OREANDA-NEWS. April 04, 2016. Fitch Ratings affirms the following San Luis Obispo County, CA (the county) obligations:

--\\$100.5 million pension obligation bonds (POBs) series 2003A, 2003C and 2009A at 'AA+';
--\\$16.6 million lease revenue refunding bonds, series 2012A, at 'AA+' issued by the San Luis Obispo County Financing Authority (the authority);
--Implied general obligation (GO) rating at 'AAA'.

The Rating Outlook is Stable.

SECURITY
The POBs are secured by an absolute and unconditional obligation of the county to make payments equal to debt service.

The lease revenue bonds (LRBs) are secured by lease payments made by the county to the authority under a covenant to budget and appropriate. The payments are subject to abatement. A debt service reserve is cash-funded at the standard three-prong test.

KEY RATING DRIVERS

CONSISTENTLY STRONG FINANCIAL PERFORMANCE: The county maintains a consistently solid financial position, benefiting from conservative budgeting and financial planning. The county has posted seven consecutive years of surpluses resulting in significant reserve levels.

STABLE TAX BASE, MODERATE CONCENTRATION: The tax base has remained remarkably stable. The portion of assessed value (AV) attributed to PG&E, the county's largest taxpayer, continues to decline.

STABLE LOCAL ECONOMY: The large state government, university, and utility presence aid in the stability of the county's economy, which also has noteworthy agriculture and tourism components.

VERY LOW DEBT PROFILE: The county's low overall debt levels, low carrying costs, and limited capital needs are credit positives. In addition, prefunding of retiree healthcare liabilities and implementation of pension reforms have reduced the county's long-term liabilities.

GENERAL FUND OBLIGATIONS: The LRBs and POBs are rated one notch below the GO bonds as they are not a general obligation and are payable solely from any legally available funds.

RATING SENSITIVITIES

STABLE FINANCIAL PROFILE: The rating is reflective of the county's exceptional financial performance. A significant drawdown of reserves or reduction in revenues without offsetting spending cuts would impact the rating. The Stable Outlook reflects Fitch's view that this is unlikely.

CREDIT PROFILE

The county comprises 3,300 square miles along California's central coast mid-way between San Francisco and Los Angeles. With a population of 283,815, the county includes seven cities as well as many unincorporated communities. The county seat is the city of San Luis Obispo (implied GO rating 'AA+'/Outlook Stable by Fitch).

STRONG FINANCIAL PERFORMANCE AND MANAGEMENT

San Luis Obispo County has demonstrated consistently strong financial performance due largely to conservative budgeting and planning. As such, in fiscal 2015 the county generated an operating surplus after transfers for a seventh consecutive year, equal to \\$32 million. The county's unrestricted fund balance at fiscal year-end 2015 was a high \\$263.3 million, or 65% of spending.

Management proactively established a five-year plan in 2007 to address expected budgetary pressures that was later extended to seven years due to the slower than expected economic recovery. The county took a variety of actions to close budget gaps including elimination of additional vacant positions following a board policy not to backfill cuts in state funds. As a result, the county not only closed annual structural imbalances ranging from \\$2 million to \\$30 million but generated sizable surpluses.

Liquidity is very strong with cash increasing in each of the last seven years to \\$261.3 million at year-end fiscal 2015. This results in an exceptionally strong quick ratio (cash and investments compared to liabilities less deferred revenue) of 17.1.

STABLE ECONOMY

Government represents the major employment sector, contributing to a stable economic profile. The county and California Polytechnic State University, with a student population of about 20,000, are the largest employers, with 3,000 and 2,800 employees, respectively. The county also has a large utility sector (primarily due to the presence of PG&E, which employs 1,900 people and operates the Diablo Canyon nuclear plant, whose twin reactor licenses expire in 2024 and 2025. Though PG&E had applied for a 20-year extension, its application is pending as it develops new seismic studies. Leisure and hospitality are also a large economic component, the result, in part, of beach and central-coast vineyard attractions.

County unemployment rates are well under the state and national averages at 4.4% as of January 2016. Per capita and median household income levels are slightly above state averages and well above national averages.

STABLE TAX BASE AND MODERATE CONCENTRATION

The county's tax base remained remarkably stable through the downturn, declining only 2.9% before increasing through fiscal 2016. Concentration is low when considering the top 10 taxpayers, which make up 7.3% of total AV, but PG&E accounts for a sizable 5.7%.

The median home value in the San Luis Obispo metropolitan area is \\$540,200 as of February 2016. County home values have risen 7.4% over the past year and Zillow predicts they will rise 3.5% within the next year.

VERY LOW DEBT BURDEN AND CARRYING COSTS

The debt burden is low, with overlapping debt including accreted interest totaling \\$11,763 per capita, or 1.1% of AV. Amortization is moderate with 62.5% of debt retired within 10 years. Capital needs include a women's jail and juvenile hall, both of which will be funded with a mix of state funding and county funds that have already been set aside. No additional debt is expected in the near term.

Carrying costs, including debt service on the LRBs and POBs, and pension and other post-employment benefits (OPEB) payments, were a modest 9% of governmental spending in fiscal 2015. In 2010 the county prudently established an irrevocable trust to address its OPEB liability, equal to \\$38.3 million based on a June 30, 2015 actuarial study. The trust's funded ratio is equal to 36.9% (at a discount rate of 7.28%).

The San Luis Obispo County Employees Retirement Plan, which includes county employees as well as superior court and other agencies within the county, had a funded ratio of approximately 71.6% as of Jan. 1, 2013 (as reported in the fiscal 2015 audit) adjusted for a 7% assumed rate of return. In order to address pension costs, in fiscal 2011 the county implemented a tier 2 plan which raised the retirement age to 60 from 55 and limited the cost of living increase for the majority of employees. It also began shifting a portion of the pension contribution to employees, who now pay 50%. Further, approximately 25% of its workforce is currently covered under tier 3, subject to the state's Public Employee Pension Reform Act of 2013.