Fitch Rates Monterey Cnty, California $154.8MM COPs `A+'; Outlook to Negative.

SAN FRANCISCO -- Fitch assigns an 'A+' rating to $154.8 million County of Monterey, CA certificates of participation (COPs) (2007 Refunding and Public Facilities Financing), and revises the Rating Outlook to Negative from Stable. The COPs are scheduled to sell on or about March 29 through negotiation with Morgan Stanley.

The 'A+' rating reflects Monterey County's (the county's) established tourist and agricultural industries, good financial position as evidenced by above-average fund balance levels, and very low debt burden. The Rating Outlook revision to Negative is centered around the county's financially strained medical center. The county continues its efforts to increase the hospital's operating efficiency and reduce the general fund subsidy, with early indications showing improvement. However, Fitch views achieving long-term operating stability at the hospital as difficult. Fitch will return the Rating Outlook to Stable if the county can bring hospital operations to a level that requires an affordable general fund subsidy, and if the county's other rating factors retain their solid positions.

Certificates are secured by lease payments from the county for use and occupancy of essential assets. The current offering will refund various outstanding COPs totaling $93 million and finance $53.3 million in construction and renovation projects. The construction projects include completion of the courthouse facilities renovation, a new health department building, and new parking garage. Pledged assets, including the courthouse buildings and facilities, jail complex, and administrative buildings have an estimated value that represents sufficient collateralization.

As a result of strong revenue gains and effective spending controls for non-medical-center costs, the county's financial position is sound. The general fund ran break-even operations in fiscal 2006 despite a sizable hospital subsidy. This follows two years of sizable operating surpluses. The fiscal 2006 general fund balance totaled $87.7 million or a high 17.9% of expenditures and transfers out. This reserve level is above average and a significant improvement from the county's position a few years ago. Fitch believes this level is prudent given the county economy and the medical center exposure.

The medical center's financial position deteriorated as a result of increasing service costs, a sizable uninsured population, and reductions in state and federal reimbursements. In response, a new management team has implemented several cost-saving measures including eliminating 44 vacant positions in fiscal 2007. In a proactive effort to more closely align operating costs with available revenue, the county negotiated an agreement with two separate health care entities. These entities will contribute a total of $8 million in fiscals 2007 and 2008 to support operations and enable the county to hire a consultant to assist in realigning the medical center's services, delivery methods, and other functions. While the county forecasts the general fund subsidy to decline from historical levels to approximately $5 million annually, Fitch believes achieving the required operating efficiencies involves uncertainty, given the rapid rise in health care costs and the hospital's patient mix, which is primarily Medi-Cal recipients and uninsured individuals.

Monterey County's economy consists primarily of tourism, government, and agriculture related activity. The agriculture sector is somewhat vulnerable to above-average unemployment rates. The county's relatively low income levels are offset largely by the inland area's affordable cost of living. The county has experienced good assessed value gains, averaging 6.2% growth annually since fiscal 2002 and growing to a high 10.7% in fiscal 2007. Fitch views the county's economy as stable over the long run.

With this issuance the county's debt burden remains low. Direct debt including this issue is a very low $538 per capita and 0.5% of market value. Overall debt also remains low at $1,839 per capita, or 1.8% of assessed valuation. The county does not anticipate any debt needs in the near future as pay-as-you-go financing will be utilized for all additional capital projects.

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