OREANDA-NEWS. August 17, 2015.  Fitch Ratings has affirmed ratings on the following Sacramento County, California bonds:

--\\$990.3 million pension obligation bonds series 1995A, 2003B, 2008, 2011A, 2011B and 2013 at 'A-';
--\\$161 million certificates of participation (COPs), series 2006, 2007 and 2010 at 'A-';
--Implied general obligation (GO) bond rating at 'A'.

The Rating Outlook is Stable.

SECURITY
The POBs are absolute and unconditional obligations imposed by law and are payable from any money lawfully available to the county.

The COPs are supported by the county's covenant to budget and appropriate lease payments for use and occupancy of certain essential facilities. Lease payments are subject to abatement and supported by cash-funded debt service reserves.

KEY RATING DRIVERS

IMPROVING ECONOMY AND REVENUES: The local housing and employment markets have improved materially from steep declines during the last recession, contributing to steady growth in general fund revenues.

FINANCIAL FLEXIBILITY STILL WEAK: The county's financial flexibility remains constrained despite recent revenue growth due to rising spending pressures and minimal reserves. In addition, the general fund retains a substantial balance owed to non-general fund sources.

SLOW PROGRESS RESTORING FINANCES: General fund budgets continue to rely on one-time resources and the county's timeframes for restoring budgetary balance and increasing reserves from current negative levels are unclear.

LONG-TERM OBLIGATIONS MIXED: County debt ratios are moderate but pension obligation debt, in combination with pension contributions, comprises a large and rising share of general fund expenditure requirements. Capital needs are limited, and carrying costs for debt service and retiree benefits are moderate.

RATING SENSITIVITIES

FINANCIAL IMPROVEMENT KEY: The rating is sensitive to changes in financial flexibility, as indicated by unrestricted general fund balance and cash levels. An inability to attain at least a modest fund balance cushion during the current economic expansion, in anticipation of an eventual slowdown or reversal of economic and revenue growth, would increase downward rating pressure.

CREDIT PROFILE

Sacramento County is home to California's state capital and nearly 1.5 million residents, while also serving as a regional employment center. In addition to countywide operations, the county provides a broad range of municipal services to more than one-third of residents living in unincorporated areas.

IMPROVING ECONOMY AND REVENUES

The regional economy has recovered steadily over the past four years but still bears scars from the last recession. The Sacramento housing market was among the nation's hardest hit by the downturn, but foreclosures have fallen markedly since 2008 and are now consistent with national levels. Home values reported by Zillow.com for June 2015 were 58% above 2012 levels, yet still 26% below pre-recession peaks. Recent home value gains have contributed to a cumulative 15.8% increase over the past three years in taxable assessed value, which surpassed its pre-recession peak in fiscal 2016.

Recent employment growth has been strong, with 47 consecutive months of year-over-year gains through June 2015. Total employment recently surpassed pre-recession levels and unemployment rates are close to state and national averages.

An improving economy has resulted in increased county revenues, particularly property and sales taxes. General fund tax revenues recorded a 6.4% gain in fiscal 2014, their first material increase in more than five years. Management estimates property and sales tax revenue growth of 6.2% in 2015 and 5.5% in fiscal 2016, which appears reasonable based on recent trends.

LIMITED FINANCIAL FLEXIBILITY

The county's financial flexibility remains constrained, despite recent revenue growth, due to ongoing spending pressures and minimal reserves. General fund expenditure requirements have kept pace with revenue gains and the county has been pressured to increase spending on public safety, mental health, and social services. In addition, five-year agreements for most bargaining units commit the county to annual growth in personnel costs through 2018, partly offset by increasing employee pension contributions.

Year-end general fund cash levels are somewhat low and were equivalent to approximately one month of annual spending requirements at the end of fiscal 2014. Liquidity concerns are largely offset by the county's substantial pool of borrowable resources, estimated by management at \\$1.8 billion, which the county has utilized regularly to manage cashflow.

Available fund balances continue to be weak. General fund reserves were depleted during the last recession and unrestricted fund balance remained negative at the end of fiscal 2014. Consecutive years of general fund surpluses helped the county to achieve a small positive unrestricted fund balance in fiscal 2013. Management achieved a \\$20.1 million operating surplus (1% of general fund spending) after transfers in fiscal 2014, but an accounting change reduced revenue accruals from 365 to 120 days, resulting in a negative \\$39 million unrestricted fund balance (1.9% of general fund spending) at year end. Management projects further progress in reducing this deficit in fiscal 2015 but the balance will likely remain negative.

The county's negative general fund balances are partly due to internal borrowings during the last recession that have yet to be fully repaid. Loans to the general fund exceeded \\$75 million at their peak, and were estimated by management at \\$50 million at the end of fiscal 2015. The majority of this balance is due to the county's self-insured workers' compensation fund. The county has reduced this balance incrementally over the last several years but no schedule for full repayment has been established.

SLOW PROGRESS RESTORING FINANCES

The county's finances were severely strained by the last recession and their recovery has been slow. Management has highlighted the county's continuing fiscal challenges in budget documents and financial statements, but the time frame for further improvements remains unclear. Negative fund balance levels, in particular, leave the county vulnerable to heightened financial pressure in the event of a new recession and decline in discretionary revenues.

LONG-TERM OBLIGATIONS MIXED

Overall debt levels are moderate at 3.8% of assessed value and \\$3,431 per capita but repayment of pension obligation debt, in combination with pension contributions, make up a large and rising share of general fund expenditure requirements. Capital needs are limited and 2010 revisions to other post-employment benefits reduced associated liabilities substantially. Carrying costs for debt service and retiree benefits remain relatively affordable at 16% of governmental expenditures in 2014.

The county has made considerable progress in restructuring a substantial derivatives portfolio in recent years but retains one structured POB issue that accounts for approximately one-quarter of outstanding direct debt. An associated swap had a negative termination value of \\$112 million as of July 2015.