Fitch Rates Kentucky Asset/Liability Commission $11MM Project Notes 'A+' Underlying.

NEW YORK -- Fitch Ratings assigns an 'A+' underlying rating to approximately $11.3 million Kentucky Asset/Liability Commission (ALCO) project notes, 2005 agency fund taxable first series, which will sell through negotiation with Citigroup on or about May 25. Proceeds will fund an expansion at the Kentucky department of military affairs' (DMA) Bluegrass Station facility in Lexington, an economic development project. Bonds will mature March 1, 2007-2025.

The 'A+' rating is based on Kentucky's well established mechanisms of lease financing, the financial health and importance to the state of the DMA agency fund that will support debt service, and the state's general credit characteristics. Kentucky has a long history of executive action to address potential fiscal imbalances and to ensure payment of all general fund, road fund, and agency fund leases. All of the state's debt is in the form of lease rental bonds, requiring appropriation.

Debt service on these notes will be paid pursuant to a financing/lease agreement between the finance and administration cabinet, DMA, and the issuer, one of the state's important financing vehicles. ALCO is governed by a board consisting of the secretary of the finance and administration cabinet, the attorney general, state treasurer, and budget director. Appropriated DMA funds will pay debt service.

The state expects that debt service will be covered by increased revenues from a federal lease for the expanded facilities at Bluegrass Station. Risks include the fact that these funds are subject to federal appropriation, and the current federal lease documents provide options for renewal only until 2013. These concerns are offset by ALCO and DMA covenants to seek appropriations for debt service, the state's centralized management in the finance and administration cabinet of all forms of lease rental debt, and the DMA's pledge of all available revenues to meet its financing/lease agreement obligations, subject to the biennial option to take affirmative action not to renew the lease. DMA's total revenues equaled $92 million in fiscal 2004, including restricted and federal funds.

Bluegrass Station, a former army depot closed in the 1989 round of base closures, is managed by DMA as an economic development center in the region. The 46 tenants of the station's 106 buildings now employ 1,700, principally state employees and state and federal military personnel, both uniformed and civilian. Nearly all available rental space currently is leased. A major tenant is the Kentucky Logistics Operations Center, established by Kentucky's adjutant general following the base closure, which supports national guard, reserve, and other military personnel nationwide with vehicle and aircraft parts and clothing distribution facilities. A small branch of the Defense Finance and Accounting Service at Bluegrass Station was recommended for closure by the Department of Defense during the current round of base closures. The station's finances are self-supporting from rental revenues.

Expected to occupy the facilities financed by these note proceeds, the U.S. government would be expanding its substantial presence at Bluegrass Station. The federal government, now responsible for 50% of rentals, would be responsible for 60% of rentals. Special Operations Forces Support Activity (SOFSA) operates their headquarters at Bluegrass Station with 25-30 satellite operations throughout the United States. SOFSA has approximately 1,700 employees, of which more than 1,000 are located in the Lexington region.

For more information on the state's general credit, see the Fitch Release of earlier today, 'Fitch Rates Kentucky Asset/Liability Commission $82MM Project Notes 'AA-' Underlying,' available on the Fitch Ratings web site at www.fitchratings.com.