Correction: Fitch Rates Tennessee's $199.4MM GO Refunding Bonds 'AA'.

NEW YORK -- (This is a revised version of a press release issued yesterday and contains amended par amount and sale date information in the first paragraph.)

Fitch Ratings assigns an 'AA' rating to the State of Tennessee's $199.4 million general obligation bonds, refunding series C. The final amount refunded is subject to change. The bonds are expected as early as this week through negotiation with a syndicate led by UBS Financial Services. In addition, the 'AA' rating on $1.14 billion outstanding GO bonds is affirmed. The bonds will mature Sept. 1, 2007-2014. Optional call provisions are to be determined.

The bonds are general obligations and have as security the full faith and credit of the State of Tennessee. Additionally, the state has pledged the proceeds of up to $0.05 of its gas tax, $0.01 of its petroleum products tax, one-half of the proceeds of vehicle registration fees, portions of its sales tax, and its franchise tax. The taxes pledged to debt service and their yield is the base for a debt limit, currently only about one-third used. The state's credit is very well protected by its conservative use of debt, which is exclusively general obligation. Debt is used sparingly, is well structured with rapid amortization, and represents a low burden upon resources.

The state's economy and its increasing reliance on the sales tax have long created cyclical vulnerabilities, but a persistent structural deficit emerged during the past economic downturn. In response to these pressures and expenditure pressures, especially from TennCare, the state passed a sales tax increase that took effect in July 2002. The tax increase and the rebounding economy have restored the budget to its traditional balance. For the 12 months ending July 31, 2004, the general fund is $353.5 million over estimates, which will allow a considerable balance to be carried forward, with some use for one-time expenditures. The overage in collections includes sales tax at $178.5 million and the franchise and excise tax at $113 million over estimates. Tennessee accrues July revenues as the 12th month in its fiscal year. The state's reserve now holds $217 million and is scheduled to increase to $273 million at June 30, 2005, a record high level.

Tennessee began a lottery earlier this year, and proceeds are exceeding estimates. Profits from the lottery are for education and provide scholarships at Tennessee's higher education institutions.

Tennessee continues to work to reduce rapidly growing expenditures from TennCare, the state's Medicaid program. TennCare is beset by the rising cost of health care, especially pharmaceuticals, and numerous consent decrees, which have pushed projected costs to the state up to $2.6 billion in fiscal 2005. Left unchecked, it is estimated that spending will grow to $3.8 million by fiscal 2008, consuming nearly all of the state's revenue growth. The state is pursuing several waivers from the federal government and hopes to make major cost savings, with a goal of holding growth to only $2.8 billion by fiscal 2008. The state's economy has rebounded faster than that of the U.S. as a whole and is beginning to show strength. June employment was up 0.8% from June 2003, led by increases of over 1% in leisure and hospitality, health care, and construction. Job growth was fastest in Knoxville, while in Memphis employment is still below that of 2001. Per capita personal income grew at 2.6% and 3.1% in 2002 and 2003, respectively. Per capita personal income growth exceeded the nation's growth in 2001, 2002, and 2003. Estimated 2003 per capita personal income was $28,445, 90% of the U.S. and ranking 36th among the states.

The state's debt burden is very low. State net tax-supported debt of $1.2 billion is lower than it was in 2000 and is equal to $214 per capita, 0.4% of estimated full value, and 0.7% of personal income. Over the next five years, 35% of the state's bonds are due, and over 10 years, 64% are due, rapid rates of amortization.