Fitch Rates Oakland, California $63MM Sewer Revs 'A'.

AUSTIN, Texas -- Fitch Ratings assigns an initial rating of 'A' to the City of Oakland, California's (the city) $63.4 million sewer revenue bonds, 2004 series A. No parity debt is outstanding as the bonds are the first issuance of revenue bonds under the indenture. The bonds are scheduled to sell competitively on Dec. 2. The bonds are special, limited obligations of the city payable from and secured by a first lien upon the net revenues of the sewer system (the system). Bond proceeds will be used to finance certain capital costs related to the system, fund a debt service reserve, and pay costs of issuance. The Rating Outlook is Stable.

The city's 'A' rating reflects the system's limited scope of operations and sound economic underpinnings of the service area. Liquidity is lacking, but recent approval of moderate multi-year rate increases should ultimately restore financial margins and provide additional funds for rehabilitation. While subject to regulatory enforcement action, the city has made strides to correct system deficiencies and meet approved timelines.

The system collects and transports wastewater flows within the corporate limits of the city to the East Bay Municipal Utility District (EBMUD) for treatment; the city maintains no treatment facilities of its own. EBMUD bills the city's 103,000 customers directly for water and sewer services, including a sewer service charge assessed by the city. Service charges collected by EBMUD are remitted to the city monthly.

The system has experienced sanitary sewer overflows (SSOs) as a result of infiltration and inflows (I/I) from wet weather events. Consequently, the state Regional Water Quality Control Board has required the city, along with other jurisdictions that transport wastewater flows to EBMUD for treatment, to undertake system improvements which will eliminate wet-weather SSOs. To meet these requirements, the city is a participant in the East Bay Infiltration/Inflow Correction Program, a 25-year regional program that addresses I/I through rehabilitation of sewer lines. To date the city has expended around $103 million of the $202 million for the city's share of the program. Funding for the remaining portion, expected to be complete in 2012, will be derived from cash, future bond proceeds, or a combination of the two.

Financial operations have been strained over the last several years as pay-as-you-go funding has outstripped net income, eliminating cash balances for fiscal 2001-2004. To continue funding of its $8-$13 million in annual capital improvements, the system has relied on interfund borrowing from the city's general fund. As a result, the system has accrued over $12.5 million in liabilities through fiscal 2004.

To restore financial health to the system, the city council adopted a series of annual rate increases in 2003. The first increase of 11% became effective January 2004 and subsequent 11% annual increases will take effect each January through 2009 followed by annual hikes based on the consumer price index. With these increases interfund obligations are expected to be eliminated by fiscal 2006, with positive cash balances expected the following year. Also, system income should be adequate to provide necessary cash funding of required capital items going forward.

With a population of around 412,000, Oakland is California's eighth largest city. The city is a major commercial and trade center and is the urban core of San Francisco Bay's east bay area. Like most other Bay area communities, the national recession has led to job losses over the last three years. However, from September 2003 to September 2004 both the civilian labor force and the number of people employed have shown signs of improvement with a 2% decline in unemployment rates to 8.4% during the period.