Fitch Rates Monterey County Financing Authority, California $33MM Revs 'A+'.

AUSTIN, Texas -- Fitch Ratings assigns an 'A+' rating to Monterey County Financing Authority, California (the authority) $33.3 million revenue bonds, series A (Salinas Valley Water Project) issued on behalf of the Monterey County Water Resources Agency, California (the agency). The bonds are scheduled to sell the week of July 14 via negotiation. Bond proceeds will be used to construct the Salinas Valley Water Project (SVWP); reimburse the agency for prior expenditures on the SVWP; fund capitalized interest and a debt service reserve fund; and pay costs of issuance. The Rating Outlook is Stable.

The rating reflects a change to the pledged revenues since Fitch's initial rating released on June 24. Certain investment income is no longer specifically pledged to bondholders as originally anticipated. The interest income stream was a minor source of overall pledged revenues and Fitch does not view this as a material change.

The 'A+' rating principally reflects the strong projected debt service coverage from multiple established sources of pledged revenues and the closed lien legal structure, as well as the volatility of certain pledged revenues. Other credit considerations include the essential nature of the SVWP, the concentration of assessment payments by agricultural interest, and the slow amortization of the bonds. Despite the fluctuation of certain pledged revenues over the last several years, debt service coverage remains well above minimum amounts even under various stress scenarios due to the multiple layers of pledged revenues.

The bonds are secured by installment payments made by the agency to the trustee, as assignee of the authority, with installment payments comprised of a debt service and debt service reserve component. The agency is a flood control and water agency whose boundaries are coterminous with Monterey County (the county, certificates of participation rated 'A+' with a Negative Outlook by Fitch), but serves only areas where specific benefit zones have been established. Pledged revenues consist primarily of certain benefit assessments collected as part of the property tax bill on real property within the agency's Zone 2C; the agency's portion of the 1% county property tax levy; and hydroelectric revenues derived from the agency's ownership of an electric generation facility located at Nacimiento Dam. Other pledged revenues, which are expected to be minimal or are less predictable, includes annexation fees.

Over the last few years, both assessment and hydroelectric revenues have declined, although assessment fees are expected to stabilize going forward as a result of a stipulated judgment between property owners and the agency in 2006 which settled all challenges to the assessments and validated the levy of the assessments by the agency. Hydroelectric revenues will continue to fluctuate based on water releases from Nacimiento Dam, but the agency has prudently taken steps to mitigate the swings in these revenues by establishing an internal operating reserve equal to approximately 4.0 times (x) the lowest amount of net revenues from facility over the last five fiscal years. This reserve could be used by the agency for payment of debt service on the bonds if needed, although it is not legally pledged to bondholders and there is no legal requirement for the agency to maintain the operating reserve.

Based on fiscal 2008 revenues from assessments, ad valorem taxes, and hydroelectric revenues, debt service coverage on maximum annual debt service was a solid 1.9x. Ad valorem taxes have posted solid growth over the last five fiscal years and are expected to increase further for fiscal 2009, but could be impacted somewhat in future years if there is a continued contraction in the housing market within the county. Nevertheless, assuming continued levels of assessment collections and no hydroelectric revenues, ad valorem taxes could fall 46% from current levels without impacting bond performance.

There are two components to the SVWP, both of which are ultimately designed to enhance water supplies and reduce saltwater intrusion that has occurred in the northern portion of the Salinas River basin as a result of groundwater overpumping. While the SVWP benefits approximately 80% of the county's population, there is concentration among the 10 largest assessment payers, all of whom are agricultural in nature. These largest assesses accounted for nearly 19% of total fiscal 2007 assessment payments, creating some exposure to collections in the event of declining agricultural production or bankruptcy. Nevertheless, collection since implementation of the assessments in fiscal 2004 has averaged nearly 98%.

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