OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to the following Los Angeles County Public Works Financing Authority (the authority), California lease revenue bonds:

--\\$120.4 million lease revenue refunding bonds (master refunding project), 2015 series B (tax-exempt);
--\\$85.4 million lease revenue refunding bonds (master refunding project), 2015 series C (federally taxable).

The bonds will be sold via negotiation during the week of Aug. 10, 2015.

The Rating Outlook is Positive.

SECURITY
Repayment of the 2015 series B and C bonds is from the county's annual lease rental payments to the authority, payable from legally available funds, under a covenant to budget and appropriate, subject to abatement.

KEY RATING DRIVERS

SOLID FINANCIAL MANAGEMENT: The Positive Outlook reflects the county's well-managed financial operations, with strong general fund balances throughout the economic cycle, and strengthened reserve policies.

ONGOING GENERAL FUND SUPPORT FOR HEALTH SYSTEM: The performance of the county's Department of Health Services' (DHS) continues to benefit from both wider health sector reform and changes implemented internally. However, DHS' finances remain vulnerable to state and federal funding changes and heavy social service expenditures, and Fitch expects that DHS will continue to need significant general fund support.

SIGNIFICANT LONG-TERM LIABILITY EXPOSURE: While the county has a moderate overall debt burden, it faces large unfunded accrued actuarial liabilities (UAAL) for its pensions and other-post employment benefits (OPEB).

LOCAL ECONOMY CONTINUES TO IMPROVE: The county's vast economy and tax base is vulnerable to economic cycles despite its diversity and maturity. Economic indicators are mixed, with improving tax base and revenue streams but a persistently above-average unemployment rate.

LEASE DEBT RATING DISTINCTION: The one-notch rating distinction between the county's implied ULTGO rating of 'AA-' and the 2015 series B and C bonds represents the county's covenant to budget and appropriate for lease payments, subject to abatement.

RATING SENSITIVITIES
A sustained trend of positive operations, strong general fund balances, improved reserves, reduced liabilities, and manageable general fund support for DHS could result in a ratings upgrade.

CREDIT PROFILE

SOLID FINANCIAL MANAGEMENT
The implied long-term ULTGO rating of 'AA-' reflects the county's diverse and mature economy, moderate debt burden, sound financial reserves, and prudent management efforts to achieve fiscal balance amid ongoing and sizable financial pressures. These pressures stem from a heavy social service spending burden, state funding changes, DHS cash flow issues, a large unfunded pension liability, and a costly retiree medical program.

The county ended fiscal 2014 with a solid surplus for the second consecutive year, increasing the unrestricted general fund balance to \\$2.790 billion (18.1% of spending) from the prior year's \\$2.566 billion (17.2%). These results follow a pattern of notably stable county financial operations throughout the challenging recent economic downturn.

The county is currently projecting a \\$237.8 million general fund drawdown in fiscal 2015. However, the county expects to outperform this projection based on previous years' experience of benefitting from revenues at the year-end reconciliation. In the unlikely event that there was a drawdown of that magnitude, the total general fund balance would remain a very strong \\$2.865 billion.

The county's rainy day reserve fund is now \\$256 million. The county remains committed to achieving its goal of 10% of ongoing locally generated revenues (currently equivalent to approximately \\$543 million) through the annual allocation of at least 10% of surplus revenues to either the rainy day reserve fund and/or the county's OPEB trust. In September 2014, the county added a further budget policy requiring the annual appropriation of 5%-10% of new ongoing discretionary revenues to a contingency reserve, with any unused monies at the end of the year transferred to the rainy day reserve fund and/or the OPEB trust. Fitch views the strengthening of the county's reserve policies as a credit positive because of the extra insulation provided against future economic downturns.

DHS FINANCIALS IMPROVING BUT GENERAL FUND SUPPORT STILL REQUIRED
The county projects that DHS will end fiscal 2015 with a \\$107.4 million surplus, representing its sixth year consecutive year of improved year-end financial results. This is the result of more stable revenue streams, stable contributions from the general fund, improved patient demographics under health care reform, and significant operational changes.

