Fitch Rates Alabama's $62.2MM GOs 'AA'.

NEW YORK -- Fitch Ratings assigns an 'AA' rating to the State of Alabama's $62.2 million general obligation (GO) bonds, series 2006. The bonds are expected to sell competitively on Feb. 9 and will be due Feb. 1, 2008-26. Fitch also affirms Alabama's $456.8 outstanding GO bonds at 'AA'.

Alabama's 'AA' credit rests upon debt levels that do not over-burden resources, a diversifying economy, strong spending control powers, and substantial fund balances that include the Alabama Trust. Challenges include a fund structure constrained by earmarking of revenues, replacement of vanishing non-durable manufacturing jobs and low wealth measures. Pensions are well-funded and net tax supported debt of nearly $2.5 billion amounts to a lower moderate ratio of 2.1% of personal income.

A constitutional amendment is required to authorize GO debt. Accordingly, after this issue less than one-fifth of the $2.5 billion tax-supported debt will be GO. The remainder is from various authorities, backed either by lease payments or specific taxes. All debt, including leases, must be approved by the state legislature and a central division of debt management coordinates accounting and recordkeeping. The bonds offered, which carry a full faith pledge pursuant to a constitutional amendment, also have a pledge from the Alabama Capital Improvement Trust Fund, funded by part of the state's oil and gas royalties.

Alabama's economy, long dependent on manufacturing, has grown slower than the nation over the past decade, as non-durable manufacturing declined, especially textiles and apparel which now employ just 36,800 compared to nearly 90,000 one decade prior. Meanwhile, the state has benefited from impressive growth in higher-paying durable sectors such as transportation equipment, which now employs over 45,000, and aerospace, which employs 11,400. The state is home to several foreign owned auto assembly plants and numerous suppliers; the Huntsville area has also attracted significant research and development jobs. The state lost nearly 3% of jobs during the recent recession, about twice the national loss. Recovery began with a 2004 gain of 1.4% employment, although 2005 slowed a bit with December employment up 0.9% from one year prior. Alabama's unemployment rate of 3.5% in December was well below the national rate of 4.9%. Both education levels and wealth measures remain comparatively low. Per capita personal income of $27,630 is 84% of the U.S., ranking 41st among the states.

Alabama's finances are characterized by a broad array of taxes, including sales, income, and property, mostly dedicated for specific purposes. The general fund is small, with separate funds for education, Medicaid, transportation, and welfare. Strengths include the requirement that the governor prorate appropriations to ensure no deficits are incurred and the Alabama Trust Fund, which had a principal balance of about $2.5 billion at the close of fiscal 2005. The trust fund was initially capitalized with proceeds from offshore lease sales in the 1980's, and it still receives portions of oil and gas royalty payments to the state. The trust capital may only be spent by constitutional amendment, and income flows to the general fund; recent carve-outs dedicated portions of the income for local government projects, the environment, and senior services. The trust fund was also used to create an education rainy day fund, which was partially used in fiscal 2003 and now holds $108 million.

Following a difficult period earlier in the decade, Alabama's finances improved in fiscal 2004 and 2005. Continuing general fund revenues grew 17.5% in fiscal 2005, and income tax revenues, which flow to the larger education fund, were up 16%, pressing the education fund cash balance to $587 million (or nearly 12% of revenues). The general fund cash balance was $214 million, or nearly 15% of revenues. To date, general and education fund revenues for fiscal 2006 are exceeding estimates. The governor has proposed tax relief in his fiscal 2007 proposal, including a modest sales tax holiday and a more significant cut in the income tax to be phased in over five years, ultimately costing $233 million. The governor has also proposed using $500 million of the previous year's surplus for capital spending on K-12 schools.

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