The 'A+' rating on Oakland, Calif.'s GO bonds reflects:

• A stable and diversified economic base relative to other cities in the San Francisco Bay Area, despite experiencing a marked downturn in employment and retail sales activity;
• Continued strong assessed value (AV) growth trends;
• Strong financial management, which contributes to the city's ability to maintain its fund balance in both fiscal 2003 and in the budget for fiscal 2004; and
• High overlapping debt ratios.

The bonds are secured by unlimited ad valorem property taxes levied within the city.

Oakland, seven miles from downtown San Francisco, is an integral part of the Bay Area economy with many employment opportunities. Leading employers include the county (11,800 employees), federal government (10,300), Oakland Unified School District (7,500), the County of Alameda (9,738), and Kaiser Permanente (6,611). The city has access to a broad transportation network--including highway, port, rail, and airport facilities--providing commuter access to San Francisco and Silicon Valley. However, reflective of the economic slowdown that has plagued the area over the past 2 years, unemployment in the city in 2002 spiked upward relative to the region to 10.6%, compared to 6.7% and 6.1% for the state and nation, respectively. AV totals $25.2 billion in fiscal 2003, and the per capita market value is $61,072. This represents an 8% increase in total AV over the fiscal 2002 level. Median household effective buying income ($39,567 in 2001) measures 90.9% of the state average and 103.6% of the nation.

The city continues to demonstrate sound financial management, with an unreserved and undesignated fund balance in its general fund at June 30, 2002 of $29.7 million, or 6.9% of expenditures. Fiscal 2003 operations are estimated to be balanced after implementing several rounds of expenditure reductions (total reductions of $40 million) since the fiscal 2003 budget was adopted in June 2002. The 2004 budget is also structurally balanced with conservative revenue growth projections.

The series 2003A, Measure DD bonds are being issued by the city to finance the preservation and acquisition of open space, parks renovation, water quality improvements related to Lake Merritt, restoration of Oakland's creeks, the renovation and creation of new youth and public recreation facilities, rehabilitation of open space and other safety and maintenance facilities and finally, to provide safe public access to Lake Merritt, Lake Merritt Channel, and the Estuary.

The overall net debt of Oakland is high at $4,646 per capita and 7.6% of true value. While these ratios include debt issued to pay unfunded pension liabilities, the debt burden is still very high. In fiscal 1998, Oakland restructured a portion of outstanding debt previously issued to reduce its pension liability. Although the issuance did not increase the debt burden, it increased the city's exposure to variable-rate debt. Almost 66% of the variable-rate debt, however, is currently hedged, leaving a more manageable 10% of the city's total debt with unhedged variable-rate exposure.

The stable outlook reflects the expectation of continued strong financial management such that adequate fund balance reserve levels are maintained. The outlook also reflects the expectation of gradual economic recovery from the recent period of considerable slowdown.

Oakland, with an approximate population of 412,200, encompasses 54 square miles on the eastern side of the San Francisco Bay and is the seat of Alameda County. While residents of the city have access to the greater Bay Area for employment, the city has developed into a financial, commercial, and government center. Although Oakland tends to have lower wealth and income indicators than other cities in the Bay Area, its relatively diverse economic base has made it among the more economically stable communities in recent years, particularly through the implosion of the dot-com industry. Leading employers in the city include local, county, state (including the office of the president of the University of California), and federal governments and public transportation entities. Health service organizations and air transportation firms are also major employers. Wealth levels in the city have jumped in recent years, with per capita effective buying income at 102% and 103.6% of state and national averages, respectively.

Oakland's economic base, which has historically been largely industrial, has diversified into commercial and service sectors. The focus of the city's economic development strategy is in biotechnology/healthcare, telecommunications, software/multimedia, food processing, and transportation. Projects currently under development in the city include a new Lexus dealership, big box retail stores such as Costco, Wal-Mart, Best Buy and Home Depot, and various housing sites, with an explicit mayoral goal of bringing 10,000 new residents to the downtown area. Known as the "10k Initiative," the program is multi-phased with the goal to develop housing for 10,000 new residents or approximately 6,000 new units in downtown Oakland by 2004. Through aggressive marketing and utilization of economic redevelopment, the city has brought 4,428 housing units online, equivalent to 74% of the goal. The city has two new redevelopment districts, with no plans to issue tax allocation bonds until 2005. Building permit valuation has tripled from 1998 to 2003, at $220 million and $700 million respectively.

