the tax package in November
could leave the state poised for further structural gains, allowing it to begin
repaying the sizable budgetary borrowing accrued in the last decade, but would
likewise expose the state to further tax revenue volatility.

ECONOMY

California's economy is unmatched in diversity. Recovery is taking hold after a
particularly deep and protracted recession, although economic recovery remains
uneven. June 2012 employment is up 2% from June 2011, higher than the 1.3%
national rate for the same period. Employment gains are widespread, particularly
in key service sectors, and construction employment has returned to growth.
However, California's unemployment rate remains well above the national average,
at 10.7% in June 2012 vs. 8.2% nationally. Personal income is also growing, with
the first quarter of 2012 rising 2.5% year-over-year, compared to 2.9%
nationally. The state's latest economic outlook, released in May 2012, foresees
economic activity in 2012 and 2013 accelerating after generally sluggish growth
in 2011, although the unemployment rate is expected to remain at historically
elevated levels.

FINANCES

California fiscal performance in recent decades has been marked by cyclical
revenue collections and periodic, severe budgetary and cash flow crises.
Resolution of the state's fiscal challenges has often been delayed, reliant on
non-recurring solutions, and constrained by restrictive voter initiatives. The
state's recent slow and uncertain economic and revenue recovery, in contrast to
the much stronger post-recessionary experience in prior downturns, has resulted
in persistent fiscal strain. To date this has left the state with little
flexibility to begin making progress on paying down past budgetary borrowing.

The state's last two budgets were adopted on a timely basis and incorporated
sizable recurring spending reductions, narrowing the state's structural
imbalance. The fiscal 2012 budget closed a cumulative gap estimated in January
2011 at $26.6 billion (equal to 15.3% of baseline general fund revenues). The
plan relied on $15 billion in spending reductions along with an optimistic
revenue forecast and non-recurring items to achieve balance. Given
underperformance of actual revenues in the course of the year, spending cuts of
approximately $880 million were triggered mid-year, enabling the state to
quickly offset a portion of the revenue underperformance. Nonetheless, the
combination of revenue erosion and an inability to achieve certain enacted
solutions required the controller to implement $3.3 billion in measures to
augment cash resources. The state estimates that fiscal 2012 closed with a
negative fund balance of $2.9 billion.

The adopted budget for fiscal 2013, which began on July 1, closed a gap of $15.7
billion (equal to 17.8% of general fund revenues and transfers) and leaves a
forecast year-end available reserve of $948 million. The $16.6 billion in
adopted solutions includes recurring and non-recurring spending reductions ($8.1
billion), revenue measures ($6 billion) and other transfers and loans ($2.5
billion). The state's revenue outlook assumes voter consent in November to
temporary personal income and sales tax rate increases, which would generate
$8.5 billion in gross revenues and $5.6 billion in net revenue for the general
fund. Voter rejection of the measures would trigger $6 billion in automatic
spending reductions, the vast majority of which would affect K-12 education.

Despite recent structural gains, considerable budgetary uncertainty remains
through fiscal 2013 and beyond. Enactment of the temporary tax package could
enable the state to make progress toward repaying the sizable budgetary
borrowing built up over the last decade, but would also leave the state more
reliant on volatile personal income tax receipts. If the tax package is rejected
by voters, triggered cuts would absorb most, but not all, of the foregone
revenues. Beyond the achievability of the voter initiative, the state has
consistently faced challenges implementing and sustaining planned spending cuts
due to litigation, federal rejection of program changes, or other obstacles.

DEBT AND PENSIONS

California has a moderate but above-average debt burden, with net tax-supported
debt of approximately $92.7 billion as of July 1, 2012, equal to 5.5% of 2011
personal income. The debt burden has risen over the last decade due primarily to
substantial GO bond issuance for infrastructure and borrowing to cover budget
gaps. Net tax-supported debt excludes cash flow borrowing; the state plans to
issue $10 billion in revenue anticipation notes for cash flow later in August
2012, higher than last year but generally consistent with recent experience.

System-wide funded ratios on a reported basis for the state's two main pension
systems, covering public employees and teachers, have eroded due to investment
losses. Based on their June 30, 2010 actuarial valuations, the public employees'
plan reported an 83.4% system-wide funded ratio and the teachers' plan reported
a 71.5% system-wide funded ratio.

Using Fitch's more conservative 7% discount rate assumption, funded ratios for
the two systems fall to 77% for public employees' and 66% for teachers'. On a
combined basis, net tax-supported debt and pension liabilities attributable to
the state are estimated by Fitch at 8.5% of 2011 personal income, just above the
6.6% median of Fitch-rated states.

Some reforms to contribution levels and benefits were adopted with the state's
fiscal 2011 budget, and both systems have reduced their discount rate
assumptions. Full actuarial contributions to the public employees' system are
legally required, but not for the teachers' system, leading to consistent
underfunding of the latter. The governor has proposed wide-ranging reforms to
state pensions that would delay retirement ages and create hybrid options to
lower the state's burden over time.

Today's affirmation of the state's GO rating at 'A-' with a Stable Outlook also
applies to the following:

--Cal-Mortgage Loan Insurance Division bonds;
--California Statewide Community Development Authority revenue bonds (State of
California Proposition 1A Receivables Program).

In addition, appropriation bonds of the state issued by the following entities
are affirmed at 'BBB+' with a Stable Outlook, one notch below the state's GO
rating:

--Public Works Board (except for those issued for the Regents of the University
of California);
--East Bay State Building Authority;
--Los Angeles State Building Authority;
--Oakland State Building Authority;
--Riverside County Financing Authority;
--Sacramento City Financing Authority;
--San Bernardino Joint Powers Financing Authority;
--San Francisco State Building Authority;
--Golden State Tobacco Securitization Corporation (series 2005A);
--California Judgment Trust;
--Shafter Joint Powers Financing Authority;
--Taft Public Finance Authority.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

In addition to the sources of information identified in the Tax-Supported Rating
Criteria, this action was additionally informed by information from IHS Global
Insight.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 15, 2011);

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria