Fitch Rates Los Angeles County, California's $500MM TRANs 'F1+'.

SAN FRANCISCO -- Fitch rates Los Angeles County, California's (the county) $500 million 2006-07 Tax and Revenue Anticipation Notes, Series A 'F1+'. The notes will be sold through negotiation by a syndicate led by Goldman, Sachs & Co on or about June 7. The notes are dated July 3, 2006 and mature June 29, 2007.

Fitch's highest rating for short-term debt reflects the sound note repayment structure, strong coverage of all note repayment set-asides, and the availability of substantial borrowable resources throughout the fiscal-year (FY). The repayment deposit structure sets aside 100% of principal and interest two months in advance of note maturity. The county's long-term credit quality also is a rating factor, reflecting a growing and diverse economy, improved financial operations including progress toward ongoing fiscal balance in the health and hospitals system, and good year-end reserves, as well as ongoing financial challenges. While acknowledging the county's successful efforts in achieving fiscal balance and gradually restoring some services, Fitch notes that the health and hospitals' system remaining fiscal imbalance, albeit reduced from prior years, will continue to require acute focus and strong discipline to achieve a sustainable financial condition.

The notes are secured by a first lien on unrestricted revenue in FY 2007. Pledged revenue is projected to total $5.99 billion, covering note principal and interest 11.4 times (x). Funds for repayment will be set aside based on an aggressive schedule beginning in December 2006. By Jan. 31, 2007 more than one-half of the estimated principal and interest due will be impounded; the full amount will be set-aside by April 30. The projected cash flow covers all five set-asides well, ranging from 3.2x-12.3x. Also, the county has a substantial pool of resources available for the intrafund loans, with month-end balances in these funds ranging from $1.2-$3.6 billion. The FY 2007 cash flow projects ending the year with a moderate cash balance relative to the budget, $630.1 million. Historically, the county's actual ending balances have been higher than originally forecast.

The projected cash flow is based on the county's proposed budget, which is based on California's proposed budget as detailed in January 2006. Since then, the state's May revision suggests several small items that could balance to a minimal increase in revenue for the county. For all California counties and like last year, the county's budget incorporates greater certainty than in prior years.

The proposed FY 2007 budget shows a slight decline in spending from the FY 2006 budget, although the reduction is in one-time costs that were funded with non-recurring revenue. Ongoing spending shows moderate growth as discretionary revenue, primarily property taxes, and the end of the state initiated shift of property tax revenue to school districts, enables reinstatement of certain programs and services cut in recent years. The budget proposes to reopen jail facilities closed during weak financial years, expand certain health social services, and moderately increase county employees by 3.1%, while incorporating recent labor agreements and expectations for ongoing negotiations. The county reached a three-year labor agreement with one union, and reports being close to closure with two others. The general fund budget is balanced using $622 million of the prior year's fund balance, a reasonable 3% of the total $19.4 billion in spending.

Fitch notes the county's progress in restructuring its extensive, and financially draining, health and hospital system. While the County Board of Supervisors approved a service and facility reduction plan several years ago, litigation and other obstacles have prevented implementation. Within the last few months, however, the county reached agreements with plaintiffs in two cases, enabling service reductions at two facilities. These changes are far smaller than those incorporated in the Board's original plan, and the system still faces a $300 million structural budget gap. To date, funding shortfalls have been closed with limited-time state and federal resources, accumulated reserves, additional general fund support, and, most recently, revenue from a voter-approved parcel tax. The legal settlements are contingent upon the county achieving certain performance targets. Fitch believes that the county's progress to date bodes well for its ability to close the remaining gap, which is small relative to the systems' overall operations. However, public demand and political pressures remain strong on this issue.

Overall, Los Angeles County's financial performance in non-health areas shows sound policies and practices, resulting in operating surpluses each of the last eight fiscal years, building up strong reserves. Also, the county's debt burden is moderate, and future issuance is expected to be manageable. Debt levels are aided by the county's recent funding of a 600-bed replacement hospital for its LAC+USC medical center without debt.

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