Fitch Rates State of Missouri $50MM GOs 'AAA'.

NEW YORK -- Fitch Ratings assigns an 'AAA' rating to the State of Missouri's $50 million water pollution control general obligation (GO) bonds, series A 2007, scheduled to sell competitively on Nov. 14, 2007. The bonds will mature Dec. 1, 2008-2032, and will be subject to optional

The state's 'AAA' GO 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. Security for general obligations is strong, with the constitution providing that debt service payments be transferred to the sinking fund one year in advance of the required payment. Financial pressures persist, particularly from Medicaid, education, and transportation needs.

Missouri has a cautious approach to debt and a low to moderate debt burden. Net tax-supported debt totals $3.5 billion, equal to 1.8% of 2006 personal income. The state's debt burden has increased in recent years due to significant transportation-related borrowing under voter-approved Amendment 3. Debt retirement is rapid, with 82% of general obligations amortized in 10 years. The state is seeking to fund additional transportation needs through bonding and alternative financing. The state has authorized grant anticipation revenue vehicle (GARVEE) bond financing, and is pursuing privatization of bridge replacement and repair.

Missouri has a history of maintaining fiscal balance through spending restraint. The budget must be balanced, and the governor has constitutional authority to withhold funds to achieve balance. The state faces significant spending pressure in fiscal 2008 and beyond, driven by Medicaid inflation, legislated school funding increases and transportation needs. Fiscal 2007 performance was strong, with general revenue fund collections rising 5.5%, to $8.9 billion. Individual income gains were particularly strong, rising 7% over the prior year; sales and use tax collections rose 2.5%. The year is estimated to have ended with a balance of more than $500 million.

Missouri's consensus revenue forecast projects only modest growth in fiscal 2008 over prior year actual collections. Fiscal 2008 revenue collections are projected to rise 3.3%, to $9.2 billion, with individual income expected to climb 5.2%, while sales and use receipts are expected to rise 1.9%, in spite of the continued phase-in of Amendment 3-related revenue shifts to the transportation fund. The budget as passed includes tax reductions of $161 million. Actual collections through the first quarter of fiscal 2008 show continued strength, up 5.3% from fiscal 2007.

Fiscal year 2008 expenditures are budgeted to grow 6.4% over the prior year, to $8.2 billion. Education spending is rising 3.8%, reflecting the continued, 6-year phase-in of legislated funding increases to address equity needs. Medicaid spending continues to grow, despite a decline in enrollment, with growth driven in part by persistent inflation. Spending for social services, including Medicaid, rises 11.1% in fiscal 2008. Liquidity is ensured by the budget reserve fund, which is fully funded at $536 million as of the start of the fiscal year.

The Missouri economy is broad based, with a profile very similar to that of the nation. Employment and personal income growth have lagged the U.S. during much of this decade. Missouri's employment rose 1.4% in 2006, compared to 1.8% nationally. September 2007 employment is up 1%, versus 1.2% nationally. Missouri continues to show strength in service sector employment growth, with leisure and hospitality up 2.5%, and education and health up 1.9%. By contrast, manufacturing continues a long-term decline, dropping 2.3% in September 2007 compared to last year. Job losses in the sector have been concentrated in transportation equipment; motor vehicle manufacturing employment fell 3.5% in September 2007 year-over-year. Personal income is growing, albeit more slowly than the U.S. Second-quarter 2007 personal income was up 5.3%, compared to 6.4% nationally. Measured by personal income per capita, Missouri ranks 31th among the states, at 92% of the U.S. level.

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