Fitch Upgrades San Bernardino County, California 1995 COPs to 'A+'

Business Wire, Sept 26, 2008

NEW YORK -- During the course of routine surveillance, Fitch Ratings has upgraded San Bernardino County, California's (the county) approximately $102 million of outstanding certificates of participation (COPs), series 1995 (Medical Center Financing Project) to 'A+' from 'A.' The Rating Outlook is Stable.

The 'A+' rating on the COPs reflects the county's consistently strong financial management, high fund balance levels, and a moderately low debt burden. The rating also incorporates slowed economic growth attributable to the significant weakness in the residential and commercial real estate sectors. Lease provisions are standard and payments equal to debt service are subject to appropriation. The upgrade to 'A+' from 'A' reflects Fitch's belief that diversification due to the growing presence of warehousing and distribution facilities and available land for development will contribute to strong long-term economic prospects for the county despite the current real estate market weakness. Fitch also believes that the county's consistently strong reserve levels and substantial pay-as-you-go capital financing provide sufficient financial flexibility to weather comfortably the economic downturn.

Containing the largest land mass of any county in the contiguous states, San Bernardino has experienced rapid population and job growth, which in turn fueled residential and commercial construction. Secured assessed value gains have averaged a high 15% annually from fiscal years 2003 - 2009, although the fiscal 2009 growth rate was about 5% and the county is considering a downward revision of its modest 3% fiscal year 2010 projected growth rate. Residential construction in recent years was further supported by the availability of sub-prime mortgages and other new loan products, which are defaulting at record levels and pressuring home prices. Commercial and industrial real estate development has somewhat mitigated the decline in the housing market, but that sector is starting to soften as well, exhibiting lower absorption rates and rising vacancy rates. Fitch posits that the county's copious land available for future development will enhance its long-term prospects for economic growth.

With an estimated 2007 population of 2,007,800, San Bernardino County's 17% population growth since the 2000 census supported solid labor force and employment growth, respectively averaging 2.3% and 2.5% annually from 2003 - 2007. The county's July 2008 unemployment of 8.5% was well above the 6% national average, in contrast to the narrow differential earlier this decade. The warehousing and distribution sector, a contributor to economic diversification, is poised for long-term growth due to projected volume increases in nearby ports' traffic and ample county land available for facility construction.

Several years of strong economic and tax base growth coupled with good cost controls enabled the county to add to its fund balance while also building flexibility into its budget. Fiscal 2007's $431 million unreserved general fund balance equaled 21% of spending, consistent with past results and providing an important cushion as the county adjusts to slower or negative revenue growth. Preliminary estimates indicate relatively unchanged fund balance at the end of fiscal 2008. Sound budgetary practices, expenditure controls, and significant reserve levels will aid the county in absorbing state fiscal pressures.

Substantial pay-as-you-go capital financing will enable the county to maintain moderately low overall debt levels, currently at $2,483 per capita and 2.7% of market value. Amortization is average at 50.6% within ten years. Other than an upcoming refunding, the county does not plan to issue debt during the next few years.

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