Fitch Rates Arizona Transportation Board GANs 'AA'.

NEW YORK -- Fitch Ratings assigns an 'AA' rating to the $116,430,000 Arizona Transportation Board (the board) grant anticipation notes (GANs) series 2004B, which are expected to sell on or about October 25 via negotiation by a Bear Stearns and Co., led syndicate. The GANs mature beginning on July 1, 2008, through 2016. In addition, Fitch affirms the 'AA' rating on the board's $308,585,000 of outstanding GANs. The Rating Outlook on the board's GANs 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 GANs 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 and Regional Area Road Fund (RARF) revenues.

The absence of other debt leveraging against federal highway revenues, the stability of this revenue source to ADOT, a stringent additional notes test, and the fact that debt service is not subject to appropriation action by the state ensure that pledged revenues will remain a very strong security for note holders. Covenants by the board and ADOT provide additional protection and include: commitments to obligate funds for debt service as soon as practicable after the beginning of the federal fiscal year; not obligating funds for any other purpose until funds for debt service have been obligated; and, conversion of another advance construction project to a regular federal-aid project to provide sufficient obligation authority for debt service on the notes (in the unlikely event that no new obligation authority is available due to a delayed budget or multi-year reauthorization bill).

Although the Transportation Equity Act for the 21st Century (TEA-21) expired on September 30, 2003, without a successor multi-year authorization, Fitch assigns a low probability of a long-term interruption in the flow of federal transportation funds. A series of short-term extensions of the program have been in place since Oct. 1, 2003, the most recent of which expires on May 31, 2005. In addition, even assuming the highly remote possibility that the federal highway program is unauthorized, states have obligated balances that can be drawn down to continue the flow of federal dollars during such authorization lapses. ADOT is estimated to have over $400 million in such balances, or approximately 78% of total debt service on the 2004B and all outstanding notes. Given the requirements of the GAN indenture, ADOT would be required to use all of these funds for debt service, assuming no additional federal funding.

Additional multi-month extensions of the federal surface transportation program are possible as the contents of a multi-year bill continue to be debated by Congress. Based on indications to-date, major programmatic changes, that would adversely affect these notes, seem unlikely in the immediate successor federal surface transportation program to TEA-21. In addition to transferring funds from certain federal-aid construction sub-accounts and the Note Proceeds Account, the state treasurer can offset any remaining deficiencies in federal-aid funds by transferring any other moneys in the State Highway Fund, except those pledged to highway revenue bonds and moneys in the Regional Area Road Fund (RARF) construction account to the extent GAN proceeds were used to finance projects eligible under the fund.

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.