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 October 30, 2015 - 1:40 PM EDT
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Fitch Affirms Ventura County PFA, CA's Lease Revs at 'AA'; Outlook Stable

Fitch Ratings has affirmed the following Ventura County Public Financing Authority, California's (PFA; the authority) ratings:

--$326.4 million lease revenue bonds, series 2013A and 2013B at 'AA'.

In addition, Fitch has affirmed Ventura County, California's (the county) implied general obligation (GO) bond rating at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The lease revenues bonds are repaid by lease payments from the county to the authority for use of certain medical and public safety facilities, subject to abatement. The bonds additionally are secured by a cash-funded debt service reserve fund sized to 50% of maximum annual debt service.

KEY RATING DRIVERS

SOLID FINANCIAL OPERATIONS: The 'AA+' implied GO bond rating reflects the county's sound financial cushion, years of operational surpluses, prudent expenditure reductions and pension reform measures, and a significant degree of remaining expenditure flexibility.

SOLID LEGAL STRUCTURE: The lease revenue bonds' one-notch distinction from the implied GO bond rating reflects the sound legal structure, including a covenant to budget and appropriate lease payments, essential leased assets, standard insurance provisions, and 24 months of rental interruption insurance.

ABOVE-AVERAGE LOCAL ECONOMY: The moderately diverse local economy is strong, with high income levels, a strongly rebounding tax base, an improving unemployment rate, and adequate access to the large and diverse Los Angeles employment market.

SOUND DEBT PROFILE: The county's debt burden is low, capital needs are limited, the pension system is conservatively managed, and the other-post employment benefits (OPEB) liability is minimal. However, debt amortization is slow when medical center debt is taken into account.

GOOD MANAGEMENT PRACTICES: The county has been exceeding its sound minimum 15% unassigned general fund balance policy, the budget must be structurally balanced by policy, and labor relations are largely good.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the county's strong financial operations and management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

Ventura County serves a population of approximately 846,000 residents, with close proximity to Los Angeles to the southeast and Santa Barbara to the northwest. The county benefits from adequate access to the large and diverse Los Angeles employment market, and the local economy is reasonably well-diversified.

HISTORICALLY AGRICULTURAL ECONOMY NOW MODERATELY DIVERSIFIED

In recent decades the county has diversified away from its agricultural roots, with major employers in government, health care, the oil and gas industry, technology, and military. However, agriculture still plays a significant role in the economy, with residents supportive of policies meant to prevent conversion of farmland to other uses. The county's largest employer is the Naval Base Ventura County, with 18,000 employees. No personnel reductions are expected at that naval base.

The local economy benefits from above-average income levels. Median household income equals 125% and 144% of state and national levels, respectively. Poverty levels at 11.1% of the population also compare well to the state and national rates of 15.9% and 15.4%.

Employment levels contracted significantly in 2009 and only just recovered to peak levels in 2014. In August 2015, county unemployment was 5.9% (compared to 7.0% a year prior), in line with the state's unemployment rate (6.1%) but above the nation's (5.2%).

DIVERSE, REBOUNDING TAX BASE

The county's tax base is well-diversified, with the top 10 payers making up just 4.7% of assessed value (AV). The tax base performed moderately well during the recession, contracting 4.1% in fiscals 2010-2012. This performance was helped by the maturity of a significant portion of the county's housing stock, particularly in coastal regions. Subsequently, the tax base rebounded strongly by 10.9% through fiscal 2015, with a further 4.1% increase projected for fiscal 2016. This reflects the recapture of the majority of the county's Proposition 8 revaluations during the recession, plus turnover, new development, and house-price recovery. The county is projecting strong ongoing AV growth, even though current low oil prices have reduced the valuations of key local property taxpayers in the oil and gas industry.

SOUND FINANCIAL PERFORMANCE

The county's financial performance has been very good, with six consecutive years of audited general fund operating surpluses and an unaudited surplus in fiscal 2015. General fund operations in fiscal 2014 resulted in a $38.9 million operating surplus (after transfers), raising the total and unrestricted fund balances to sound levels of $323.8 million (36.6% of spending) and $188 million (21.3%), respectively. The large difference between the total and unrestricted general fund balances is due to a number of trust funds for monies received (for example from state and federal sources) but not yet expended for specific purposes and cash flow loans to other county agencies.

The county's fiscal 2015 general fund operations are projected to produce a robust surplus of approximately $30 million, largely the result of setting monies aside for capital projects. The county expects to exceed its minimum 15% unassigned general fund balance reserve policy, as it did in fiscal 2014. The county's fiscal 2016 adopted budget is balanced as required by county policy, without appropriating existing reserves.

During the recession the county implemented prudent and incremental expenditure reductions and significant pension reforms, froze wages, and eliminated positions through attrition without having to make severe cuts to programs and staff. County policy has generally been not to backfill any reductions in funding for state programs and to negotiate somewhat flexible labor contracts. As a result, the county's expenditure flexibility remains high. Nevertheless, the county faces negotiated and projected personnel cost increases through fiscal 2019 as it provides annual cost of living adjustments, restores some classifications to market rate salaries, and amortizes its pension liabilities swiftly.

COUNTY WILL FACE ONGOING HIGH PENSION COSTS

Pension benefits are provided for most county employees through the Ventura County Employees' Retirement Association (VCERA), a defined benefit plan. The actuarially funded ratio for fiscal 2014 was 82.6%. This drops to a somewhat weaker Fitch-estimated 76.3% after the discount rate is lowered to 7.5% from 7.75%. The unfunded liability likely will narrow faster than many other pension systems' due to a rapid 15-year amortization period and no investment loss corridor. Fitch regards this rapid amortization as a credit positive but notes that the county's conservative approach to pension system funding will require ongoing budget absorption of high annual pension costs going forward.

COUNTY MEDICAL CENTER ON SOUND FINANCIAL FOOTING

The county runs a medical center. Fitch does not view this as a material credit weakness because the center has been financially well-managed and the county's operating subsidy has held steady at $15.2 million annually for several years (1.7% of fiscal 2014 general fund expenditures and transfers out). County policy caps the subsidy at this dollar amount moving forward. Net of the subsidy, the hospital has increased its net assets in the last few years with the exception of fiscal 2015, which saw an $8.5 million loss because of a new system implementation. Under the Affordable Care Act, county management expects the medical center to generate balanced-to-surplus operations going forward as a preferred provider of care to formerly uninsured patients.

SOUND DEBT PROFILE

The county's debt profile is good overall, but is weighted somewhat by slow debt amortization (when medical center debt is taken into account) and the high ongoing pension costs. Repayment is slow with approximately 38% of principal retiring in 10 years.

The county's overall debt burden, net of self-supporting medical center debt, is a low $1,870 per capita or 1.4% of AV. The county has limited exposure to variable-rate debt, and its capital needs are small after this issuance. The county's OPEB obligation is minimal, consisting largely of an implicit subsidy.

Annual debt service, actuarially required pension contribution, and OPEB pay-as-you-go carrying costs are affordable at 15.5% of total governmental spending.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993214

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993214

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Alan Gibson
Director
+1-415-732-7577
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com


Source: Business Wire (October 30, 2015 - 1:40 PM EDT)

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