Fitch Rates San Jose, California's $93.5MM GOs 'AA+' & $35.8MM San Jose Fin Auth Lease Revs 'AA'.

SAN FRANCISCO -- Fitch assigns an 'AA+' rating to $93.5 million San Jose, California (the city) general obligation (GO) bonds, series 2007 (parks and public safety projects). Fitch also assigns a rating of 'AA' to $35.8 million San Jose Financing Authority lease revenue bonds, series 2007A (recreational facilities refunding project). Furthermore, Fitch affirms the 'AA+' rating on the city's approximately $420.7 million in outstanding GO bonds and the 'AA' on the following City of San Jose Financing Authority (the authority) lease revenue bonds:

--$2.3 million (Fire Apparatus, Childcare, Library), series 1997B;

--$8.1 million (Communication Center Refunding Project), series 2001E;

--$166.2 million (Convention Center Refunding Project), series 2001F;

--$352.3 million (Civic Center Project), series 2002B and C;

--$20.2 million (Central Service Yard Refunding Project), series 2003A;

--$78.2 million (Land Acquisition Project), series 2005A and B;

--$57.4 million (Civic Center Project), series 2006A.

The Rating Outlook is Stable.

The GO bonds will be sold competitively on June 6, 2007 with Public Financial Management serving as the financial advisor. The lease revenue bonds will be sold competitively on June 7, with First Southwest acting as the financial advisor.

The GO bonds are secured by the city's unlimited full faith and credit ad valorem tax levy while the lease revenue bonds are secured by lease payments made by the city for the use and occupancy of two municipal golf courses with an estimated value well in excess of the planned issuance. The lease provisions are standard and typical of California leases, including a debt service reserve fund.

The 'AA+' rating on the city's GO bonds reflects the city's overall sound credit quality, marked by its strong financial position, diverse revenues, and above-average demographics. The rating also reflects the city's cyclical economy, slow debt amortization and high overall debt levels when including tax allocation debt. The 'AA' rating on the various lease revenue bonds also reflects strong lease characteristics. The economy is showing positive growth after several years of contraction during which the city's financial position remained strong. The city has emerged from the recent economic downturn in very good financial condition as a result of management's fiscal discipline including midyear budget cuts and workforce reduction.

With an estimated population of 974,000, San Jose is the third largest city in the state. The city is located at the southern end of the San Francisco Bay, and benefits from its well-educated populace and large size (178 square miles). Following a period of rapid economic expansion in the late 1990s, the region experienced a severe economic downturn, with significant job losses and a peak unemployment rate in the city of 9.8%. The economic recovery has been gradual, including solid improvement in 2006, with good job growth (2.4%), continued strength in assessed valuation gains (9.9%), and markedly reduced unemployment (5.0%). Per capita income and median household income remain above average, at 137% and 132% of state averages, respectively.

In spite of reduced revenues, primarily in sales tax and license and permit revenues, which declined 18% and 13%, respectively, in fiscal 2002, the city's financial position remains strong. After three years of operating deficits through fiscal 2004, the city's fund balance was still solid at 32% of expenditures and transfers out. For fiscal 2006, following two years of surpluses, the audit shows a fund balance of $237 million, or 38% of expenditures and transfers out. The unreserved portion of $204 million, represented a high 33% of expenditures and transfers out. Assuming modest growth in revenues for fiscal 2008, city management has closed a $16 million operating deficit, largely with ongoing revenues or expenditure cuts.

The city's direct debt burden remains low at about 1.2% of market value and approximately $1,400 per capita. Including overlapping entities and the $1.7 billion in redevelopment agency tax allocation bonds, debt ratios are high with per capita debt at $5,500 and debt to market value of 4.7%. Debt amortization is slow, with only about 19% of principal repaid after ten years.

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