Amended: Fitch Places $307MM San Diego, CA Debt on Rating Watch Negative.

SAN FRANCISCO -- Fitch places San Diego, CA's 'AA' rating on $52.2 million in general obligation bonds and 'AA-' rating on $254.6 million in bonds backed by city lease rental payments on Rating Watch Negative. The action reflects concern over deficiencies in decision-making and management of the city's pension system and related disclosure, as detailed in a report released last week. The issuers and issues affected are detailed below.

Fitch's viewpoint stems from a report done by the law firm Vinson & Elkins L.L.P. and was released last week. Earlier this year, the city hired the firm to review the by then well publicized problems in the San Diego Employees Retirement Systems (SDCERS) and related securities disclosure. Fitch believes that the city's credit quality could deteriorate further if the practices that enabled the granting of costly pension benefits without adequate and timely funding continue. Fitch is troubled by many findings in the report, particularly the number and levels of individuals and entities agreeing or acquiescing to poor financial planning and inadequate disclosure, as it is characterized in the report. Fitch's concern and Rating Watch action is in keeping with its emphasis on effective management as a key credit quality component.

In continuing to monitor the city's credit quality, Fitch will look for effective changes implemented in the near term that address pension funding as a whole, decision-making in the pension management and labor process, and disclosure. Such action will require strong commitment to reform, as well as leadership, cooperation, and coordination amongst many individuals and groups, including elected officials, appointees, city staff at many levels, the SDCERS Board of Administration, labor groups, and other interested and responsible parties. The San Diego City Council now is considering an ordinance that will impose significant changes, including the establishment of two oversight boards. The changes are based on recommendations made by Vinson & Elkins and are designed to create greater communication, coordination, and direct responsibility regarding pension funding, financial reporting, and disclosure. A vote is expected next week. Evidence of significant structural change and a resulting positive effect are key to Fitch's maintaining the current ratings.

Fitch notes that the city, while slow to recognize and acknowledge the pension and disclosure problems, now appears to be taking an interest in rebuilding confidence in SDCERS and trust amongst investors and others. This is evidenced by the January 2004 voluntary disclosure of errors in the fiscal 2002 audit, the hiring of a new, independent accounting firm to audit fiscal 2003, the hiring of Vinson & Elkins to perform the pension and disclosure review, and the council's consideration of the reform ordinance. Also, as part of a recent litigation settlement, the city significantly increased its pension contribution for fiscal 2005 and will contribute the actuarially determined required amounts in fiscal years 2006-2008. Further evidence of a commitment to restore financial stability could come from future structural changes implemented, including additional recommendations made by Vinson & Elkins.

The Vinson & Elkins report details weaknesses in the city's and SDCERS' history over the 1996 to February 2004 period reviewed, as well as inadequacies with the disclosure made to potential investors. The report finds that many of the shortcomings stem from structural problems and a lack of centralization rather than from malicious or self-focused intent. Vinson & Elkins did not find evidence of an intention to deceive or of criminal wrongdoing and notes that no one involved appears to have benefited financially or professionally. Rather, the report cites a lack of the appropriate communication, coordination, and oversight needed to effectively manage SDCERS benefits and funding. Through a series of negotiated agreements between the city and the SDCERS Board established over several years, the system became extremely complicated. It appears that critical actions were taken by individuals and groups without full comprehension of the system's complexity and their actions' implications. The reports notes that disclosure suffered from a lack of complete understanding of the system as well and from broad distribution of responsibilities regarding securities transactions.

Fitch awaits release of the city's audited financial report for fiscal 2003 and views the audit's completion within a reasonable time period as also critical to maintaining the city's current ratings. The audit was delayed when the city discovered errors in the fiscal 2002 audit's footnotes and hired a new accounting firm to redo the fiscal 2003 report. While available financial data for the city's overall operations outside of the pension system is preliminary and unverified, Fitch's role as a rating agency dictates the responsibility to retain ratings whenever possible and requested. Historically, the city's financial operations and reserve levels have been sound, benefiting from strong economic growth and a diverse set of tax revenue sources. The city budgeted for reductions in reserves in the past two fiscal years, and even assuming performance at no better than budgeted levels, the current financial position likely is at least adequate. Fitch believes the city is well positioned financially to respond to its current and upcoming sizable budget challenges.

Fitch's ratings were lowered in February 2004, reflecting the city's rising pension costs and the resulting reduced financial flexibility. The ratings also consider the city's strong economy, which is among the fastest growing in the U.S. The city's financial operations benefit from a diverse group of taxes, enabling the city to capitalize on its economic development and strong tourism draw. Financial performance and reserves have been sound, although audited results for fiscal 2003 have been delayed as detailed above. Also, the city's debt burden is low and expected to remain affordable.

Investigations by the Securities and Exchange Commission and the U.S. Attorney for the Southern District of California continue, and both entities have received copies of the Vinson & Elkins report. Neither group has divulged much information regarding their work. Fitch will monitor all forthcoming details. Particularly, Fitch is concerned about the city's ongoing costs involved with the investigations and the potential for fines, payments, or settlements that could further reduce the city's financial flexibility.

Affected issues are:

-- City of San Diego general obligation bonds 'AA';

-- City of San Diego (1993 Balboa Park/Mission Bay Park Refunding) COPs, series 2003, 'AA-';

-- San Diego Public Facilities Financing Authority (Fire and Life Safety Facilities Project) lease revenue bonds, series 2002B 'AA-';

-- San Diego Metropolitan Transit Development Board (San Diego Old Town Light Transit Extension refunding) lease revenue bonds, series 2003 'AA-';

-- Convention Center Expansion Authority lease revenue bonds, series 1998A 'AA-'.