OREANDA-NEWS. Fitch Ratings has affirmed the short-term 'F1+' rating assigned to the credit enhancement program (CEP) sponsored by the California Public Employees' Retirement System (CalPERS).

SECURITY

CalPERS' CEP provides direct and confirming letters of credit (LOCs) and standby bond purchase agreements (SBPAs) for municipal issuers. CalPERS is unconditionally obligated to provide liquidity for any facilities under the CEP program from available short - or long-term assets. The security for the CEP is the investments of the California Public Employees' Retirement System (CalPERS; or the Plan), which is the primary source of liquidity for any draws under the CEP.

KEY RATING DRIVERS

Long-Term Analysis: The 'AAA' long-term rating maintained on CalPERS' CEP is based on Fitch's analysis of the CEP's risk profile; available liquidity; the financial condition of the pension system; sponsor quality; and management.

Internal Liquidity Risk: Fund assets cover the maximum CEP exposure by a wide margin, even with significant discounting of assets. The 'F1+' short-term rating reflects the availability of highly liquid assets that could immediately cover draws on the program.

Low-Risk CEP Profile: CalPERS' CEP obligors include high-quality credits in California and two other states. In addition, the weighted average maturity of the portfolio may not exceed five years.

Short Duration Limits Sponsor Impact: While the credit quality of the state (California general obligation (GO) bonds rated 'A+'/Stable Outlook) is below average relative to other state ratings, and many of the participating employers are not rated by Fitch, exposure to the sponsor and employers is largely offset by the short duration of the CEP relative to the life of the pension liabilities and the current adequate funding level of the pension fund.

RATING SENSITIVITIES

STRONG LIQUIDITY ESSENTIAL: Maintenance of a strong liquid cushion over potential CEP liabilities and benefit payouts is critical to maintaining the current rating level.

CREDIT PROFILE

CalPERS' CEP currently generates additional income for the pension system by providing a total of $427.3 million in credit and liquidity support for four municipal obligors through direct-pay LOCs and/or SBPAs. These facilities, which consist of tax-supported and water/wastewater utility pledges, are scheduled to expire by March 6, 2018 or earlier. While the CEP has a maximum allocation limit of $10 billion, management expects that the program commitments will not exceeds $2.5 billion.

Fitch considers the liquidity available to meet CEP obligations. We reviewed the investments of the PERF, which is the primary fund of CalPERS 15 programs, and the source of funds for any draws under the CEP. This includes a comparison of the Fund's liquid assets available to pay potential CEP liabilities and near-term obligations, as well as any discounting of available assets for potential timing delay.

As of June 30, 2015, CalPERS' PERF investment portfolio totaled $302 billion, a small increase from the $301 billion in the prior fiscal year. This reflects a 2.4% return on investments at fiscal year-end. CalPERS investment policies are designed to allow the system to achieve a long-term total return. Therefore, management's objective is to broadly diversify assets to minimize the effects of short-term losses.

The Fund's liquidity is strong and able to meet the CEP's maximum obligations. Within this portfolio, management maintains an abundance of cash and high-quality, highly rated fixed income investments to fund any draws under the CEP at the maximum $10 billion limit. Based on a three-year historical daily average, liquidity resources, derived primarily from highly rated fixed income securities total approximately $42 billion a day. Furthermore, when Fitch applies stresses that severely discount the market values of total invested assets, system resources are still more than sufficient to satisfy maximum CEP draws on any day and continue making near-term benefit payouts.