Riverside County, California; Appropriations; General Obligation; Joint Criteria

Summary: Riverside County, California; Appropriations; General Obligation; Joint Criteria Primary Credit Analyst: Matthew T Reining, San Francisco (1) 415-371-5044; matthew.reining@standardandpoors.com Secondary Contact: Jennifer Hansen, San Francisco (1) 415-371-5035; jen.hansen@standardandpoors.com Table Of Contents Rationale Outlook Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2014 1

Summary: Riverside County, California; Appropriations; General Obligation; Joint Criteria Credit Profile Riverside Cnty ICR Long Term Rating AA/Stable Affirmed Rationale Standard & Poor's Ratings Services affirmed its 'AA-' rating on Riverside County, Calif.'s series 20005 certificates of participation (COPs), issued by the Riverside County Asset Leasing Corporation. Standard & Poor's also affirmed its 'AA' issuer credit rating (ICR) on the county and its 'AA-' rating and underlying rating (SPUR) on all county pension obligation bonds (POBs) and COPs outstanding. The outlook is stable. For the series 2005 COPs, the county makes periodic base rental payments through a lease agreement with the County of Riverside Asset Leasing Corp. (CORAL), a nonprofit public benefit corporation. We understand that in coming months, the county expects to do an asset substitution. The original leased assets consisted of various public safety and operations buildings and land. According to management, the Ben Clark firing range and an administrative building (two of the original leased assets) are expected to be released. We understand that the remaining properties are valued at well in excess of the outstanding principal on the COPs. This asset substitution, in our opinion, does not impact the rating on the series 2005 COPs. The county's lease revenue bonds are secured by base rental payments to be made by the county for the use and occupancy of certain leased premises. The county has covenanted to budget and appropriate base rental payments to meet its obligations under the lease agreements supporting the lease revenue bonds. The COPs have an interest in the county's base rental payments, which the county covenants to budget and appropriate. The POBs are secured by any available sources of the county's general fund revenues, based on the county's absolute and unconditional obligation to make debt service payments. The ratings reflect our assessment of the following factors for the county, specifically its: Adequate economy that includes the county's access to the broad and diverse Inland Empire and greater Southern California economy as well as above-average unemployment and projected per capita income of 82% of the U.S.; Strong budgetary flexibility, with fiscal 2013 audited available reserves at 11% of general fund expenditures; Adequate budgetary performance, which includes a slight general fund surplus for fiscal 2013 and positive general fund results projected for fiscal 2014; Very strong liquidity providing very strong levels of cash and equivalents to cover both debt service and expenditures; Very strong management conditions with a "strong" Financial Management Assessment (FMA) score; and Adequate debt and contingent liabilities position. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2014 2

Adequate economy We consider Riverside County's economy to be adequate, primarily driven by projected per capita effective buying income of 82% of the U.S. We believe the county's economy is broad and diverse, and we view favorably the proximity of other Southern California economies. The county (population: over 2.2 million) had been one of California's fastest-growing counties in terms of population, employment, commercial and industrial development, and assessed value (AV) due to the higher cost of land and housing in the greater Los Angeles region and in San Diego and Orange counties. However, Riverside County County's unemployment rate was 10.3% in 2013, above the state rate, and has trended higher than the state's rate in recent years. Following a decade of real estate expansion and subsequent recessionary declines, Riverside County's tax base is moderating. Per capita market value for the county is $102,100 for fiscal 2015, up from $96,800 for fiscal 2014 and boosting the county's economic score. Fiscal 2014 AV grew by 3.8%, marking the first increase after five years of decreases. After growing at a double-digit rate for seven consecutive years (fiscal 2002 through fiscal 2008), AV net of Proposition 8 assessment reviews and appeals rose by just 1.4% in fiscal 2009. In fiscal 2010, county AV dropped by 10.5% due to the housing downturn and falling real estate values. This one-year decline was the largest in more than 50 years. AV continued to fall in fiscal years 2011 and 2012, albeit at slower rates (by 4.1% and 1.5%, respectively). For fiscal 2013, the county's AV was nearly flat, dropping by 0.1%. Property taxes are the largest tax revenue stream in the general fund. Strong budgetary flexibility In our opinion, the county's budgetary flexibility remains strong, with available general fund reserves at the end of audited fiscal 2013 at $252 million, or 11% of expenditures. This includes committed funds set aside that can be used with the board's discretion. Based on projected results for fiscal 2014, the county is expecting a similar general fund result, which would maintain the county's strong budgetary flexibility. The county does not plan to significantly alter reserve levels. Adequate budgetary performance The county's budgetary performance has been adequate overall, in our view. The county ended audited fiscal 2013 with a modestly positive general fund operating result (a $21 million surplus, or a slight 0.9% of expenditures, net of transfers and capital leases). This final ending result was very close to management's projections at the end of the fiscal year. For total governmental funds, the result in fiscal 2013 was a deficit equivalent to negative 2.1% of expenditures. We believe that fiscal 2014 general results will be slightly better than budgeted. On the revenue side, both property taxes (the largest discretionary general fund revenue) and sales tax are above budget. Sales taxes particularly are showing a proportional uptick (and point to economic expansion) although this revenue stream is a proportionally small portion of the county's revenue stream. For expenditures, the county has settled labor contracts for the next two years, which we believe will lead to more predictable costs. In total, fiscal 2014 estimates show an approximate $20 million surplus. The county has budgeted for a 4.4% deficit in total governmental funds for fiscal 2014. Very strong liquidity Supporting the county's finances is liquidity that we consider very strong, with total government available cash as a WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2014 3

