TEXT-Fitch rates University of California general revs 'AA+'

Thu Feb 14, 2013 5:35pm EST

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Feb 14 - Fitch Ratings assigns an 'AA+' rating to the following series of
general revenue bonds (GRBs) in a total amount of up to $1.7 billion to be
issued by the Regents of the University of California for the benefit of
University of California (UC).

--2013 Series AF;
--2013 Series AG (taxable);
--2013 Series AH (taxable fixed rate notes).

The bonds are expected to sell via negotiation the week of February 25. Proceeds
of the series AF and series AG bonds will be used to refund outstanding GRBs and
pay various issuance costs. Proceeds of the series AH bonds will be used to
remarket UC's outstanding 2011 series AA-2 put bonds. In addition, Fitch affirms
UC's various long- and short-term ratings as detailed at the end of this

The Rating Outlook is Stable.


GRBs are secured primarily by a broad pledge of UC's unencumbered revenues,
namely gross tuition and fees, indirect cost recovery revenues, and auxiliary


EXCEPTIONAL REPUTATION: The 'AA+' rating is supported by UC's strong reputation
for academics, research and medical care that continues to promote consistently
strong student demand and highly selective admissions, despite considerable
increases in student charges over the past several years.

PRESSURED FINANCIAL PROFILE: UC's substantial balance sheet resources; diverse
revenues; and low debt burden, despite an increase in financial leverage over
the past few years, partially mitigate concern over the university's
consistently negative and fluctuating operating results. Strategic initiatives
undertaken by management as well as additional state funding are expected to
yield positive results, though slow progress is anticipated.

STABILIZING STATE FUNDING: Following years of cuts, implemented and proposed
appropriation increases in fiscal years 2013 and 2014 should provide a level of
stability to UC's operating budget over the near-term. Partially offsetting the
steep decline in funding over the past few years is the university's limited
reliance on the state for operating support and the timely measures consistently
taken by UC's board of regents and seasoned management team during times of
state fiscal stress.

RETIREE LIABILITIES: UC's significant pension and retiree health benefits
liabilities remain a credit concern, although continue to be carefully managed
by the university.

RESOURCE SUFFICIENCY: The 'F1+' rating is based on UC's ability to cover the
maximum potential liquidity demands presented by its variable rate debt programs
by at least 1.25x from internal resources, including cash and highly liquid,
highly rated investments.


FURTHER MARGIN DETERIORATION: An inability to stem operating losses and return
to a near-breakeven level of performance over the near-term may result in
negative rating pressure. The rating assumes that management's ability to
improve operations will begin to be evidenced in fiscal 2013.



The university's operating environment remains pressured. While its operating
deficit narrowed in fiscal years 2010 and 2011, its operating margin fell to
negative 8.4% in fiscal 2012. This was partly attributed to continued state cuts
and rising employee health care related costs. Based on discussions with
management, Fitch expects marginal operating improvement for fiscal 2013, based
on a roughly 4.7% increase in state general funds, primarily to augment the
state's share of retirement contributions; modest enrollment growth, coupled
with recent tuition hikes; and positive fiscal impact being realized through
UC's ongoing Working Smarter initiative ($250 million to date - $500 million
expected by fiscal 2015). While Fitch anticipates fiscal 2013 and 2014 operating
performance to demonstrate gradual improvement, reversion to the fiscal 2012
level could put downward pressure on the rating or outlook.

Fitch believes UC's financial cushion continues to support the 'AA+' rating.
Available funds, defined as cash and investments less nonexpendable restricted
net assets, grew to an impressive $17.32 billion as of June 30, 2012. Available
funds covered fiscal 2012 operating expenses ($26.05 billion) and pro forma debt
(about $14.28 billion) by a solid 66.5% and 121%, respectively. Debt excludes
California State Public Works Board (SPWB) lease revenue bonds issued by the
state (GO bonds rated 'A-') on UC's behalf ($2.39 billion outstanding as of Jan.
1, 2013). Including this debt, the available funds-to-debt ratio declines to a
still acceptable 104%.

UC also benefits from a very diverse revenue base, a credit factor Fitch
continues to view favorably. The university's largest funding sources include
revenues derived from the operation of its five medical centers (28.4% of fiscal
2012 operating revenues), grants and contracts generated by its substantial
sponsored research activities (23.3%), and student-generated revenues, including
tuition, fees, and auxiliary receipts (18.6%). State appropriations still
represent a notable sum ($2.27 billion in fiscal 2012), though as a percent of
revenues continues to decline; 9% in fiscal 2012 from 16% in fiscal 2008.

Federal monies received for research and interest subsidies associated with
Build America Bond (BAB) related debt service could be impacted by potential
federal sequestration. If sequestration occurs, Fitch anticipates that
management will be able to make the necessary budgetary adjustments; therefore
the impact is expected to be minimal relative to UC's resource base.


