Nov 9 - Fitch Ratings has assigned an 'AA' rating to the following State of
--$55,005,000 state general fund appropriation refunding bonds, taxable series
--$599,220,000 state general fund appropriation refunding bonds, tax-exempt
The bonds are expected to sell through negotiation the week of Nov. 12, 2012.
The Rating Outlook is Stable.
The bonds are secured by biennial legislative general fund appropriations for
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
--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.
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
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.