Reflecting the state and national economic slowdown, total employment has fallen by 1% in 2003 to 184,700. In addition, on a per capita basis, retail sales are still well below state and national averages at 71.8% and 70.8%, respectively.

Due to strong fiscal policies and very strong financial management, Oakland's financial position remains sound. Demonstrative of its active budget management, for fiscal 2003, the city achieved balanced financial operations through a series of mid-year budget adjustments, which increased revenues $2.7 million and reduced expenditures by $16.8 million. The city ended fiscal 2003 without encroaching on its general fund reserve of about $52 million, including general fund undesignated and designated fund balance. The city also proposed and adopted a balanced 2003-2005 two-year budget maintaining structural balance. Oakland has been fiscally strong, with fiscal 2002 ending with a general fund unreserved fund balance of $29.7 million, or 6.9% of expenditures. Although the city was anticipating that fiscal 2003 was facing a $28.4 million deficit, through significant mid-year adjustments and expenditure adjustments the city achieved balance without utilizing its fund balance reserve of 7.5%. Mid-year budget adjustments (in January and March) totaling $28 million were in addition to $19 million in reductions implemented since budget adoption in June of 2002. Taken together, the city faced a budget problem equivalent to approximately 12% of total budgeted expenditures. Achieving a balanced budget was difficult for the city, due in large part to overtime expenses in the police department. With the implementation of a new overtime plan in November 2002 the city was able to reduce overtime costs from an anticipated $21 million to $17 million in actual costs. In addition, the city implemented a mandatory furlough for employees earning salaries less that $50,000, laid off 23 employees and cut 60 positions, with overall budget cuts totaling $19 million.

As the city approached construction of its two-year 2003-2005 budget, it faced a projected shortfall ranging from $29.5 million to $46.5 million or from 7.8% to 12% of the total general fund budget--depending upon the level of motor vehicle license fee (MVLF) backfill received from the state of California. The projected budget problem was driven by slow revenue growth due to softness in the local economy. For fiscal 2004 the city is forecasting general purpose revenue growth of only 2.2% which is considerably below the average general purpose revenue growth of 4.6% from 1992-2002. In particular the city projects little or no growth in business license, hotel, and real estate transfer taxes. The city expects only incremental increases in property taxes (2.5%) and sales taxes (2.0%)--revenue sources that comprise 34% and %. Due to the uncertainty surrounding the state budget the city conservatively budgeted to only receive the equivalent of 50% of its MVLF backfill. MVLF constitutes 4.2% of the city's budget.

It is noteworthy that for the budget cycle covering fiscals 2003 through 2005, prudent financial practices have been incorporated as guiding principles, including:

• Ensuring one-time revenues support only one-time expenditures;
• Maintaining the unreserved general fund balance at 7.5% of expenditures (a relatively new policy which increased the reserve target from 5% of expenditures);
• Utilization of a program-based budget;
• Rebuilding the city's infrastructure; and
• Redirecting services to its citizenry.

The proceeds of the series 2003A, Measure DD bonds will be used by the city to finance the preservation and acquisition of open space, parks renovation, water quality improvements related to Lake Merritt, restoration of Oakland's creeks, the renovation and creation of new youth and public recreation facilities, rehabilitation of open space and other safety and maintenance facilities and finally, to provide safe public access to Lake Merritt, Lake Merritt Channel, and the Estuary. The bonds were approved by voters in November, 2002 during an election that authorized the city to issue $198.25 million in GO bonds.

In 1995, Oakland, along with Alameda County, issued debt to renovate a stadium and relocate the NFL's Raiders. Fiscal 1999 marked the first year when the city's general fund was directly impacted. Previously, the city was able to offset underperforming Raiders-related revenues with reserves. In fiscal 2002, the city spent about $11.5 million and $10.5 million in fiscal 2003 toward Network Associates Coliseum debt and final construction costs associated with the arena. The city's overall debt burden, including the pension obligation bonds, is very high and remains one of the city's significant credit weaknesses. Total overlapping debt is at $4,646 per capita and 7.6% of true value. Oakland's capital improvement plan (CIP) for fiscals 2002-2006 totals $163 million, but there are no plans to issue additional bonds to finance the plan as the city employs an aggressive pay-go approach to its CIP. The city's pension override tax is expected to have collected approximately $46 million in fiscal 2003 which exceeds debt service on the pension obligations bonds of $32.9 million. Surplus collections are maintained in the retirement fund, which currently has a balance of approximately $30 million. The pension tax override will alleviate the general fund of having to finance the costs associated with the pension liability.