TEXT - Fitch rates Minnesota's appropriation bonds 'AA'
Nov 9 - Fitch Ratings has assigned an 'AA' rating to the following State of Minnesota bonds: --$55,005,000 state general fund appropriation refunding bonds, taxable series 2012A; --$599,220,000 state general fund appropriation refunding bonds, tax-exempt series 2012B. The bonds are expected to sell through negotiation the week of Nov. 12, 2012. The Rating Outlook is Stable. SECURITY The bonds are secured by biennial legislative general fund appropriations for debt service. KEY RATING DRIVERS --APPROPRIATION RATING LINKED TO STATE: Bond payment is from state legislative appropriations, resulting in a rating one notch below Minnesota's 'AA+' general obligation (GO) rating. --SOLID ECONOMIC PROFILE: Minnesota's economy is balanced and wealth indicators are positive. --BELOW-AVERAGE LIABILITY BURDEN: The state's debt levels are on the lower end of the moderate range, with rapid amortization of GO debt. On a combined basis, the burden of debt and unfunded pension liabilities is below average for states rated by Fitch, and other post-employment benefit obligations are minimal. --IMPROVED FINANCIAL POSITION: Minnesota's revenue structure is subject to volatility, and revenue performance in the recovery has meaningfully improved following a period of sharp declines. The state relied on non-recurring budget-balancing measures over the course of the recession, including with the budget for the current biennium, but positive budget variances have allowed for the replenishment of reserves to full policy funding levels and reduced projected gaps to be addressed for the biennium that begins July 1, 2013. CREDIT PROFILE Minnesota's 'AA+' GO rating reflects the state's broad-based economy with above-average wealth levels, its sound debt profile, and a track record of management that is sensitive to changes in the state's fiscal environment, with regular reviews of revenue forecasts. Recent budgets have included a large amount of non-recurring measures; however, financial results since the recession are significantly improved, with spending under budget and revenues exceeding estimates. Proceeds of the current sale will refund $757 million in tobacco settlement-secured debt issued in 2011 for budget relief. The goal of the refunding is to achieve debt service savings. The bonds are secured by a continuous state general fund appropriation for debt service; the appropriation will remain in place for the life of the bonds unless the legislature affirmatively chooses to repeal it. Although the bonds will pay off outstanding tobacco securitization bonds, the appropriation will be from the state's general fund and the security will not be linked to tobacco-related receipts. As such, the rating is directly linked to the state's GO rating. The state has not directly issued appropriation-backed bonds before, but has supported agency debt secured by legislative appropriations. When the legislature authorized deficit borrowing as part of balancing solutions for the current biennium they provided the option for either a tobacco settlement securitization or issuance of state appropriation-backed bonds. However, the authorization for appropriation bonds was contingent on receiving a state supreme court ruling that the issuance would be constitutional. The state issued tobacco settlement revenue bonds through the newly created Tobacco Securitization Authority to achieve the budget relief in the near term, then began the court process in April of this year. On Oct. 31, 2012, the state supreme court cleared the way for the current transaction by finding that the appropriation bonds are not public debt subject to constitutional limitations on the use of proceeds. The Commissioner of Management and Budget is authorized to issue the general fund appropriation refunding bonds under statute that includes the standing general fund appropriation for debt service. Amounts needed to pay all principal and interest then due and to become due on the next succeeding March 1 and Sept.r 1 will be set aside on Dec. 1 in each year from the state's general fund. The appropriation is subject to repeal by the legislature or unallotment by the governor; in either such event the bonds would be canceled. The risk of legislative repeal of the appropriation is inherent in appropriation-backed debt and reflected in the rating below that of the state's GO. In addition, Fitch notes that despite historical use of executive unallotment powers by the state, debt service has not been affected. Fitch would expect an issuer of the strong credit quality of Minnesota to continue to protect its debt service obligations. For more information on the State of Minnesota's general credit, please see Fitch Research 'Fitch Rates State of Minnesota's $658MM GOs 'AA+'; Outlook Stable ' dated Aug. 2, 2012.
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