Fitch Rates Montana's $37MM GOs 'AA-'.

SAN FRANCISCO -- Fitch rates the State of Montana's $37 million general obligation (GO) bond offering 'AA-' and assigns an 'AA-' rating to $193 million in outstanding parity debt. The new issue consists of the following:

-- $31,050,000 long-range building program bonds, series 2006A;

-- $3,750,000 energy conservation program bonds, series 2006B;

-- $1,000,000 comprehensive environmental response, compensation and liability program bonds (CERCLA), series 2006C;

-- $950,000 renewable resource program Bonds (TAXABLE), series 2006D.

The new issues will be sold competitively on May 18. Piper Jaffray & Co. is the financial advisor for the series 2006A, B, and C bonds. D.A. Davidson & Co. serves as financial advisor for the series 2006D bonds. The Rating Outlook for all new issues and parity general obligation debt is Stable.

Montana's rating reflects the state's strong financial reserves, low debt burden, conservative financial and debt practices, and diversifying economy. Offsetting these factors is the state's continued reliance on natural resources, relative tax volatility, and pending sizable financial challenges. Current economic conditions are very strong, enhancing revenues and enabling the state to begin to address long-standing pressures of education and pension funding. Nonetheless, Fitch believes these matters will continue to need the state's attention and resources.

The state's economy is performing well, marked by consistent job growth, low unemployment, and increasing diversification. Nonetheless, a significant share of the state's wealth and economic activity is resource-based. Recent growth in tourism and financial and professional services has been strong, and historically has offset weakness in more traditional state job sectors, although with lower wage jobs. However, mining and construction are showing rapid job growth, shoring up wages. Wage levels are important in Montana because of the state's income tax reliance. Also, despite strong overall performance, certain parts of the state have not shared in the relative prosperity.

The state's financial operations showed surpluses in the last two fiscal years, with another strong year expected for fiscal 2006. The ending general fund balance rose to $300 million in fiscal 2005, a high 22% of expenditures and transfers out. A similarly sound level is projected for fiscal 2006. Fitch views this above-average level as a credit quality balance to revenue volatility. The volatility largely results from the state's reliance on personal and corporate income taxes and taxes resulting from energy extraction, although a recent tax restructuring has added some diversity. (Montana does not have a sales tax.) Fitch notes the state's effective fiscal discipline, recognizing revenue shortfalls early in the 2002/2003 biennium and reacting with significant spending reductions. As a result, despite significant revenue declines the general fund retained a minimally adequate fund balance, equal to 4.1% of spending.

Montana's financial performance will be challenged as it continues to address two long-standing pressures; education funding and pension system underfunding. The school changes result from a state Supreme Court case that found the prior funding system unconstitutional. The state's two largest pension systems cover general state employees and teachers, and together have unfunded actuarial accrued liabilities totaling $1.4 billion. During a special session last December, the state began to address both of these issues, and state officials acknowledge the need for continued improvement as well as the challenge it represents.

The state maintains several trust funds, the largest of which, the coal severance tax trust, holds a sizable $745 million at fiscal year end 2005. The fund receives one-half of coal extraction taxes, and the corpus cannot be used without an affirmative vote by three-quarters of each house of the state's legislature. Interest on the fund flows to the state's general fund. Five other trusts totaled a combined $665 million at fiscal year end 2005, dedicated to purposes such as park acquisition, natural resources programs, and enhanced health care services. Fitch believes that the presence of the trusts enhances the state's fiscal stability by providing interest income and in some cases funds that may be utilized in an extreme emergency or for a purpose deemed a very high priority.

Montana's debt burden is low, amortization is rapid, and issuance practices are conservative. These bonds are on par with $193 million in outstanding general obligation bonds. Along with about $51 million in appropriation-backed debt, net tax-supported debt is low at $486 per capita, 1.7% of personal income, and 0.9% of taxable property. Through two state entities, the state maintains debt programs for local government and health facility loans that are well managed and have not needed to draw on state resources available as a back-up security.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.