UC took numerous steps over the past few years to offset the loss in state
funds, including significant student fee increases, staff reductions and other
cost savings initiatives. For fiscal 2012, appropriations declined a total of
$750 million to about $2.27 billion. Fitch viewed favorably voter passage of the
governor's tax increase initiative (Proposition 30) in Nov. 2012, which
eliminated further cuts to higher education in the state's adopted 2012 - 2013
budget. Moreover, in connection to passage of Proposition 30, UC will also
receive $125 million in additional state funds in fiscal 2014 as a tuition
increase buyback in return for not raising tuition for the current 2012 -2013
academic year. The fiscal 2013 budget also provides UC an $89.1 million increase
for its share of employer retirement contributions, a $5.2 million increase for
health benefits, and $11.6 million for lease revenue bond debt service.

In addition to the tuition buyback funds mentioned above, the governor's 2013 -
2014 budget proposal includes a further base budget adjustment of $125.4 million
for UC, as well as increased funding for health benefits ($6.4 million), and
lease revenue bond debt service funding ($10.1 million). UC's state general fund
budget for operating purposes would total $2.64 billion, up from $2.38 billion
in fiscal 2013 and $2.27 billion in fiscal 2012. The budget also proposes
shifting appropriations allocated for debt service costs on SPWB bonds to the
university's budget and tightening control of its capital spending. While no
immediate decision is expected, it is anticipated that the SPWB-related
appropriations would remain sufficient and be transferred directly by UC to the
bond trustee for debt service.

While the additional state funding is positive, UC is not expected to raise
tuition for 2013 - 2014, which will be the second year of flat student charges.
This somewhat limits UC's tuition raising flexibility which Fitch has
historically noted as a credit positive. Fitch will review the final budget once
adopted to determine the impact these proposals will have on the university.
UC's president also recently announced plans to step down effective August 2013.
Fitch will monitor progress on this front as well, but takes comfort in the
stability, depth and experience of UC's existing senior management team.


In recent years, UC leveraged its fundamentally strong credit profile by
diversifying the type and duration of borrowings under its GRB indenture,
including non-level amortization structures that include large bullets and
longer maturities. However, as implied by its 'AA+' rating, UC's substantial
unencumbered resources and strong access to the capital markets enable it to
appropriately manage these risks.

To evaluate UC's pro forma debt burden, Fitch evenly amortized the university's
$860 million century bond (issued in 2012) through fiscal 2050, the final
maturity for all currently outstanding GRBs. Under this approach, MADS totals
about $895 million (fiscal 2016) and represented a low 3.7% of fiscal 2012
operating revenues ($24 billion). MADS excludes debt service associated with the
SPWB lease revenue bonds, the lease payments of which are appropriated annually
by the state as a line item in UC's budget, though as discussed above, this
mechanism could potentially be revised under the governor's budget proposal.
Fitch notes positively that despite an increasing debt load and years of
significant state funding cuts, UC's debt burden remains manageable.


Liquidity support for UC's variable-rate debt programs is derived from the
strength of its short term investment pool (STIP). As of Dec. 31, 2012, the
market value of STIP holdings, primarily U.S. Treasury and agencies securities
and highly rated corporate fixed-income instruments, totaled $8.33 billion. Of
this amount, approximately $6.53 billion (after Fitch discounts based on asset
type and maturity) provided solid 2.08x coverage of UC's approximately $1.14
billion of variable-rate and put debt, and maximum CP authorization of $2
billion ($1.16 billion currently outstanding). UC intends to remarket $286.5
million of outstanding 2011 series AA-2 GRBs, currently in two-year put mode,
for a term of up to six years. Excluding this debt, liquidity coverage improves
to 2.29x. For an 'F1+' rating, Fitch expects coverage of at least 1.25x.

To manage potential calls on its liquidity, UC limits the amount of CP maturing
daily to $200 million. UC's regularly updated liquidation procedures plan
adequately addresses the procedures to be followed in advance of maturing CP
notes, mandatory tender dates, and for how a potential failed remarketing of
variable-rate demand bonds would be addressed.

Fitch affirms the following ratings:

--$6.57 billion GRBs at 'AA+';
--$200 million GRBs 2010 series V (taxable Build America Bonds-put structure) at
--$3.5 million GRBs 2011 series W (taxable Clean Renewable Energy Bonds) at
--$48.7 million California Statewide Communities Authority, Recovery Zone
Economic Development Bonds (UC Merced Student Housing Phase 4) 2010 series A at
--$500 million GRBs 2011 series Y (taxable floating-rate notes) at 'AA+/F1+';
--$150 million GRBs 2011 series Z (taxable variable-rate demand bonds) at
--$286.5 million GRBs 2011 series AA-2 (taxable fixed-rate notes) at 'AA+/F1+';
--$2.02 billion limited project revenue bonds (LPRBs) at 'AA'*;
--$2 billion taxable and tax-exempt commercial paper program at 'F1+'.

*LPRBs are secured by a junior lien on pledged revenues, subordinate to GRB debt

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.

Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. College and University Rating Criteria' (May 24, 2012);
--'Criteria for Assigning Short Term Ratings Based on Internal Liquidity (June
15, 2012);
--'Fitch Rates University of California's Limited Project Revenue Bonds 'AA';
Outlook Stable (July 13, 2012);
--'Fitch Rates Univ of California General Rev Bonds 'AA+'; Outlook Stable' (Feb.
15, 2012).

Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
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