Correction: Fitch Lowers San Diego, California's $1.98B Debt; Watch Negative.

SAN FRANCISCO -- (This is an amended version of a press release issued yesterday, containing revised information on the dollar amount in the headline and first paragraph. The $734 million in subordinate sewer revenue bonds was a planned issue that was not executed.)

Fitch Ratings downgrades San Diego, CA's approximately $46 million in outstanding general obligation bonds to 'A' from 'AA' and approximately $250 million in lease-backed debt to 'A-' from 'AA-'. Also, Fitch downgrades bonds secured by the city's water and sewer enterprises issued by the San Diego Public Facilities Financing Authority and the San Diego Facilities and Equipment Leasing Corporation. The authority's $1.1 billion in sewer revenue bonds are downgraded to 'A' from 'AA-'. The corporation's $290 million in certificates of undivided interest series 1998 (secured by a senior lien on water enterprise revenues) are lowered to 'A' from 'AA-', and $282 million in subordinate water revenue bonds issued by the authority are lowered to 'A-' from 'A+'. The ratings are on Rating Watch Negative.

Fitch takes this rating action as a result of continued delays in the release of the city's fiscal 2003 audited financial statements, as well as ongoing political struggles that appear to hinder progress toward resolving the city's sizable financial challenges. The new ratings also reflect the city's strong economic performance and revenue sources, giving San Diego a strong ability to pay general obligation, enterprise debt, and lease obligations.

The ratings for San Diego, CA remain on Rating Watch Negative to reflect continued uncertainty, centering on rising and sizable pension system contributions and their implications for the city's ability to achieve long-term budgetary balance. Also, Fitch views the city's current financial strains as exacerbated by the costs of ongoing federal and internal investigations, as well as these efforts' possible implications. Fitch placed the general obligation and lease-backed ratings on Rating Watch Negative in September 2004, reflecting concern over widespread deficiencies in the San Diego City Employees Retirement Systems' (SDCERS) funding, functioning, and related disclosure.

Without audited financial statements to confirm previously reported strong financial operations and year-end balances, Fitch cannot view the city's overall financial condition with the confidence needed to maintain higher ratings. Nonetheless, Fitch's role as a rating agency dictates the responsibility to retain ratings whenever possible and requested. Given the city's very strong reserve levels and financial operations through fiscal 2002 and the city's robust economy, Fitch expects the audited results for fiscal 2003 to be at least satisfactory. This conclusion factors in the nature of essential services provided by the city's water and sewer utilities, as well as the city's beneficial tax structure, including property, sales, hotel, franchise, and property transfer taxes, which effectively translate positive economic trends into rising revenues.

Since the September 2004 release of a report prepared by the law firm Vinson & Elkins L.L.P that detailed numerous errors, omissions, and negligence in disclosing details of the city's pension-funding obligations to investors and other interested parties, San Diego has attempted to address the information deficiencies and weaknesses and to find solutions to the pension system's dramatic underfunding (SDCERS funding ratio at June 30, 2003 was 67%, well below the national average). Discussion on ways to return SDCERS to a fiscally sound position by numerous city officials focuses on reduced pension benefits, employee contributions, and/or salary reductions, all actions that require labor group cooperation. Fitch views these crucial measures as requiring strong leadership, fiscal discipline, and political cooperation. However, Fitch sees the city's efforts, to-date, as hampered by political strain, a highly contentious mayoral election, and the high profile nature of ongoing investigations by the Securities and Exchange Commission (SEC) and the U.S. Attorney's Office, as well as the recently concluded investigation by the city attorney. While Fitch acknowledges certain internal changes made to improve coordination, communication, and establish greater oversight, political and managerial conflict continue to slow efforts addressing more of the widespread and systemic malfunctions included in the Vinson & Elkins report.

Today's downgrade reflects Fitch's emphasis on effective management as a key component of credit quality. Fitch believes that San Diego's political and management deficiencies can be remedied, although effective change will require a strong commitment to reform prior practices and coordinate decisive actions taken by the mayor, city council, city manager, SDCERS board, labor groups, and other interested and responsible parties. Evidence of significant structural change and a resulting positive effect are crucial to Fitch's returning San Diego's ratings to higher levels. In fact, Fitch believes the city has the potential to return to a position of above-average credit quality based on its economic strength and ability to translate positive economic performance into sound financial operations through its varied tax structure.

Fitch acknowledges the city's earlier efforts toward rebuilding trust among investors and others, including the January 2004 voluntary disclosure of errors in the fiscal 2002 audit, the hiring of KPMG to audit fiscal 2003, the hiring of Vinson & Elkins to perform the pension and disclosure review, and council passage of initial reforms. However, further evidence of a widespread and united commitment to restore financial stability is needed to achieve higher ratings.

Fitch continues to await release of the city's audited financial reports for fiscal years 2003 and 2004, along with further evidence of significant structural reform.

The following ratings are downgraded and remain on Rating Watch Negative by Fitch:

City of San Diego, CA

-- General obligation bonds to 'A' from 'AA';

-- Certificate of participation refunding bonds, series 2003, to 'A-' from 'AA-'.

San Diego Metropolitan Transit Development Board

-- Lease revenue bonds, series 2003 (San Diego Old Town Light Transit Extension Refunding) to 'A-' from 'AA-'.

Convention Center Expansion Authority

-- Lease revenue bonds, series 1998A, to 'A-' from 'AA-'.

Fitch also downgrades the following ratings:

San Diego Public Facilities Financing Authority

-- Lease revenue bonds, series 2002B (Fire and Life Safety Facilities Project) to 'A-' from 'AA-';

-- Sewer revenue bonds to 'A' from 'AA-';

-- Subordinate water revenue bonds to 'A-' from 'A+'.

San Diego Facilities and Equipment Leasing Corp.

-- Certificates of undivided interest, series 1998 (water revenue), to 'A' from 'AA-'.