Fitch Rates Alabama Public School and College Authority Refunding Bonds 'AA+'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA+' rating to the following bonds of the Alabama Public School and College Authority (the Authority):

--$51.27 million capital improvement pool QZAB bonds, series 2011-A;

--$30.65 million capital improvement pool refunding bonds, series 2011-B.

The bonds are expected to sell via competitive bid on or about May 17. Fitch also affirms the 'AA+' rating on $930 million outstanding capital improvement pool and qualified school bonds.

The Rating Outlook is Stable.

RATING RATIONALE:

--Although not a general obligation pledge, pledged revenues include major state revenue sources, including the sales tax, and finance a major state responsibility - K-12 and higher education.

--Pledged revenues provide ample coverage of debt service requirements both on an annual and maximum annual basis.

--Financing of education is centralized at the state level.

--State financial operations are supported by a constitutional requirement to balance the budget with across-the-board appropriation reductions if revenues fall short; debt service excluded.

--The trend in Alabama's economy is toward more diversification although it retains a sizeable manufacturing base. There is an on-going positive shift from low paying textile and apparel jobs to higher paying durable subsectors including automobile and aerospace manufacturing.

KEY RATING DRIVERS:

--Maintenance of ample debt service coverage.

--Changes in the credit quality of the state of Alabama including, continued economic growth and diversification and a continuation of its conservative approach to financial management

SECURITY:

Limited obligation payable from pledged revenues, each bond series is subordinate to prior issues; once issued, the 2011 A & B bonds will occupy the 13th lien position as far as the pledged revenues.

RATING SUMMARY:

The rating reflects ample coverage of debt service by pledged revenues, the strength of the pledged revenues, which include major state revenue sources, and the core nature of the activities being financed - K-12 and higher education, as well as the strong budget controls exhibited by the state and its overall strong credit quality.

The Authority provides capital financing for public education in Alabama, and, with $2.2 billion of debt outstanding, is the most active debt issuer of the several authorities that issue debt in the state. The Authority members are the governor, the state superintendent of education, and the director of finance, indicating the importance of this financing mechanism and the role of the state in education.

The bonds are a limited obligation of the Authority payable from pledged revenues, which include statewide sales, use, lease, utility gross receipts and utility service use taxes. Pledged revenues not needed for debt service are deposited into the state Treasury to the credit of the Education Trust Fund (ETF), a special fund of the state that is the largest operating fund into which taxes and revenues are deposited. The ETF funds K-12 and higher education as well as smaller education, health, library and other programs. Each bond series has its own separate lien on pledged revenues subordinate to prior issues; once issued, the 2011 A & B bonds will occupy a 13th lien position in respect to the pledged revenues. Given the ample coverage of debt service by pledged revenues, discussed further below, the subordinate status is not a rating factor.

While the authority bonds are not general obligations of the state, they do reflect the state's general credit quality as pledged revenues include major state revenue sources and finance a central state responsibility. Alabama has extensive earmarking of taxes and uses special obligations for nearly all of its capital needs. The general fund is minor in state operations as is debt issued against it. State general obligation bonds are rated 'AA+' by Fitch based on the state's longer term trend toward a more diversified economy despite a severe downturn in manufacturing, strong spending controls which contribute to balanced operations, and manageable debt levels.

Pledged revenues provide ample coverage of debt service requirements both on an annual and maximum annual basis. Unaudited fiscal year 2010 revenues of $2.2 billion, provide 7.5 times (x) coverage of maximum annual debt service, including the new bonds. Revenues increased 5.2% in fiscal 2010 after declining 11.2% in fiscal 2009. State financial operations, including the ETF, benefit from strong spending controls, with a constitutional requirement to make across-the-board appropriation reductions, called 'proration,' when a deficit is projected in one of several funds. Debt service is not subject to proration. This device has been implemented several times, including in fiscal year 2009, when weak revenue performance necessitated a 17.9% reduction in education appropriations and again in fiscal year 2010, when a 9.5% proration was declared. By depleting its education rainy day fund, the state was able to limit the fiscal 2009 reduction to 11%. In an attempt to minimize the unpredictability of mid-year reductions in education funding, the state recently enacted legislation to create a new budget stabilization fund for education that will be used to offset future proration. The legislation limits future education appropriations to the 15-year rolling average of ETF revenues and deposits any excess revenues into a new ETF budget stabilization fund, after first repaying the fiscal 2009 draw on the rainy day fund.

The series 2011-A bonds are being issued as Qualified Zone Academy Bonds to make loans to participating local boards of education for the rehabilitation, repair, and equipping of qualifying public school facilities. The Authority is expected to receive interest subsidy payments from the U.S. Treasury equal to 100% of interest payable on the bonds. Series 2011-B is a current refunding of outstanding debt for debt service savings. The Authority issues bonds to provide loans to local school boards for capital projects under a pooled approach that allows capital funds of the state to be leveraged rather than being limited to support pay as you go financing. The Authority also issues capital outlay bonds for capital improvements to public schools and institutions of higher education with proceeds considered grants to recipients. Overall debt levels in the state are low-to-moderate, with tax supported debt equal to 2.3% of 2009 personal income.

Litigation between the state and JP Morgan Chase over the exercise of swap options has been settled largely in the state's favor, with the state obligated to make a $19 million payment to JP Morgan Chase against a termination payment demand of between $60 million and $120 million. The state made the payment from the ETF.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the report 'Tax-Supported Rating Criteria', this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 16, 2010;

--'U.S. State Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564546

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