Fitch Rates Oregon's $49MM GO Veterans' Bonds 'AA-/F1+'.

NEW YORK -- Fitch assigns an 'AA-/F1+' rating to $49 million State of Oregon general obligation (GO) veterans' welfare bonds series 85 (non-AMT) (variable-rate), expected the week of June 19, 2006 through negotiation with Bear, Stearns & Co. Inc, who will also be the remarketing agent for the bonds. Fitch also affirms the 'AA-' rating on Oregon's approximately $4.2 billion outstanding GO bonds. The Rating Outlook remains Stable.

Oregon's 'AA-' rating and the Stable Rating Outlook are based on the state's strong economic recovery and rapidly improving revenues, tempered by the inability to retain balances, increasing yet still moderate debt, and a proclivity for initiatives with negative fiscal impacts. Revenue growth has been very strong, leading to operating surpluses; however, 'kicker' provisions requiring return of the surplus to taxpayers compromises the building of reserves. The state's economy is prone to wide swings, and after a sharp recession earlier this decade, Oregon experienced a strong jobs recovery in 2004 and 2005 which continues to date.

The short-term 'F1+' rating is based on the liquidity support provided by Dexia Credit Local, acting through its New York Branch, in the form of a standby bond purchase agreement (SBPA). The SBPA provides for the payment of the purchase price of tendered bonds during the daily and weekly modes in the event that remarketing proceeds are insufficient to pay the purchase price. The SBPA is sized to provide for the entire principal amount of the bonds, plus 34 days of interest at the maximum interest rate of 12% based on a year of 365 days. The SBPA will expire on June 30, 2013 or upon the occurrence of other events of termination, according to its terms. Fitch's short-term rating on the bonds will expire upon any expiration or termination of the SBPA.

The bonds initially bear interest in the daily rate mode, but may be converted to a weekly, monthly, quarterly, semiannual, auction, fixed, or indexed rate mode. While the bonds bear interest in the daily and weekly rate modes, interest is payable on the first business day of each calendar month. Holders of bonds bearing interest in the daily and weekly rate modes may tender their bonds for purchase with prior notice. The bonds are subject to mandatory tender: on any interest rate mode change date; on any conversion date, on which the interest rate is converted to a fixed or indexed rate; or upon the termination or expiration of the liquidity facility. The bonds are also subject to optional and mandatory redemption provisions pursuant to the terms of the Certificate of Determination and Resolution.

The new bonds are for the veterans' welfare program, which funds housing mortgage loans. The program has been self-supporting and with structural and underwriting changes implemented in 1992, operations improved from the difficult period of the 1980s and early 1990s. With the low interest rate environment continuing to result in high levels of loan prepayments and reduced yields on short-term investments, along with limited bond redemption opportunities due to the call-restricted outstanding debt, cash flow stress has been evident. The $727 million in cash and investments the program held at June 30, 2005 was down 22% from the prior year; unaudited figures from March 31, 2006 showed only $616 million. However, ultimate security for these bonds derives from the state's GO pledge, including a constitutionally authorized property tax levy if necessary, which has never been employed and is not contemplated.

The state is dependent on the personal income tax, which made up 91% of 2005 GAAP general fund revenues and has been volatile, falling 12% in the 2001-03 biennium, rising nearly 17% in the 2003-05 biennium, and is now forecast to grow another 22% this biennium. The current forecast projects a large operating surplus and a $1,073 million general fund balance by the close of the biennium. However, under the Oregon Constitution, if the amount of general fund revenues actually received in a biennium exceeds the amount of revenues estimated for the biennium by 2% or more, the excess must be returned to Oregon taxpayers. Under current estimates, the state expects to return about $1,081 million of personal and corporate income taxes, slightly more than the expected general fund balance, to taxpayers in the next biennium.

Oregon's economy tends to be more volatile than the nation's, once because of its reliance on agriculture and natural resources, and today because of its large high-tech sector. Oregon posted three consecutive annual job losses in 2001-03, before job growth returned with 2.1% growth in 2004 and 3.1% in 2005. April employment was a brisk 3.5% above the prior year, with construction jobs up 12.2% and manufacturing up 2.4%. Income growth has rebounded at a slower rate, with income lagging the nation for six of the last seven years before exceeding it in 2005. Per capita personal income of $32,103 is 93% of the U.S., ranking 29th among the states.

While state debt is still moderate, it has tripled since 2000, principally as a result of deficit and pension borrowings. Following this issuance, net tax-supported debt will be nearly $6.9 billion, equal to $1,414 per capita, or 4.4% of personal income, 2.6% without including pension bonds.

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