The 'SP-1+' rating on Oakland, Calif.'s TRANs reflects:

• The city's strong underlying general credit characteristics; and
• Strong TRANs debt service coverage at segregation dates and final maturity, provided by net general fund cash balances and other money that could be borrowed in the event of a debt service deficiency.

The notes are secured by taxes, income, revenue, cash receipts, and other money received by the general fund for fiscal 2003-2004.

The city will set aside an amount equal to 50% of the note principal by May 31, 2004 and June 30, 2004, plus an amount equal to accrued interest in June 2004. Projected net pledged revenues cover overall debt service by an adequate 1.24x. In case of a shortfall of revenues, the city has identified $29.24 million in other legal available resources it could borrow if necessary. This alternative liquidity boosts coverage to 1.61x. The city projects receipts to increase by 3.4% in fiscal 2003-2004 and disbursements to increase by 2.24%. City projections tend to be reliable, although for fiscal 2003 actual coverage (1.50x) of note principal and interest was somewhat below projected coverage (1.68x) due to the sluggish economy and the under performance of certain important and economically sensitive city revenues. When including the city's sources of alternative liquidity for fiscal 2003, coverage was quite strong at 2.07x.

Major receipts for the city include property taxes (21.3% of total receipts), utility users' taxes (10.3%), business license taxes (8.3%), and sales taxes (7.1%). Of these receipt sources, sales, business license, and fines and penalties were below 2003 projections by 12%, 3.3%, and 9.5%, respectively. Property tax and utility users tax proved to be more stable revenue sources with cash receipts show moderate positive variances of 4.7% and 2.1% respectively. Property tax related growth is attributed to very strong assessed value (AV) trends that were up a healthy 8% in 2003 compared to 2002. Utility users tax increased as a result of slightly increased energy prices and elevated demand for telecommunication services a trend that is expected to continue into fiscal 2004.

Cash flow projections for fiscal 2004 appear prudent anticipating only incremental growth of property tax receipts of 2.5%. This growth rate is at the low end of historical average growth rates. Utility users' tax related revenue is somewhat optimistic forecasting growth of 5.0% in fiscal 2004 due to continued strong demand for telecommunication services. Other economically sensitive revenue sources are projected to grow at conservative rates. Sale taxes are anticipated to grow at just 2.0% and business license taxes are forecast to grow at just 1.0%. Other significant changes in cash receipts include a 34% increase in fines and penalties from fiscal 2003 to fiscal 2004, reflecting moderate growth increases and new/modified fines such as citation increases and other parking fees and fines. Fines and penalties make up a total of 2.7% total anticipated receipts in fiscal 2004. Miscellaneous revenues are projected to decrease 16.5% due to the city's conservative treatment of motor vehicle license fee (MVLF) backfill assumed at just 50% for fiscal 2004. In addition, the city excluded various one-time revenues, which are included in this line item. Operations and maintenance (O&M) expenses are projected to increase $5 million due to about $8 million in capital projects, which will be offset by roughly $3 million in O&M cuts.

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. According to the fiscal 2002-2003 second quarter revenue and expenditure report the adjusted 2003 budget is balanced with reserves kept intact.

The city's overall debt burden, including the pension obligation bonds, is high and remains one of the city's limiting credit factors. 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 invests its own funds in its investment portfolio, with 56.2% of the operating fund in investments that mature within one year. The city's operating fund portfolio master summary had a balance of $241.6 million as of April 30, 2003. TRAN proceeds, however, will be held by the city in a separate note repayment fund held in trust by a separate third party paying agent, consistent with Standard & Poor's Ratings Services' criteria.

For additional information about the city's general creditworthiness, please see the GO analysis on RatingsDirect.

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 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 8%, respectively. Due to the uncertainty surrounding the state budget the city has conservatively budgeted to only receive the equivalent of 50% of its MVLF backfill. MVLF constitutes 4.2% of the city's budget.