Fitch Rates Kentucky Turnpike Authority's $200MM Bonds 'AA-' Underlying

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' underlying rating to approximately $200 million Turnpike Authority of Kentucky (the authority) economic development road revenue bonds, 2008 series A. The bonds are expected to be offered through negotiation during the week of July 28. Fitch has also affirmed the 'AA-' rating on the $5.0 billion of appropriation bonds previously issued by Kentucky agencies. The Rating Outlook is Negative.

The Commonwealth of Kentucky's (the commonwealth) debt is primarily in the form of lease rental bonds, requiring appropriation. The commonwealth's 'AA-' lease appropriation rating on most state appropriation bonds, including the road revenue bonds, recognizes the well-established mechanism for lease financing, highlighted by automatically renewable leases, and broader credit characteristics. The Negative Outlook reflects plans to continue to deplete fund balances and virtually drain the budget reserve trust in the new biennium that began July 1, 2008. Further, Fitch remains concerned about weakening pension funding levels and the commonwealth's rising debt position as an additional $1.65 billion in debt has been authorized for the biennium.

Road fund bonds are secured by payments appropriated by the commonwealth under a lease between the authority and the transportation cabinet. The bonds are paid from resources of the road fund; principally fuel, motor vehicle usage, license, and privilege taxes and fees. Unaudited revenues available for lease-rentals grew 1.3% in fiscal 2008, inclusive of legislative changes to tax and fee rates and to revenue-sharing requirements, and covered lease-rental obligations 6.2 times (x) before and 3.4x after operating and maintenance costs. The motor vehicle usage tax, imposed on new or used motor vehicles transactions, remains the largest contributor to available revenues, at 41% of receipts, but was down 1.3% in fiscal 2008. Primarily reflecting motor fuel rate increases, total fiscal 2008 road fund revenues grew 3.0%, prior to revenue-sharing, but were 1.6% below estimate.

Kentucky had enjoyed favorable revenue performance generally since the economic downturn earlier this decade. Such performance bolstered the commonwealth's general fund in fiscal 2006, bringing the ending undesignated balance to its highest level since fiscal 2002. To manage the fiscal effects of earlier tax reform, the fiscal 2007-2008 biennial budget relied on use of the general fund balance, along with other fund transfers and appropriation lapses, and sought to control expenditures, especially in Medicaid. Following a budgetary surplus at the end of fiscal 2007, revenue growth for fiscal 2008 slowed and the commonwealth's consensus forecasting group revised expectations downward on three occasions since August 2007. Total general fund collections grew 1.1% in fiscal 2008 and were 0.3% above revised estimates - owing to individual income tax receipts. Budgetary balance is largely achieved in the current 2009-2010 biennial budget through the depletion of undesignated and budget reserve trust balances. Total reserve balances at the end of the biennium are expected to be just 0.3% of fiscal 2010 general fund revenues, down from 3.2% estimated for fiscal 2008.

The commonwealth's economy continues its gradual expansion. 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 from the end of 2003 to 2007 employment grew 4.8% versus the national rate of expansion of 5.9% over the same period. Employment growth continued steadily through the first several months of calendar year 2008, but as of June 2008 job growth was essentially flat compared to its level one year ago. The U.S. employment rate turned negative, down 0.1%, over the same period. Manufacturing employment, which has an above-average presence, continued its downward trend, led by losses in the motor vehicle subsectors. Year-over-year gains were strongest in the government (2.8%), construction (1.6%) and trade, transportation, and utilities (1.0%) sectors. 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 $5.8 billion; representing a moderate 4.4% of preliminary 2007 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. The securing lease agreement is automatically renewable and requires the transportation cabinet to seek legislative appropriations sufficient for debt service as long as the bonds are outstanding. The funding level for the Kentucky Employees Retirement System was 58.7% as of June 30, 2007, down significantly from 2002. A special, June legislative session brought enactment of pension reform legislation, which, among a variety changes, requires more years of service and higher retirement age for certain workers, for improving the financial position of the state's pension systems.

The bonds will primarily finance public highway projects and refund a portion of previously issued notes of the Kentucky Asset/Liability Commission. The bonds are due July 1, 2013-2028 with optional redemption provisions to be determined.

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