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

Business Editors

SAN FRANCISCO--(BUSINESS WIRE)--Nov. 6, 2003

Fitch Ratings assigns an 'A-' to the following issues of the State Public Works Board of the State of California:

-- $396,385,000 lease revenue bonds (Department of Corrections)

2003 series C (California State Prison - Kern County at Delano

II);

-- $34,605,000 lease revenue bonds (Department of General

Services) 2003 series D (Butterfield State Office Complex).

This rating, many Public Works Board issues, and California's 'A' general obligation bond rating remain on Rating Watch Negative. The 2003 series C and D bonds will be sold on or about Nov. 12 by a syndicate led by Siebert Brandford Shank & Co., LLC.

The 'A-' rating reflects the leased assets' essentiality, strong lease structure, and the state's long-term credit quality. The series C and D bonds each are secured by rental payments made by the Department of Corrections (DOC) and the Department of General Services (DGS), respectively, for use and occupancy of the facilities being built with bond proceeds. The DOC project is a 5,000 bed prison currently under construction. The facility will include 3,500 maximum security beds, which are in short supply statewide. The DGS project is the first phase of an office complex that will be used by the state's Franchise Tax Board. The project consists of a warehouse, surface parking, and infrastructure necessary for office buildings that will be financed with a future Public Works Board issue.

The additional issue will be on parity with the 2003 D bonds and the added facilities will become part of the leased assets. The new DGS facilities join two existing buildings also used by the Franchise Tax Board as its largest employee and facility base. All leases are executed as supplements to the board's master indenture, which covers $3.32 billion in outstanding debt in addition to these issues.

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.

The 'A' rating on California's general obligation bonds reflects a moderate debt burden and the fundamental strength of the state's economy as well as continuing financial pressures. The Rating Watch Negative indicates the potential for further deterioration in financial position.

California had faced a projected deficit of $38 billion for fiscal years 2003 and 2004. Budgetary actions to address the deficit included nearly $20 billion in non-recurring items, particularly $10.7 billion in deficit funding and $2 billion bonds for pension funding, underscoring California's reliance on the credit markets for operations as well as for sizeable capital needs. Expenditures were reduced some $4 billion through re-imposition of a vehicle license tax benefiting local governments that the state had suspended. Although a balanced budget for this year was achieved, a gap of over $8 billion in fiscal 2005 has been identified, reflecting that the state has yet to absorb the loss of 25% of its personal income tax since fiscal 2001.

Although this year's first quarter revenues exceeded estimates and revenue anticipation notes provide adequate cash for operations until June, risks have been heightened by legal challenges to pension and deficit bond issues. Should the state eventually prevail, there may be financial complications from the delay. If the pension bonds are not validated the general fund deficit, already up by $500 million as a pension payment has been made from cash, would increase further by $1.4 billion. Should the deficit bonds not be issued, liquidity considerations arise as proceeds are intended to retire $11 billion outstanding revenue anticipation warrants due in June.

The new administration has stated that tax reduction is a priority, perhaps starting with the vehicle license tax. If this is done and local governments are held harmless, the general fund deficit would increase by some $4 billion. Also, press reports indicate that the governor-elect may be evaluating the planned security for the deficit bonds. Until policies are clearer, credit considerations will continue to be based on achievement of the budget in place.