According to a new report issued by Fitch Ratings, California's fiscal and
credit prospects remain clouded, despite welcome progress that has been made on
its budget. California's 'A-' general obligation rating is low considering the
size and breadth of the state's economy and tax base and the strength inherent
in a state's sovereign powers. This reflects the extensive budgetary pressures
confronting the state and the state's constrained financial flexibility stemming
from voter initiatives.

Fitch says that early in 2011 the state of California identified a cumulative budget
gap for the fiscal year ending June 30, 2012 of as much as $26.6 billion. Since that
time, actions taken by the state and a gradually brightening economic outlook have
resolved a significant share of that gap.

The governor's amended budget proposal released last week, the May Revise, forecasted
a much-reduced gap of $9.6 billion through the same period, a $17 billion improvement
since January. The plan's emphasis on recurring budgetary solutions, if achieved and
sustained, would mark a significant shift from past budgeting practice.

In spite of tangible fiscal improvement, numerous financial challenges continue to
burden the state. The remaining $9.6 billion budget gap is substantial, and achieving
agreement on a final budget balancing package is likely to be contentious and protracted
given controversial elements of the proposal, the lack of easily achievable alternatives,
and the highly partisan decision-making environment of the state's capital.

Uncertainty also affects the state's near-term cash flows, which, despite the likely
gains provided by progress on the budget to date, will erode in the early part of the
new fiscal year in the absence of a completed gap-closing plan. Fitch will continue
to review budgetary and cash flow developments in the state in the coming weeks and
months.

The special report 'California's Budget Crisis Not Over', delves into Proposition 25,
other recent reforms and the May Revise. The report is available on Fitch's web site,
'www.fitchratings.com