Fitch Rates Kentucky State Property & Buildings Commission's $270.66MM Revs, Proj No.

NEW YORK -- Fitch Ratings has assigned an 'AA-' rating to the Kentucky State Property and Buildings Commission's (SPBC) approximately $270.66 million revenue bonds, Project No. 88. The bonds are expected to sell competitively on Oct. 30. Fitch has also affirmed the 'AA-'

The Commonwealth of Kentucky's debt is primarily in the form of lease rental bonds, requiring appropriation. The commonwealth's 'AA-' rating on most state appropriation bonds recognizes the well-established mechanism for lease financing, highlighted by automatically renewable leases, and broader credit characteristics. Such characteristics include a long history of prompt executive actions to address potential financial imbalance, countered by successive high debt authorizations and a weakening manufacturing sector that has offset broader economic expansion. To date, the commonwealth appears successful in absorbing the effects of a 2005 tax reform and modernization measure.

Favorable revenue performance bolstered further the commonwealth's general fund in fiscal 2006, bringing the ending undesignated balance to $681 million, or 8.1% of fiscal 2006 revenues; the highest level since fiscal 2002. At the end of fiscal 2007, or midway through the biennium, the general fund enjoyed an estimated budgetary surplus of $138 million, following adjustments, as receipts were 2.4% higher than fiscal 2006. In a planned effort to manage the fiscal effects of the tax reform, the current balanced budget relies on use of the general fund balance, along with other fund transfers and appropriation lapses, and seeks to control expenditures, especially in Medicaid. Since budget enactment, the governor made an additional $112.5 million transfer to the reserve from a portion of the fiscal 2006 surplus, bringing its balance to $231.5 million or 2.7% of fiscal 2007 revenues.

The commonwealth's consensus forecasting group recently released its preliminary forecast. Total general fund growth is anticipated to slow in fiscal 2008 to 1.1%. If the forecast holds, revenues would be nearly $100 million short of budgetary estimates, yet the commonwealth estimates ending the biennium with $240.4 million, or 2.8% of estimated fiscal 2008 revenues in combined undesignated and budget reserve fund balances. Through the first quarter of fiscal 2008, general fund receipts were 1.5% higher than fiscal 2007, with sales tax collections up 3.5%.

The commonwealth's economy continues its gradual expansion, contributing to increasing state revenues, although the most recent growth has been sluggish. Between 2000 and 2003, employment in the state declined 2.3%, which was more than the national rate of job loss. In 2004, the economy began to recover and posted gains of 1.4% in 2005 and 1.1% in 2006, versus the national expansion of 1.7% and 1.8%, respectively. Through September 2007, employment was up only 0.3% over a year ago, while the U.S. rate of increase was 1.2%. Manufacturing employment, which has an above-average presence, continued its downward trend, as jobs were down 2.1% in September 2007 compared to one year ago. Meanwhile, the professional and business services and financial activities sectors both posted an encouraging 2% growth rate over the same period. Kentucky's per capita personal income over the last 10 years has consistently been just over 80% of the U.S. average and currently ranks the commonwealth 46th among the states for this measure. Prior to this issue, total net tax supported debt approximates $5.3 billion; a moderate 4.3% of 2006 personal income.

Kentucky has long used special agencies for its financings, which for capital purposes depend on biennial legislative appropriations for security, and has well-established policies and procedures that recognize such obligations as debt. Although payment is subject to future legislative biennial budget appropriations, the securing financing/lease agreement is automatically renewable. The funding level for the Kentucky Employees Retirement System was 61.5% as of June 30, 2006, down significantly from 2002. The governor has created a Blue Ribbon Task Force to study ways to meet the Commonwealth's pension liabilities and Other Post-Employment Benefits (OPEB) obligations.

The Project No. 88 bonds primarily refund notes of the Kentucky Asset/Liability Commission and finance various new capital projects, among other purposes. The bonds are due November 1, 2008-2027 with bonds due November 1, 2018 and thereafter being callable.

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