NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following bonds of the State of Minnesota:
-- $85,380,000 State of Minnesota certificates of participation (COPs), series 2014 (legislative office facility project).
The bonds are expected to sell through competitive bid on Aug. 5, 2014.
In addition, Fitch has affirmed the 'AA' rating on the following debt, which is backed by state appropriations and rated one notch below the state's GO rating:
--State general fund appropriation bonds series 2012A, 2012B, 2014A and 2014B;
--St. Paul Port Authority (State of Minnesota Office Building) lease revenue bonds.
The Rating Outlook is Stable.
The bonds are secured by lease rental payments by the state of Minnesota, subject to biennial legislative appropriation.
KEY RATING DRIVERS
--APPROPRIATION RATING LINKED TO STATE: Bond payment is from state legislative appropriations, resulting in a rating one notch below the state's 'AA+' general obligation (GO) rating.
--SOLID ECONOMIC PROFILE: The state's economy is balanced and wealth indicators are positive.
--BELOW-AVERAGE LIABILITY BURDEN: The state's debt levels are moderate, with rapid amortization of GO debt. On a combined basis, the burden of debt and unfunded pension liabilities is below average for a U.S. state. Other post-employment benefit obligations are minimal.
--IMPROVED FINANCIAL POSITION: The state's revenue structure is subject to volatility, and revenue performance in the recovery has been strong following a period of sharp declines. The state relied on non-recurring budget-balancing measures over the course of the recession. However, positive budget variances have allowed for the replenishment of reserves and repayment of deferred school aid.
The rating is sensitive to changes in the state's GO rating, to which it is linked.
Proceeds of the bonds will fund a new office building and associated parking facilities for the state senate. The project, associated with a broader state capitol renovation plan, generated controversy but is now moving ahead. Pursuant to the authorizing legislation, the facility must provide office accommodations for all senators and senate staff who do not have offices in the Capitol building and on-site parking facilities for all members and staff and disabled visitors to senate offices. This offering represents the only expected borrowing for the project. Bonds will have a final maturity in 25 years, with level debt service projected at about $6 million a year following a capitalized interest period through December 2015 (estimated project completion).
The bonds are secured by biennially appropriated payments to be made under a lease-purchase agreement between the state's commissioner of management and budget (as lessor) and the state's commissioner of administration (as lessee). A ground lease between the two parties, with the relationships reversed, covers the site on which the project will be built. The commissioner of administration oversees and manages the administrative functions of state agencies, including facilities management. Minnesota Management & Budget manages state finances, including responsibility for debt management.
The 'AA' rating on the bonds reflects the state appropriation security and is directly linked to the state's 'AA+' GO rating. The certificates evidence proportionate undivided interests in rights to receive rental payments under the lease-purchase agreement. Pursuant to the authorizing legislation, the lease-purchase agreement must not be terminated, except for non-appropriation of funds. Except in the event of non-appropriation, the obligation to make rental payments shall be absolute and unconditional in all events. An event of non-appropriation would trigger an extraordinary mandatory redemption without recourse by the bondholder for additional payment.
Debt service is subject to the risk of non-appropriation and the governor's un-allotment powers. The risk of non-appropriation is inherent in appropriation-backed debt and reflected in the rating below that of the state's GO. In addition, despite historical use of executive un-allotment powers by the state, debt service has not been affected. Fitch would expect an issuer of strong credit quality like Minnesota to continue to protect its debt service obligations.
An order of the commissioner of management and budget for the issuance of the certificates establishes a special legislative office facility certificates account, to which are appropriated each year moneys received as rental payments, from which debt service shall be paid. Deposits will be made into the account May 14 and Nov. 14 in each year in amounts sufficient to pay all principal and interest due on the next succeeding June 1 and Dec. 1. The timing of debt service payments protects against late budget risk.
Minnesota's 'AA+' GO rating reflects the state's moderate liability position, a broad-based economy with above-average wealth levels, and a track record of management that is sensitive to changes in the state's fiscal environment, with regular reviews of revenue forecasts. Additional information on the State of Minnesota's general credit is available in Fitch's press release, 'Fitch Rates Minnesota's $904MM GOs 'AA+'; Outlook Stable', published today and available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria