Fitch Rates California Public Works Board's $405MM Bonds 'A+'.

Business Editors

SAN FRANCISCO--(BUSINESS WIRE)--Nov. 11, 2002

The State Public Works Board of the State of California's $400,000,000 lease revenue bonds (The Department of General Services), 2002 series A (Capital East End Complex - Blocks 171-174 & 225)and $5,000,000 lease revenue bonds (Department of the Youth Authority) 2202 series B (Various Correctional Projects) are rated 'A+' by Fitch Ratings. This rating, many Public Works Board issues and California's (the state) 'AA' general obligation bond rating are on Rating Watch Negative by Fitch. The 2002 series A and B bonds will be sold on or about Nov. 20 by a syndicate led by Morgan Stanley & Co. Inc.

The 'A+' rating reflects the leased assets' essentiality, strong lease structure, and the state's long-term credit quality. The series A and B bonds are secured by rental payments made by the Department of General Services (DGS) and the Department of the Youth Authority (DYA), respectively, for use and occupancy of the facilities being built with bond proceeds. The DGS project consists of five state office buildings on a single site, which primarily will house employees of the state's departments of health and education. The new buildings will replace space leased from private sector entities, and consolidate workers currently located at several sites throughout Sacramento.

The DYA projects consist of a new mental health services building and renovation of the existing infirmary at Heman G. Stark Youth Correctional Facility in Chino and a new visitors center and security entrance at the DeWitt Nelson Youth Correctional Facility in Stockton. The Chino and Stockton projects are leased to DYA under separate legal documents, while the DGS buildings are leased under as one project. All leases are executed as supplements to the board's master indenture, which covers $3.06 billion in outstanding debt.

Lease provisions are strong and typical of board issues. While the lease payments are subject to annual appropriation by the state, the departments are required by law to use the first funds appropriated to them from the state to make their payments. Security includes the board's master debt service reserve fund. Interest is capitalized six months beyond the expected completion of each project.

California's 'AA' general obligation rating reflects a moderate debt burden, equal to 2.6% of personal income, the fundamental strengths of the economy, and the state's current financial and cash flow strain. The financial stress results from a steep 25% decline in personal income tax collections in fiscal 2002, compounded by the cash outflow of over $6 billion for power purchases in 2001. The Rating Watch Negative is based on these financial factors.

Somewhat lower revenues in comparison with the previous year were expected in fiscal 2002, but ultimately, revenues were a higher 15% below estimates, creating a funding gap for that year and fiscal 2003 of some $23 billion. The problem has been addressed through the use of several one-time measures, including a planned tobacco securitization for $4.5 billion, fund transfers and loans for about $4 billion and some deferrals, as well as through minor tax increases and program reductions. However, revenue estimates for this year again appear optimistic and for the first two months are about 3% below expectations. The state's cash position has deteriorated and at June 30, 2002, the general fund had a cash deficit of about $10.4 billion, covered by the proceeds of revenue anticipation warrants and borrowable resources. Issuance of $12.5 billion revenue anticipation notes is underway and reimbursement for power purchases will be made soon from proceeds of the recent Department of Water Resources bond sale.

The magnitude of the drop in revenues is unprecedented and it is unlikely that such a change could be accommodated within one year. While the 2002-03 budget would absorb the deficit if budgeted revenues are realized, the heavy use of non-recurring revenues ensures a sizeable budget gap for 2003-04.

California's economy has been under some recessionary pressure but employment currently is only 0.4% below the level of a year ago, in line with state forecasts. Personal income per capita in 2001 continued to exceed the U.S. figure but growth was anemic and the state's rank slipped from eighth to tenth.