Fitch Rates Kentucky Asset/Liability Commission's $247.7MM Floating Rate Notes 'AA-'.

NEW YORK -- Fitch assigns an 'AA-' rating on the Kentucky Asset/Liability Commission's (ALCo) approximately $247.7 million general fund floating rate project notes, consisting of $100.9 million in 2007 series A notes and $146.8 million in 2007 series B refunding notes. The notes are expected to

The Commonwealth of Kentucky's debt is primarily in the form of lease rental bonds, requiring appropriation. The commonwealth's 'AA-' lease rental debt rating recognizes the well-established mechanism for lease financing, highlighted by automatically renewable leases, and a long history of prompt executive actions to address potential financial imbalances, which are countered by successive high debt authorizations and a manufacturing-focused economy that has offset economic expansion. The commonwealth appears successful thus far in absorbing the effects of a 2005 tax reform and modernization measure.

Favorable revenue performance bolstered the commonwealth's general fund in fiscal year 2006. Led by sales and corporate income taxes, fiscal year 2006 revenues exceeded expectations by $138.8 million, swelling the general fund undesignated balance to $681 million, or 8.1% of fiscal year 2006 revenues, its highest level since fiscal year 2002. In a planned effort to manage the fiscal effects of the tax reform, fiscal years 2006-2008 balanced budget relies on use of the general fund balance, along with other fund transfers and appropriation lapses, and continues to control expenditures, especially in Medicaid. The enacted budget estimated an ending fiscal year 2008 undesignated general fund and budget reserve balance of $152.9 million or 1.8% of estimated revenues. Since budget enactment, the governor made an additional $112.5 million transfer to the reserve from a portion of the fiscal 2006 surplus. In late January 2007, the state's consensus forecasting group revised upward, by approximately $356 million over the budget act, the official general fund revenue estimates for the biennium and revenue growth of 2.8% and 3.4% is now expected for fiscal year 2007 and fiscal year 2008, respectively. The revision was primarily due to the expectation that corporate income taxes will again exceed original estimates. The funding level for the Kentucky Employees Retirement System was 61.5% as of June 30, 2006, down significantly from 2002. Separately, 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.

Kentucky's economy is improving slowly, contributing to increasing state revenues. 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 nation expansion of 1.7% and 1.8%, respectively. Through March 2007, employment was up 0.7% over a year ago; approximately half the U.S. rate. Despite growth, per capita personal income over the last 10 years has consistently been 82% of the U.S. average for this measure and currently ranks 46th among the states.

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 agreement is automatically renewable. Proceeds from this issuance will, among other purposes, be credited to the state's Petroleum Storage Tank Environmental Fund, finance a portion of the Louisville Arena project, and refund certain outstanding Project 79 and Project 85 revenue bonds of the State Property and Buildings Commission. Prior to this issue, Kentucky's total net tax supported debt approximates $5.5 billion, which equals a moderate 4.4% of 2006 estimated personal income.

The series A notes will be due Nov. 1, 2007-2027 and the series B notes mature Nov. 1, 2007-2025 and will be optionally callable on dates to be determined. The notes are floating rate and structured as long-term par bonds with a coupon that adjusts and pays quarterly based on a percentage of three-month LIBOR plus a fixed spread to be set on the pricing date. The state will enter into a matching variable to fixed rate swap agreement. The state has appropriated note principal and interest through the biennium ending June 30, 2008.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.