Fitch Rates State of Minnesota's $35MM 911 Revenue Bonds 'AA-'; Outlook Stable.

NEW YORK -- Fitch assigns an underlying 'AA-' rating to $35 million State of Minnesota 911 Revenue Bonds (bonds), series 2006. The bonds, scheduled to sell competitively on Nov. 14, 2006, will be insured by MBIA Insurance Corporation (insurer financial strength [IFS] rated 'AAA' by Fitch). The bonds will mature June 1, 2008- 2018 and are callable beginning December 1, 2016 at par plus accrued interest. The Rating Outlook is Stable.

The underlying 'AA-' rating reflects the strong debt service coverage provided by pledged 911 fee revenues, planned debt retirement in just eleven years with level debt service, and the thorough project planning and oversight by state and local participants. Although narrow, the pledged revenue stream is assessed to each customer in the state who uses telephone service and has been in effect since 1988. Receipts have been and are projected to be stable with notable fluctuations having occurred only when the fee amount was administratively increased within the parameters of state statute.

The bonds are special, limited obligations issued by the State of Minnesota to partially fund phase two and to finance phase three projects of the six-phase Allied Radio Matrix Emergency Response (ARMER) system. The ARMER system will ultimately provide a statewide digital radio network that is interoperable between state, county, and city public safety officers, as well as other government workers.

The bonds are solely secured by the 911 fee revenues and have priority over all other payments from the fees, except for one portion. The bonds have second priority to 1999 Metropolitan Council Bonds, which were issued for phase one of the ARMER system and first receive the amount necessary to pay annual debt service costs. Annual debt service on the Metropolitan Council Bonds will annually require approximately $.02, or $1.4 million, of the current $.65 monthly fee. The outstanding Metropolitan Council Bonds mature in 2015 and no additional Metropolitan Council Bonds have been authorized and none are expected. The Minnesota Legislature has authorized $62.5 million in 911 revenue bonds, however only $49 million, inclusive of this series, is anticipated to be issued as projects costs have since been paid from available cash. The state intends issue a second and final series of bonds for phase three in early 2008. The additional bonds test requires projected fee revenues for the following fiscal year are not less than 150% of maximum annual debt service (MADS). Neither the authority to issue bonds nor additional 911 fees for the remaining phases, four through six, has been authorized by the state legislature.

The 911 fee is assessed at a monthly rate of $.65 cents to each customer in the state who uses telephone service, whether wireless, wire-line, or voice-over internet protocol, and is collected by the telecommunication provider who in turn monthly remits the fee to the state. The fees are then deposited to a special revenue account, held separate from the state's general fund. Since inception the 911 fee revenue has primarily been used to construct and operate the infrastructure necessary for a 911 emergency response system. Over the last eight years, fee revenues have also been applied to the first phase of ARMER. Inclusive of MADS for both the Metropolitan Council Bonds and series 2006 bonds, fiscal 2006 fee revenues provide 8.4x coverage. When MADS for the planned 2008 issue of the second and final series is included, fiscal 2006 revenues still afford 6.3x coverage. Fee revenues could drop 84% from the fiscal 2006 level and still be sufficient to meet MADS on the combined issuances. Fee revenues are estimated to rise 1.5% in fiscal 2007. Concern for the narrow revenue source is mitigated by the substantial cushion between current fee revenues and projected MADS, conservative revenue growth assumptions that are part of the biannual state forecasting, and level debt service.

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