Fitch Rates San Jose, CA's $57.7MM Lease Revenue Refunding Bonds 'AA'.

SAN FRANCISCO -- Fitch assigns an underlying rating of 'AA' to approximately $57.7 million San Jose Financing Authority, California's (the authority) lease revenue refunding bonds, series 2006A (civic center project). The bonds are scheduled to sell competitively on May 24, 2006, with Public Resources Advisory Group serving as the city's financial advisor. The bonds are expected to be insured by Ambac Assurance Corporation, whose claims paying ability is rated 'AAA' by Fitch Ratings.

In addition, Fitch affirms the 'AA' rating on the $292.4 million of the authority's outstanding parity series 2002B bonds issued to finance the civic center project, as well as the underlying 'AA' on the $60 million of parity variable rate 2002C bonds. Furthermore, Fitch affirms the 'AA+' rating on the city of San Jose's (city) approximately $327 million outstanding general obligation bonds. The Rating Outlook is Stable.

The 'AA' underlying rating on the 2006 bonds reflects Fitch's 'AA+' rating for the city's general obligation bonds, as well as the sound lease structure. The bonds are secured by parity lease payments made by the city to the authority for use and occupancy of the civic center project. Also, the 'AA+' GO rating reflects the city's slowly recovering economy and strong financial performance despite a deep and prolonged regional downturn. In response to declining revenues early in the decade, city management's fiscal discipline included midyear budget cuts and workforce reduction. As a result, the city maintained high fund balances. With a return to revenue growth, Fitch expects the city to retain its strong financial position.

The 2007 budget continues the city's efforts to bring expenditure growth in line with revenue gains. The city's plans do not assume that the strong economic and tax performance seen in the early part of this decade will resume. While some one-time measures have been used, the proposed fiscal 2007 budget is balanced primarily through the use of ongoing revenue enhancements and expenditure cuts. Fitch notes that the budget includes $10.4 million in revenues which assume city council extends an emergency communications fee which otherwise sunsets at the end of 2006. The budget also assumes modest growth in tax revenues, targeted use of reserves, and some fee increases. As with the current year's budget, the city has prudently adopted a contingency plan if the fee is not extended or if the assumed revenue growth does not materialize.

The economic recovery in San Jose and the Silicon Valley area is still gradual and includes almost no job growth. However, throughout the downturn, city income levels and home prices remained high. San Jose's unemployment data improved again in 2005, with the jobless rate declining to 6.1% from 7.4% in 2004, although most of the reduction still stems from labor force declines, and is still above county and state levels. Employment remains well below the 2000 peak. The city's assessed values grew 7.8% on average from 2000-2005, supported by continued residential construction. The median home price is over $700,000.

The city's financial operations have remained above average in spite of the recent challenges. The general fund ended fiscal 2005 with a modest surplus following three years of operating deficits; in spite of the recent drawdowns, the ending general fund balance remains high at $192 million, 33% of the year's $587 million in expenditures and transfers out. The unreserved balance also is high at $163 million, or 28%. Fiscal 2006 projections indicate higher than budgeted revenues and effective cost controls.

The city's direct debt burden remains low at 1% of market value and approximately $1,022 per capita. Direct debt consists of lease revenue bonds and increasing levels of GO indebtedness. Including overlapping, debt per capita rises to about $3,251 or 3.3% of market value. Direct debt levels are expected to remain affordable; the city plans to issue approximately $110 million of its remaining $247 million in GO bond authorization for the libraries and parks projects in the next few months.

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