percentage of total governmental fund expenditures at 43% at the end of fiscal 2013. Total government available cash at the end of fiscal 2013 was also very strong, at over 1,400% of total government funds debt service. We believe the county has exceptional access to external liquidity. The county has issued bonds frequently, including COPs, POBs, tax and revenue anticipation notes and Teeter notes, and special district bonds, during the past 15 years. Very strong management We consider the county's management conditions very strong. The county's management practices are considered "strong" under Standard & Poor's FMA methodology. An FMA of "strong" indicates our view that practices are strong, well embedded, and likely sustainable. The county has a policy of maintaining economic uncertainty funds at no less than 15% of ongoing discretionary revenues, with additional contingency funds of $20 million (approximately 3.5% of discretionary revenues). Economic uncertainty funds are used only for emergencies (and are thus rarely used); however, contingency reserve balances are often used but are subsequently restored. In our opinion, management's proactive financial management practices -- for example, taking midyear action to mitigate a decline in revenue -- have helped the county's financial performance in recent years. Adequate debt and contingent liability profile In our opinion, the county's debt and contingent liabilities profile is adequate, with total governmental funds debt service as a percentage of total governmental funds expenditures at 2.9% and with net direct debt as a percentage of total governmental funds revenue at 71%. The county plans in the next six to 12 months to issue $325 million in appropriation debt for a jail expansion and a training center. The county participates in the State of California Public Employees' Retirement System, and for fiscal 2013 it fully funded the annual required contributions of $179 million, which represented 6.2% of total governmental funds expenditures. For the county's miscellaneous portion, the funded ratio was 88.6% at the end of fiscal 2013; for the county's safety portion, the funded ratio was 89.2% for the same period. Based on data provided in the county's fiscal 2013 audit, the county has a $20 million other postemployment benefits (OPEBs) unfunded actuarially accrued liability with a 53% funded ratio. This liability is down significantly from prior studies due to the phase-out of an implicit subsidy for certain retirees and county-contributed funding. In fiscal 2013, the county contributed $5 million for OPEBs. Pension and OPEB contributions in fiscal 2014 were 6.4% of total government expenditures. Strong institutional framework We consider the institutional framework score for California counties that report under the single audit act as a single audit as strong. See Institutional Framework score for California. Outlook The stable outlook reflects our view that revenue trends are generally stabilizing, and our anticipation that the county's reserve position will remain strong and that the county will proactively manage its budget. While we do not expect to raise the ratings in the near term, further economic expansion could positively affect the ratings. The county is coming off several years of extensive budget cuts; however, results for the most recent year were a modest surplus. We could WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2014 4

lower the ratings if the county spends down reserves beyond previously articulated levels; however, we do not project negative results in the general fund based on year-to-date performance. We anticipate that the county will take steps to avoid significant declines in reserves and do not expect to change the ratings during the two-year outlook horizon. Related Criteria And Research Related Criteria USPF Criteria: Local Government GO Ratings Methodology And Assumptions, Sept. 12, 2013 USPF Criteria: Appropriation-Backed Obligations, June 13, 2007 Related Research Institutional Framework Overview: California Local Governments Ratings Detail (As Of November 26, 2014) Riverside Cnty certs of part (Family Law Court Rfdg) ser 2005B Riverside Cnty rfdg COPs Riverside Cnty COPs (Larson Justice Ctr Rfdg) ser 2009B Riverside Cnty POBs ser 2005A Riverside Cnty certs of part (Cap Imp & Family Law Court Rfdg Projs) Riverside Cnty certs of part (Historic Court Rfdg) ser 2005C Riverside Cnty certs of part (Pub Safety Communication Proj) ser 2007A Riverside Cnty taxable rfdg certs of part (Bankruptcy Court Proj) ser 2003 dtd 04/30/2003 due 11/01/2003-2007 2013-2014 2019 Riverside Cnty COPs ser 2006A Riverside Cnty POBs Riverside Cnty Asset Lsg Corp, California Riverside Cnty Asset Lsg Corp (Riverside Cnty) certs of part (Historic Courthouse Proj) ser 2003A WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2014 5

Ratings Detail (As Of November 26, 2014) (cont.) Riverside Cnty Asset Lsg Corp (Riverside Cnty) lse rev bnds (pub defender and info technol bldg projs) Riverside Cnty Asset Lsg Corp (Riverside Cnty) lse rev bnds (Cnty of Riverside Cap Proj) Riverside Cnty Asset Lsg Corp (Riverside Cnty) lse rev bnds (County Of Riverside Cap Proj) Riverside Cnty Asset Lsg Corp (Riverside Cnty) lse rev rfdg bnds (Riverside Cnty) ser 2014A due 11/01/2033 Riverside Cnty Asset Lsg Corp (Riverside Cnty) lse rev rfdg bnds (Riverside Cnty) ser 2014B due 11/01/2019 Riverside Cnty Asset Lsg Corp (Riverside Cnty) VRDB ser 2008A (ASSURED GTY) Long Term Rating AAA/A-1+ Affirmed Riverside Cnty Asset Lsg Corp (Riverside Cnty) leasehold (Cnty of Riverside Hosp Proj) ser 1997C (RMKTD) Riverside Cnty (Riverside Cnty Asset Lsg Corp) rfdg certs of part (Cap Facs Proj) ser 2003B dtd 12/04/2003 due 11/01/2004-2018 Riverside Cnty Palm Desert Fincg Auth, California Riverside Cnty Palm Desert Fincg Auth (Riverside Cnty) lse rev Bonds ser 2008A Riverside Comnty Properties Dev, Inc., California Riverside Comnty Properties Dev, Inc. (Riverside Cnty) lease rev bnds ser 2013 Southwest Comntys Fing Auth, California Southwest Comntys Fin Auth (Riverside Cnty) lse rev bnds (Cnty Of Riverside Cap Proj) ser 2008 A Many issues are enhanced by bond insurance. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2014 6

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