In fiscal 2015, the net county contribution is projected to be \\$561 million or 12.6% of the total DHS budget. By contrast, the net county contribution peaked in fiscal 2008 at \\$827.7 million or 18.2% of the total DHS budget. The net county contribution is budgeted to increase slightly in fiscal 2016 to \\$633.2 million or 13.1% of the total DHS budget as board policy allows DHS to retain savings generated from the state's redirection of fewer realignment revenues to social services under Assembly Bill (AB) 85. In addition, there will be increased costs related to higher staffing.

The county expects general fund loans to DHS to assist with cash flow issues to decline to between \\$500 and \\$600 million outstanding per year. At fiscal 2015 year-end, there will be a projected \\$419.6 million in outstanding general fund loans, down from \\$871 million a year prior and a fiscal 2011 peak of \\$1 billion.

DHS pressures continue to be partially alleviated by the extension of a federal section 1115 waiver through Oct. 31, 2015 and the negotiation of a unique formula for the county under AB 85. The waiver facilitated increased enrollment of newly eligible Medi-Cal patients under health care reform which improved DHS' payor mix. Negotiations with the federal government are currently underway over further extending the waiver to cover the future costs of uninsured patients. The negotiation of a unique formula under AB 85 has allowed the county to maintain a fairly stable source of funding for DHS.

SIGNIFICANT LONG-TERM LIABILITY EXPOSURE
The county's overall debt burden is a moderate \\$3,602 per capita or 2.9% of market valuation. Principal amortization is average at an estimated 54.3% in 10 years. During the first quarter of 2016, the county expects to issue \\$275 million in bonds to take out commercial paper used to fund the Martin Luther King Jr. Hospital inpatient tower. After that, no further debt issuances are planned for the next couple of years.

The county faces sizeable long-term unfunded pension and OPEB liabilities. As of June 30, 2014, the county pension system's UAAL was \\$11.3 billion and its funded ratio was 79.5% using the county's 7.5% assumed rate of return. Fitch estimates the funded ratio at 75.3% when adjusted to reflect a more conservative 7% rate of return. The county's cash contributions to the pension system, which are equal to the annually required contribution (ARC), grew to \\$1.4 billion in fiscal 2015 from \\$676.7 million in fiscal 2006. The most recently implemented pension tier with lower benefits for new hires should decrease costs slightly over time.

The county also has a \\$27.3 billion UAAL for OPEB, which it has begun to address by recently establishing an OPEB trust. At its current balance of \\$497 million, the trust funds approximately 1.8% of the outstanding OPEB liability. The county aims to increase its OPEB trust funding from future surplus revenues. The fiscal 2016 adopted budget includes a \\$22 million contribution to the OPEB trust. Thereafter, the county plans to increase its annual OPEB contributions to \\$60 million annually until the actuarially required contribution is fully funded.

A new OPEB tier has been created for employees hired on or after July 1, 2014. It eliminates spousal and dependent coverage and requires mandatory enrollment in Medicare at age 65. This new tier is projected to save \\$840 million over 30 years.

The combined carrying costs for debt service, pension ARC, and OPEB pay-go in fiscal 2014 were very manageable at 12.8% of total governmental spending.

LOCAL ECONOMY CONTINUES TO IMPROVE
The county's unemployment rate (7.1% in April 2015) remains higher than the state's (6.1%) and the nation's (5.1%). However, there has been growth in both employment opportunities and the labor force which has brought the unemployment rate down from 7.8% a year prior. The county's socioeconomic characteristics are below average relative to the state and somewhat mixed relative to the nation. Educational attainment is similarly mixed relative to national averages.

Due to the county's highly developed and mature nature, taxable assessed valuation (TAV) losses were relatively low at 0.5% and 1.9% decreases in fiscal years 2010 and 2011, respectively, indicating a significant Proposition 13 cushion. In the subsequent five years, the property market has rebounded by 21.4% through fiscal 2016. This rebound is supported by rising house prices, a strong rebound in the number of residential construction permits, decreasing defaults and foreclosures, more Proposition 8 TAV restorations, and healthier commercial and industrial real estate markets.

ESSENTIAL ASSETS
The 2015 series B and C bonds are on parity with 2015 series A bonds (rated 'A+' by Fitch) and have the same bondholder protections and share a pool of leased assets. All eight leased facilities provide essential county services. They include courthouses, a sheriff station, a library, county department buildings, and the civic center heating and refrigeration plant. Their combined value of an estimated \\$622 million well exceeds the outstanding cumulative par amount of the parity bonds (\\$359 million).