Fitch: Exposure to IOUs a Potential Concern for California LGIP Ratings

NEW YORK--(Business Wire)--
Fitch Ratings is evaluating the holdings of registered warrants issued by the
state of California (IOUs) in rated local government investment pools (LGIPs)
and city operational fund portfolios. Fitch recognizes the involuntary aspect of
the IOU receipt and believes that for some pools there may be offsetting factors
that enable temporary and limited IOU exposure in these funds without
jeopardizing the current ratings.

Pool rating implications, if any, will depend on certain credit and liquidity
factors, including the size of any California IOU exposure relative to total
pool size, the credit quality and liquidity profile of the overall pool relative
to its participant base, the appropriateness of the exposure relative to
established investment policies and the expected IOU holding period. Fitch will
consider these factors as well as the status of California's budget and IOU
issuance.

As outlined in Fitch's rating action commentary 'Fitch Downgrades State of
California GOs to 'BBB'; Maintains Rating Watch Negative' dated July 6, 2009,
the state of California's controller has begun issuing IOUs to meet certain
non-priority obligations including some payments to local governments, following
the state's inability to achieve timely agreement on budgetary and cash flow
solutions to its severe fiscal crisis. Local municipalities are among the
expected recipients of such IOUs and, in turn, some asked Fitch about the rating
implications of depositing the IOUs in LGIPs and operational fund portfolios
managed by city and county treasurers. These Fitch-rated LGIPs and operational
fund portfolios are typically invested in high credit quality and liquid
securities in order to meet the portfolios' stated objectives of capital
preservation and sufficient liquidity to meet projected cash flow needs.

Fitch's rating criteria for 'AAA/V1+' LGIPs and operational fund portfolios
outlines minimum credit quality guidelines of at least 'A/F1' by Fitch or of
comparable quality. Additionally, the rating criteria includes maximum issuer
concentration guidelines of 5% per issuer, with the exception of short-dated
exposure to 'F1+' rated entities, which may be as high as 10% per issuer. Fitch
does not rate the IOUs issued by the state of California but would expect them
to be rated no higher than the 'BBB' on Rating Watch Negative assigned to the
state's general obligation bonds. Fitch has stated that resolution of the Rating
Watch Negative will depend on actions taken to address the state's cash flow
imbalance. Cash flow solutions, including the ability to access short-term
borrowing, are inextricably tied to reaching a timely agreement on effective and
credible budget solutions.

Exposure to IOUs presents credit and liquidity risks outside the typical
guidelines for highly-rated LGIPs and operational fund portfolios. For pools
that contain IOU deposits, Fitch will review the ratings and give consideration
to the overall credit quality of the portfolio assets and whether sufficient
liquidity is available to meet potential redemptions. A positive and partially
offsetting ratings factor is that Fitch-rated LGIPs and operational fund
portfolios for California localities on average held 78% of their investments in
U.S. Treasury and government agency securities as of June 30, 2009.

Other considerations include the size and potential holding period of such IOU
exposure, including the likelihood of repayment on or before the stated
repayment date of Oct. 2, 2009. Finally, Fitch will consider what alternatives
the portfolio manager may have in terms of selling or monetizing IOUs with banks
or other third parties that are continuing to accept IOUs. From the perspective
of LGIP and operational fund portfolios, the ability to monetize the exposure
with a bank at no loss of principal would be viewed favorably by Fitch. That
said, Fitch acknowledges that banks may face their own issuer concentration
constraints in assuming such IOU exposure. Fitch also notes that the above
commentary assumes that IOU holdings are involuntary in nature, resulting solely
from the state's payment actions.

Fitch rates the following seven LGIPs and city operational fund portfolios,
which had approximately $15 billion in aggregate assets under management as of
June 30, 2009:

--City of Oakland Operating Fund 'AAA/V1+';

--Community Redevelopment Agency of Los Angeles 'AAA/V1+';

--Marin County Investment Pool 'AAA/V1+';

--Riverside County Treasurer's Pooled Investment Fund 'AAA/V1+';

--San Bernardino County Investment Pool 'AAA/V1+';

--San Luis Obispo County Treasury Investment Pool 'AAA/V1+';

--San Mateo County Pool 'A-/V2'.

For more information on Fitch's rating criteria for LGIPs, please see the
criteria report entitled 'Local Government Investment Pool Ratings', dated March
3, 2006 and available on Fitch's web site at www.fitchratings.com.

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, New York
Viktoria Baklanova, CFA, +1-212-908-9162
Nathan Flanders, +1-212-908-0827 (Fund and Asset Manager Ratings)
Douglas Offerman, +1-212-908-0889 (Public Finance)
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com

Copyright Business Wire 2009