Fitch Rates Montclair State University Outstanding Revs 'A'.

NEW YORK -- Fitch assigns an 'A' rating to the New Jersey Educational Facilities Authority's (Montclair State University) outstanding revenue and refunding bonds (see list of affected issues at the end of the release). Fitch also affirms the 'A' rating on the following revenue and refunding bonds for Montclair State University (MSU):

--$106 million series 2006A;

--$11 million series 2006B.

The series 2006 A and 2006 B bonds will be sold via negotiation on June 22 by Lehman Brothers. The bonds are expected to be insured by Ambac Assurance Corporation, whose Insurer Financial Strength is rated 'AAA' by Fitch. The Rating Outlook is Stable.

Fitch initially assigned a rating to the series 2006 bonds on March 17, 2006. The bond sale was delayed until June 22, 2006 largely due to management's finding of a misapplication of certain project funds and failure to follow required procurement processes. All of the projects have been completed and placed in service. Following the internal review, management has disclosed that the construction fund was restored, and capital accounts were corrected. The university has retained accounting firms to perform post-construction audits and assess the adequacy of existing policies and procedures relating to capital construction and to make recommendations they consider appropriate. KPMG, the university's auditors, determined that a restatement of fiscal 2005's financial statements was not warranted.

The 'A' rating is primarily supported by MSU's historical operating profitability, strong revenue growth, impressive undergraduate enrollment growth, and an increasingly prominent market position as the second largest public university in New Jersey's higher education sector. The University's strategically focused, results-oriented management team is strengthening the university's academic and operating profiles, and physical plant. Furthermore, budgeted historical surpluses, tuition and fee flexibility, and the anticipated revenue generated by recently completed and pending debt-financed projects provide an important cushion to support increased debt levels.

Fall 2005 headcount was 16,063, up 16% over fall 2001 enrollment levels, and the University is well on its way to attaining an enrollment goal of 18,000 by its centennial in 2008, particularly if recent initiatives to jumpstart graduate enrollment trends succeed. Between fiscal years 2002 and 2005, MSU's total annual revenues, excluding capital gifts and grants, increased by over 36%, and operating margins averaged nearly 7%. This impressive performance reflects increased enrollment, growth in auxiliary enterprises, and higher tuition and fees to accommodate the university's planned capital expansion, enlarged faculty, and higher operating, maintenance and debt service costs. Beginning in fiscal 2006, operating margins are expected to moderate to about 4%. Thinner though positive surpluses are anticipated in the near term.

The primary credit concern is the university's relatively high pro forma debt burden. Following the issuance of the series 2006A and 2006B bonds, total outstanding debt is projected to increase to about $380 million, maximum annual debt service is estimated at $25.2 million in 2012, and would consume a high 11.8% of fiscal 2005's revenues. Funds available for debt service generates pro forma debt service coverage of 1.6 times (x) in fiscal 2005. These ratios could be exacerbated in the next two years if MSU moves forward with its capital plan. MSU has identified $77 million of future financing needs for two critical academic projects, and is proactively seeking funding through a proposed state general obligation (GO) bond issue for higher education. In the event a bond issue is not passed (the last time the state issued GO bonds for public universities was in 1988), MSU intends to issue direct debt to finance these projects. Although Fitch stressed debt ratios to determine the affordability of the additional debt at this time, rating and Outlook stability will ultimately hinge on the university's financial strength at the time of issuance.

MSU's available funds of about $60 million as of June 30, 2005, cover 30.5% of expenses and 15.8% of pro forma debt. These respective ratios are at the low range and below Fitch's medians for 'A' rated public universities. Concerns are partially mitigated by recent fundraising success toward a $50 million capital campaign, and the university's strong operating cash flow generation and tuition and fee flexibility.

Historically, state appropriations for higher education have been restrictive and budgetary pressures could limit future appropriations. MSU's direct appropriations and funding for fringe benefit costs totaled $71.4 million in fiscal 2005, and accounted for about one-third of revenues. State funding is approximately $77 million for fiscal 2006. As state direct appropriations remained relatively static, the percent of MSU's growing unrestricted revenues from state funds has declined, and the percent of unrestricted revenues derived from tuition and fees increased from 28.8% in fiscal 2002 to 37.5% in fiscal 2005. Other net student revenues from auxiliary activities contribute an additional 13% of unrestricted revenues in fiscal 2005. These growing revenue sources help to mitigate the negative impact of a tight state funding environment.

Near-term cuts in state operating appropriations may be higher than initially anticipated. Management has disclosed plans to diffuse funding cuts with an operating budget cut and pending 10% tuition increase. Fitch expects these initiatives to yield thin but positive operating margins in the near term as the university continues to benefit from positive enrollment trends.

Montclair State University was founded in 1908 as a two-year Normal School. The university is located on a large and accessible suburban campus in Montclair, N.J.

Outstanding Issues:

--Series 1972B;

--Series 1974D;

--Series 1996D;

--Series 1997D;

--Series 1997E;

--Series 2001F;

--Series 2002F;

--Series 2003E;

--Series 2003L.

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.