Fitch Rates Minnesota $345MM GO Tax-Exempt & $3.5MM GO Taxable Bonds 'AAA'.

NEW YORK -- Fitch Ratings assigns an 'AAA' rating to the $345 million State of Minnesota general obligation (GO) tax-exempt bonds, to sell competitively on July 18, and the $3.5 million GO taxable bonds, to sell competitively on July 20 (additional details below). Fitch also affirms the 'AAA' rating on $3.4 billion outstanding Minnesota GO bonds. The Rating Outlook is Stable.

Minnesota's superior credit standing reflects several factors. The debt structure is excellent; nearly all debt is GO and amortizes rapidly, and there has been notable restraint in extending credit. The state has a broad-based economy, with a significant presence of the manufacturing, service, and trade sectors, positive wealth indicators, and resumed employment growth. Minnesota has become highly sensitive to changes in its fiscal environment, with frequent reviews of revenue forecasts and timely legislative action.

Revenues, fueled by individual and corporate income tax receipts, have exceeded estimates, allowing the state to rebuild reserves to pre-recession levels. Approximately half of projected shortfalls, as high as $4 billion for the past two biennia, were eliminated through nonrecurring resources. After revenues surpassed expectations, the state closed the 2003-2005 biennium with total reserve balances of $1.4 billion or approximately 9.5% of fiscal 2005 general fund revenues. Although the improved revenues and other measures substantially reduced the structural imbalance heading into the 2005-2007 biennium, budget negotiations were contentious, resulting in a partial government shutdown. An eventual agreement addressed projected shortfalls by enacting various revenue enhancements, notably cigarette and other tobacco increases. General fund estimates have since been raised and surpassed twice, allowing the state to keep its commitment to fully fund reserves and reverse delayed school aid payments, which were adjusted when the state faced revenue shortfalls. With just over $400 million in excess revenue available after such action, supplemental legislation enacted at the close of the 2006 legislative session authorized minimal additional spending and tax reductions, and made a deposit to the tax relief account -- a reserve of the general fund to replace scheduled tax cuts affecting future fiscal years.

Ending some uncertainty, the state supreme court recently upheld the legality of the new cigarette (health impact) fee, anticipated to raise $400 million over the current biennium. However, the ultimate revenue impact of a separate supreme court ruling regarding tax liabilities of companies with out-of-state subsidiaries is not yet fully known. The state anticipates ending the biennium with approximately $1.1 billion in combined reserves or nearly 7% of expected fiscal 2007 general fund revenue. Revised economic and revenue forecasts are expected in November 2006 and will serve as the basis for the governor's 2008-2009 budget recommendations to the legislature in January 2007.

Minnesota's economy closely resembles the nation's and grew steadily throughout the 1990s. After job losses in 2002 and 2003, nonfarm employment expanded in 2004 and 2005 and in May 2006 was up 1.7% compared to a year ago. The state's unemployment rate, which historically has been below that of the nation, was 3.7%, 80% of the U.S. rate, in May 2006. Personal income per capita grew faster than the national average for most of the past decade, although it was below the national increase in 2005; Minnesota's ranking among the state's improved to ninth in 2005 from 18th in 1993.

Minnesota's net tax-supported debt burden of approximately $3.9 billion, following this issue, is 2.1% of 2005 personal income, the very low end of moderate. Amortization remains rapid, as 70% of GO bonds, which equal about 95% of net tax-supported debt, mature within 10 years. After the legislature failed to pass a capital budget in the 2004 session, substantial new borrowing is expected and the state recently authorized a $1 billion 2006 capital bill, almost all of which will be financed by GO debt. However, by policy, the debt burden is expected to continue at its current low to moderate level.

The July 18 offering consists of $289.45 million various purpose GO bonds and $55.55 million trunk highway GO bonds. The state constitution provides that payment of trunk highway bonds is a first charge on money coming in to the state trunk highway fund, which receives a share of taxes on motor vehicles and motor vehicle fuels. The bonds are due June 1, 2007-2026 and callable beginning June 1, 2016 at par plus accrued interest.

The July 20 offering consists entirely of $3.5 million various purpose GO taxable bonds being issued to finance the cost of state rural finance authority programs. The bonds are due Aug. 1, 2013 and are not callable.

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