CORRECTION: Fitch Rates CA's $900MM GOs 'A'; Negative Watch Continues.

Business Editors

NEW YORK--(BUSINESS WIRE)--Feb. 11, 2003

(In a press release issued earlier, the outstanding general obligation bonds should be approximately $25.5 billion. The amended release follows.)

Fitch Ratings assigns an 'A' rating to $900 million state of California general obligation bonds, for bids on Feb. 13, and affirms the 'A' rating on approximately $25.5 billion outstanding general obligation bonds. The ratings remain on Rating Watch Negative. The new bonds will be due Feb. 1, 2008-32 and are callable beginning Feb. 1, 2013, at par.

Despite the moderate burden of long-term debt and the fundamental strength of its economy, California has been under financial pressure since 2001, reflecting in part recessionary conditions, but, more importantly, a steep, unprecedented drop in personal income tax receipts due to a precipitous decline in capital gains, bonuses, options, etc. The yield from the tax in fiscal 2002 was 25% below the previous year, falling from $44 billion to $33 billion, and collections this year and next are expected to remain at that level. The state estimates that the budgetary gap for fiscal years 2003 and 2004 is $34.5 billion. The proposed budget addresses the problem through sizeable expenditure reduction, some tax increases and other measures. The plan is now before the legislature. The Rating Watch Negative indicates the potential for further deterioration in financial position.

California's general fund closed preliminarily at June 30, 2002, with a deficit of $2.1 billion, down from a starting balance of over $8 billion. In 2002-03, expenditures are expected to exceed revenues by $2.3 billion, to increase the deficit to $4.5 billion; after accounting for encumbrances, the unreserved deficit amounts to $6.1 billion. The actual operating deficit is closer to $9.6 billion, as revenues include $4.5 billion from a tobacco securitization (approximately one-half already achieved as planned) and $2.8 billion in interfund loans and transfers.

The governor's recommended budget would cure the deficit in 2003-04 through a number of measures, including transfer of some $8 billion expenditures for social services to the counties; financing would be provided from increases in the sales, personal income and cigarette taxes. Further cuts would reduce general fund expenditures to $62.8 billion, as compared with $75 billion in 2001-02, allowing an operating surplus of $6.4 billion which would eliminate the deficit and leave a $1.9 billion balance.

Operating borrowing has become increasingly important to California. In fiscal 2002, revenue anticipation notes (RAN's) totaling $5.7 billion were issued and when reimbursement of more than $6 billion reimbursement for power purchase was delayed, $7.5 billion revenue anticipation warrants (RAW's) were issued, as those securities may extend over the fiscal year-end. As revenues deteriorated, RAN's of $12.5 billion were issued. It is likely that RAW's will again be employed this year to assure adequate cash for operations as well as RAN repayment. California's reliance on the credit markets for operations as well as for sizeable capital needs is a vulnerability.

The state's economy has been affected by the recession, with employment showing slight declines from the previous year, and the slower than expected recovery will continue to be a factor. However, the decline of the financial markets, slashing the value of capital gains and stock options, has been a far greater influence on state operations. Even with recovery from the recession, the state must absorb the very real revenue loss that it has sustained.