Fitch Rates Missouri's $124.3MM Refunding COPs 'AA'.

NEW YORK -- Fitch Ratings assigns an 'AA' rating to the State of Missouri's $124.315 million refunding certificates of participation (State of Missouri, lessee), series A 2005, scheduled to sell competitively on March 17. Fitch also affirms the 'AAA' rating assigned to

The certificates are payable as a lease obligation of the State of Missouri, subject to annual legislative appropriations. As a remedy for default or non-appropriation, the trustee may take possession and re-let or sell the leased projects.

The 'AA' rating reflects Missouri's conservative approach to debt and long record of balanced operations, as well as strong lease provisions and the essential nature of the projects (three psychiatric hospitals and one maximum security correctional center). Base rentals paid by the state, pursuant to an annually renewable lease purchase agreement, provide for debt service on the certificates plus additional amounts to operate and maintain the facilities. The payments are subject to annual appropriation by the Missouri legislature. In the event of non-appropriation, the lease will terminate and the state will have no obligation to make payments after the end of the fiscal year.

Lease provisions are strong. The state covenants to request annually an appropriation from the Missouri legislature to fund rental payments sufficient to pay debt service on the certificates. Abatement is not permitted. The state has a historical record of timely budget adoption, and the certificate debt service payment is due late in the state's fiscal year.

The state's 'AAA' general obligation bond rating reflects superior bondholder security derived from Missouri's conservative approach to debt, both in amounts owed and in provision for repayment, as well as from its long record of well managed and balanced financial operations. The state consistently has reduced expenditures to stay within available resources. Significant spending reductions have been necessary to maintain balance in recent years. Liquidity is ensured by the budget reserve fund, which had a balance of $445 million at June 30, 2004.

In December 2004, the state revised its projection of revenue growth for fiscal 2005 from 2.3% to 3.8%, largely due to a reduction in the amount of refunds the state expects to pay during the fiscal year. Revenues are behind estimates year-to-date, with corporate income tax strong but sales tax lagging. If the growth does not improve, the governor has the right to withhold funds to achieve balance.

The governor's fiscal 2006 proposed budget includes no new taxes and large cuts in spending, particularly for Medicaid. Revenues are projected to increase by 3.1%, with growth restrained by the complete phase-out of the estate tax and the impact of the transportation ballot initiative Amendment 3. Amendment 3, approved by voters in November 2004, will apply all state motor vehicle sales tax revenue to transportation by fiscal 2009 and move additional costs to the general fund. The reallocation of revenue and expenses in fiscal 2006 is expected to lower general fund collections by about $30 million and increase general fund costs by about $32 million.

The Missouri economy is broad based, with a profile very similar to that of the nation. Missouri has lagged the U.S. in the recent recovery and has not regained its prerecession employment peak. After three years of decline, total employment showed a 0.5% gain in 2004, compared with 1.1% for the nation, and grew 0.9% in January 2005, compared with the same month in the prior year. National employment grew 1.6% in this period. January unemployment, at 6.0%, was well above the 5.2% U.S. rate. Personal income per capita for 2003 was 93% of the U.S., ranking it 28th of the states.

The certificates will fully refund four separate series of certificates, issued from 1994-1999, under one new resolution. The state acts through the Office of Administration, Division of Design and Construction, on behalf of the Department of Mental Health and the Department of Corrections (the lessee) with four separate ground leases. As part of the refunding, all lessors have assigned rights under the ground leases and the leases to the trustee.

The certificates will be due June 1, 2006-2019 and are subject to prepayment on June 1, 2011 and thereafter.