The Eyes of Wall Street are Upon Us

The following is from an excerpt from the Wall Street bond rating entity Fitch:

The bonds rating entity Fitch has placed the State of California's approximately $43 billion outstanding
general obligation (GO) and $5.9 billion in related state appropriation-backed bonds on Rating Watch
Negative. Bonds affected by the action are detailed at the end of this release.

The action reflects California's widening structural budget and cash flow imbalances as the state's economy
slows largely due to the housing downturn. Risks are heightened given the long-term lack of political
consensus for fiscal solutions to California's chronic structural budget imbalances, as well as concerns
regarding state economic and revenue forecasts developed in early December, since which time the general
economic outlook has diminished. Underlying assumptions project that the California housing downturn
bottoms out later this year, and revenue deceleration reverses in the new fiscal year, which in Fitch's view
is uncertain. The depth and diversity of the underlying economy, despite short-term direction, remains a
strength. Debt levels are moderate, though rising, and proposed new authorizations would substantially
increase this burden.

Rating downgrade would be triggered by the lack of timely action during the emergency session to implement
proposed cash conservation or equivalent measures to offset cash shortfalls projected through August,
accelerating economic and revenue weakening, extended delays in budget enactment, or the absence of
sustainable structural measures incorporated in the final budget.

Moderate cash and budget imbalances are projected for the current fiscal year ending June 30. These would
largely be closed through the issuance of the remaining $3.3 billion in authorized economic recovery deficit
funding bonds (ERBs). Such measures are contained in the governor's budget and do not require legislative
approval. After utilizing the ERBs, a sizable $9.2 billion fiscal year-end cash balance is projected after payment
of $7 billion in outstanding revenue anticipation notes (RANs). However, cash deficits would open again in July
and August, absent $5.4 billion in cash conservation measures.

A large $11.2 billion operating budget gap, 10.9% of revenues, is projected for fiscal 2009. This compares to
a $6.1 billion projected imbalance for fiscal 2009 when the fiscal 2008 budget was enacted. Most of the fiscal
2009 cash conservation measures and all of the spending reductions to close the operating gap, including 10% across-the-board cuts totaling over $9 billion, require legislative approval. Early action is required in order to
achieve the full benefit of the budget reductions next year, which is uncertain.

Under new provisions pursuant to Proposition 58, passed in 2004, the governor has declared a fiscal emergency
to address the current-year deficits. However, the availability of the ERBs to address most of the current fiscal
year problem reduces the chances of early action on next year's budget shortfall. The cash conservation measures
largely do not entail budget cuts but rather seemingly less contentious disbursement timing deferrals and will be
part of the emergency session. Approval is important as new cash flow notes (RANs) cannot be issued until a
new budget is enacted.

The governor's fiscal 2009 budget balancing proposal essentially relies on deep service cuts and not significant
levels of tax increases. Such proposals in the past have been opposed by the majority in the state legislature
resulting in political stalemate and delayed budgets, as budget enactment and tax increases require a two-thirds
majority vote and some bipartisan consensus. The two-year shortfall totals $14.5 billion with an $11.2 billion
projected operating deficit attributed to fiscal 2009. Over $9 billion in 2009 balancing measures stem from 10%
reductions from the existing 'workload' general fund budget. Spending would decline 2.3% from fiscal 2008
revised proposed spending levels. School funding, corrections, and health and human services would experience
large funding reductions. Early agreement and action would be required this spring, given employee termination
procedures, in order to achieve these savings, which is very uncertain given the significance of the proposal and
the state's track record of protracted budget deliberations.

Some one-time measures included in the fiscal 2009 proposed solutions extend imbalances. The issuance of
the $3.3 billion in remaining ERBs authorized, combined with not implementing their early retirement, reverses
prior expectations of significant structural improvement after fiscal 2010, when the early retirement of the deficit
bonds would have been achieved. The governor's budget proposal also includes $2 billion in personal income and
corporation tax accounting accruals.

Revenue assumptions may be optimistic, heightening uncertainty. Economic and revenue assumptions include
taxable sales growth picking up to 3.4% and 4.6% in calendar years 2008 and 2009, respectively, after increasing
only an estimated 0.9% last year. Personal income tax collections increase 1.4% in fiscal 2008 and 5% in fiscal
2009 (net of the accounting accrual) with capital gains flat in calendar 2007 and declining 3% in 2008.

California's economy is very diverse, and continues to grow, albeit at a slowing pace as the housing downturn
continues. Employment in November 2007 in California rose 0.6% year-over-year, the slowest pace since April
2004, when the state was emerging from the previous recession. By contrast, January 2007 employment rose
1.9% year-over-year. Unemployment in November has risen to 5.6% in California as the housing downturn has
accelerated, compared to 4.7% nationwide. Housing-related sectors are experiencing broad job losses; in
November 2007, construction employment fell 3.7% year-over-year, retail trade fell 1%, and financial activities
fell 1.9%. However, personal income growth is steady to date, rising 6.3% in the third quarter of 2007, versus
6.5% for the nation.

California's debt burden to date is moderate, with tax-supported debt of $57.6 billion equal to 4% of 2006 personal
income. The debt burden will climb in the near term, but likely remain manageable, following voter authorization in
2006 of $42.7 billion in GO bonds for infrastructure. Since then, another $7.8 billion in lease appropriation debt,
largely for corrections, has been approved. The governor's budget proposes a further $48.1 billion in GO bond
issuance through 2016. If approved by voters, the plan could place additional stress on California's operating
budget depending on timing of issuance, as amortization of ERBs is further delayed.

Fitch currently rates California's GO bonds 'A+'. Today's action affects all GO bonds, including the veterans GO
and Cal-Mortgage Loan Insurance Division ratings. California's lease obligations (rated 'A' by Fitch) issued by the
following agencies have also been placed on Rating Watch Negative:

--State of California Public Works Board (except for those issued for the Regents of the University of California);

--East Bay State Building Authority;

--Los Angeles State Building Authority;

--Oakland State Building Authority;

--Riverside County Financing Authority;

--Sacramento City Financing Authority;

--San Bernardino Joint Powers Financing Authority;

--San Francisco State Building Authority;

--Golden State Tobacco Securitization Corporation (series 2005A);

--California Infrastructure and Economic Development Bank (series 2005A, 2005B and 2005C school bonds);

The ratings of the Shafter Joint Powers Financing Authority and Taft Public Financing Authority (both rated 'A-' by
Fitch) are also placed on Rating Watch Negative.

Ratings on the state's RANs (rated 'F1+' by Fitch) and ERBs (rated 'AA-', with a Stable Outlook) are not affected
by today's action.