Fitch Rates Denver, Colorado's $257MM COPs 'AA-'.

Business Editors

SAN FRANCISCO--(BUSINESS WIRE)--July 9, 2003

Fitch Ratings assigns a 'AA-' underlying rating to the city and county of Denver, Colorado's $256,720,000 refunding certificates of participation, series 2003C1-C3 (Wellington E. Webb Municipal Office Building). The certificates will be insured by Ambac with liquidity provided by JP Morgan Chase Bank and Dexia Credit Locale. Ratings based on these credit enhancements will be assigned at a later date. The certificates will be sold through negotiation by JPMorgan (series 2003C1), A.G. Edwards & Sons, Inc. (2003C2), and RBC Dain Rauscher Inc. (2003C3) on or about July 16. Fitch affirms the 'AA+' rating on $315.5 million in outstanding city general obligation bonds and $205.5 million in outstanding Denver board of water commissioners' general obligation debt, as well as the 'AA-' ratings on $429.5 million in city lease obligations (certain series) and $63.5 million in water board leases (certain series).

The ratings reflect Denver's sound economy, moderate debt burden and satisfactory financial position as well as a sound lease structure. As both a regional center and the state capital, Denver's economic base is diverse, although currently it is experiencing significant recessionary weakness. Substantial development and economic strength in prior years enabled the city to build up strong financial reserves, part of which has been used in response to weak revenue performance. Expenditure controls and reductions are in place, as well as non-tax revenue enhancements. Recently released audited results for 2002 show a significant operating loss, reducing the unreserved fund balance to a still good 10.2% of expenditures and transfers out. This amount is on target with the city's policy but well below prior years.

Certificate of participation (COP) proceeds will refund the city's 2000B COPs, which financed construction of the Wellington E. Webb Municipal Office Building, as well as a parking garage and an employee wellness center. All three facilities are complete and fully occupied, and are the leased asset supporting the COP. The office building now houses 1,800 city employees, the largest concentration of municipal workers, replacing space rented from private sector owners. When initially financed, the city projected the new facility to result in cost savings over private leases. However, due to current weaker economic conditions, the savings are not present. However, the operating efficiency gained by a consolidated location as well as the stability provided by a municipally owned building offset concerns over the initial cost differential. Also, the city states its need for the facilities and intent to continue appropriating for the properties in the lease.

The 2003C1-C3 certificates will be issued as variable rate, initially in a weekly mode. The city will execute a swap to fixed rate to minimize its variable rate exposure. The swap counterparties are JP Morgan Chase Bank and Lehman Brothers Special Financing Inc. The swap document, as proposed, meets Fitch's guidelines, including COP holders and the swap counterparty having an equal claim on city lease payments for specific amounts. This is the city's first tax-supported issue involving a swap, although a similar transaction was done secured by airport revenues. City staff is in the process of developing policies regarding use of variable rate debt and derivative products such as swaps.

Denver's economic indicators show a reversal of several years of very high growth. Job gains in the six-county metropolitan area slowed to in 2001 and showed a small decline last year. The unemployment rate in the area rose to 5.9% 2002 from 3.5% in 2001. More recent levels show a slight increase over monthly figures in 2002, with the May 2003 jobless rate at 6.5% for the city and 5.6% for the area. These levels continue to exceed state and national averages. From 1995-2000, employment in the area rose a strong 20.7%. Retail activity, important for Denver because of its reliance on sales tax revenue, has slowed dramatically; sales tax collections in 2002 showed a decline for the second consecutive year, and results for the first four months of 2003 also fall below the prior year. In contrast, assessed value continues to rise, increasing 60% in the last five years.

Financial operations are satisfactory, with fund balance levels reduced but adequate. Management response to revenue shortfalls has been effective in minimizing reserve reductions by implementing mid-year spending cuts, raising several fees, deferring salary increases, and delaying or eliminating capital projects. Results for 2002 show a 5.3% operating loss but preserve the general fund unreserved balance at $77.9 million, an above average 10.2% of spending. In contrast, financial operations in 2000 and several earlier years benefited from the city's economic growth and diversity, with prior years' unreserved balances ranging from 18%-20% of expenditures. Financial operations in 2003 to date show sales tax collections declining again and underperforming budget expectations. The loss has been offset by spending reductions, and the city expects to end the year with about a 10% undesignated general fund balance again. Given the city's dependence on sales taxes and the revenue's volatility, rebuilding year-end reserve levels will be key to maintaining high credit quality.

Denver is a frequent debt issuer, financing a variety of projects with general obligation bonds and leases. The city expects to continue to be active in the capital markets, although the debt burden will remain moderate. As a result of a charter changed approved by voters in November, Board of Water Commissioners' debt now is sold as revenue secured, thereby increasing the city's tax-backed debt issuance capacity. The city is challenged in dealing with jail overcrowding, as voters rejected at $325 million bond authorization.