Fitch Rates Muni Improvement Corp of Los Angeles, California, $138.4MM Lease Revs 'AA-'.

SAN FRANCISCO -- Fitch assigns an 'AA-' rating to approximately $138.4 million Municipal Improvement Corporation of Los Angeles (MICLA), CA's lease revenue bonds, series 2008-A (Capital Equipment) and 2008-B (Real Property). The bonds are expected to sell via negotiation during the week of Aug. 25, 2008. The bonds are secured by the City of Los Angeles' lease rental payments to MICLA for the use of equipment and properties.

In addition, Fitch affirms the following related ratings:

--$800.2 million in outstanding MICLA certificates of participation (Refunding Program AY), and lease revenue bonds, series 2006-A, 2007-A, 2007-B1, and 2007-B2 at 'AA-';

--$1.4 billion in outstanding City of Los Angeles general obligation bonds at 'AA';

--$9.2 million in City of Los Angeles judgement obligation bonds at 'AA-';

--$188.8 million in Los Angeles Convention and Exhibition Center Authority lease revenue bonds, series 2003A at 'AA-'.

Also, the 'AA-' long-term portion of the 'AA-/F1+' rating on $235.5 million in Los Angeles Convention and Exhibition Center Authority lease revenue bonds, series 2003B-F is affirmed. The 'F1+' short-term rating is based on bank-provided liquidity and is unaffected by this rating.

The Rating Outlook for all obligations is Stable.

These ratings reflect the economy's growth and strong underpinnings, sound financial position and reserves, and a moderate debt burden. These credit strengths remain despite recent economic weakening and corresponding budget pressures. The city responded quickly to a mid-year budget imbalance in fiscal 2008, retaining a reserve close to the 5% of revenue policy. The adopted fiscal 2009 budget incorporates a credible plan to close a moderate-sized gap, but relies on non-recurring actions, including a six-day employee furlough. While Fitch notes the city's progress in reducing its structural imbalance, continued efforts to further reduce reliance on non-recurring revenue (including prior years' accumulated funds) remains a challenge. Economic softening is evident in slow growth in the sensitive taxes, a sharp rise in the unemployment rate, and slower assessed value gains than in recent years.

In the near term, the city's financial operations are pressured as revenue growth is slowed by the economic downturn, as evidenced in the sizable increase in projected budget gaps in the city's five-year forecast. Also, the city's tax base is vulnerable to residential price declines given the substantial run-up experienced for several years. The metropolitan statistical area's median single-family home price has declined in each of the last three quarters, recording a 23% cumulative drop.

Los Angeles' economy continued to see job gains in 2007, albeit at a slower pace, as certain service sectors grew and offset continued losses in manufacturing. Continued slow growth is expected, although some sizable commercial and public sector projects are underway. The county's recessionary job loss was mild, and consistent growth since 2007 brings jobs to just above the 2001 peak. However, the city's unemployment rate has been rising sharply.

The city's financial operating results are sound despite recent small-to-moderate operating losses. The general fund balance remains sizable, though, and fiscal controls are prudent. General fund results in the last nine fiscal years have shown either strong operating surpluses or small-to- moderate deficits, netting fund balance growth over the period. However, the city expects another small operating deficit for fiscal 2008, which will be the third consecutive fund balance reduction. The fiscal 2007 general fund balance declined to $707.9 million, still a high 17.7% of expenditures and transfers out. The unreserved share, $435.3 million, also is above average at 10.9%. Financial operations benefit from a diverse revenue base, with 71% of fiscal 2009 general fund revenues projected to come from taxes, primarily property, utility, sales, and business.

The adopted fiscal 2009 budget is balanced without use of any reserve fund money, but relies on non-recurring revenue to close just under one-half an initial $343 million general fund gap. The plan looks to $165 million in surplus enterprise revenue, proceeds from surplus property sales, a litigation settlement, and six days of employee furloughs. Also, subsequent to the budget adoption the city has determined that revenue may fall short of budget expectations by about $50 million, with corrective action needed as the fiscal year begins. Fitch views positively the city's progress in reducing its reliance on one-time resources and preserving the reserve fund at near its 5% policy, but notes much higher structural imbalances in the five-year general fund forecast than in prior years.

Fitch's concern over the city's structural imbalance is offset somewhat by the prudent management practices and policies. These include the reserve policy, five-year forecasts, close monitoring of financial performance as the year progresses, and reporting to the city council quarterly. The newly established budget stabilization fund also may add to the city's credit strength, depending on the details which are being developed. Also evidence of sound management practices is the city's 55% funded ratio for other post-employment benefits. Los Angeles now funds this cost on an actuarially sound basis, having begun funding at above the pay-as-you-go amount many years ago.

Los Angeles' debt issuance has been increasing. The overall debt burden is moderate at $3,187 per capita and 3.4% of taxable value, and will remain affordable given the city's above-average amortization rates.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance, and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.