Fitch Rates Arizona Transportation Board's $68MM GANs 'AA'; Outlook Stable.

NEW YORK -- Fitch Ratings assigns an 'AA' rating to the $68 million Arizona Transportation Board (the board) Grant Anticipation Notes (GANs) Series 2008A, which are expected to sell on or about Dec. 10, 2007 via negotiation by a Citigroup-led syndicate. The GANs mature from 2011 through 2014. In addition, Fitch affirms the underlying 'AA' rating on the board's $282.9 million of outstanding GAN's. The Rating Outlook is Stable. A portion of the outstanding notes are rated 'AAA' based on the enhancement provided by municipal bond insurance policies issued by AMBAC Assurance Corp. and MBIA Insurance Corp., both of which have insurer financial strength ratings of 'AAA' from Fitch Ratings. Proceeds are expected to be used to finance portions of the construction costs of certain controlled access highways in Maricopa County, and may also be used for construction costs of other controlled access highways to the extent grant agreements are executed with the Federal Highway Administration. Total costs of the various projects will be funded through a combination of state and federal sources.

The GANs are special obligations of the board. The Arizona Department of Transportation (ADOT) operates and administers the state highway system under the policy directives and debt-issuing authority of the board. Debt service on the notes is payable from federal-aid revenues under grant agreements between ADOT and the Federal Highway Administration (FHWA) related to each GAN series. Since this contractually establishes a sum sufficient debt service payment stream, the board has broadened the definition of pledged revenues to include all federal-aid revenues received by ADOT and, to the extent necessary, certain State Highway Fund (SHF) and Regional Area Road Fund (RARF) revenues.

Fitch's 'AA' rating reflects the long-established track record of federal transportation funding and an additional notes test which allows for new note issuance only if FHWA grant coverage of debt service is at least 1.5 times (x) in each year during the current authorization period and 3.0x thereafter. The rating also reflects the fact that debt service is not subject to appropriation action by the state, a backup pledge of SHF and RARF funds, and the notes' short 6-year maturity which helps limit exposure to federal surface transportation program reauthorization risk.

Similar to other debt programs' leveraging of federal transportation funds, there is no debt service reserve fund. However, this is offset to some degree by ADOT's covenant to convert advanced construction funds in the amount of debt service at the beginning of each federal fiscal year and that such conversion will be the first authorization of funds legally available. This covenant in effect establishes debt service as the first priority in the flow of federal funds.

A key risk for all grant anticipation revenue vehicle (GARVEE) debt is the potential for significant changes in federal transportation funding policy with each new authorization period. Interruption in the flow of federal transportation funding is highly unlikely given the broad-based political support for the program. However, the most recent multi-year reauthorization of the federal surface transportation program was significantly delayed. The Transportation Equity Act for the 21st Century (TEA-21) expired on Sept. 30, 2003 without a successor multi-year authorization, although 12 short-term extensions were passed. The Safe, Accountable, Flexible, and Efficient Transportation Equity Act- A Legacy for Users (SAFETEA-LU) took nearly two years to enact. The 6-year note maturity for this series and 12-year maturity for previously issued notes expose noteholders to one federal funding reauthorization. In the near term, federal transportation funding may be less than authorized levels under SAFETEA-LU due to Highway Trust Fund resource constraints. In Fitch's view, however, potential federal transportation funding constraints and reauthorization risk are sufficiently hedged at the 'AA' rating level by 2007 federal aid coverage in excess of 4.8x maximum annual debt service and by the backup pledge of SHF and RARF revenues.

The board sets policy for ADOT and has the authority to issue bonds and notes to finance highway projects, including GANS. ADOT was established by state legislation in 1974 through the combination of the Arizona Highway Department and the State Department of Aeronautics. ADOT consists of the intermodal transportation, motor vehicle, transportation planning, public transportation, and aeronautics division. Highway system design, construction, and maintenance are the responsibility of the intermodal transportation division. ADOT's capital budget and highway development plans are approved by the board. Chief administrative officers of ADOT include the director, deputy director, chief of staff, and chief financial officer.

Similar to other Arizona state agencies, ADOT and the board are subject to periodic sunset and are scheduled to terminate in 2008. However, the state's sunset laws provide that if the statutes pertaining to ADOT and its relevant fees and taxes are repealed, the provisions of the statutes would remain in full force and effect until any outstanding debt payable from the state highway user revenue fund (HURF) or RARF have been fully paid. These provisions and the high coverage on HURF and RARF bonds provide considerable comfort that adequate resources will be available to service the GANs even if this scenario were to play out. Fitch considers the dissolution of ADOT an extremely remote possibility. Preliminary discussions with legislators in advance of the 2008 review indicate no contemplated changes to the Department's legal status.

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