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%.