Fitch Rates University of Connecticut's $136MM GOs & GO Rfdg Bonds 'AA-'; Affirms Outstanding.

NEW YORK -- Fitch Ratings assigns an 'AA-' rating to the University of Connecticut (UConn) general obligation bonds (GO) (2007 Series A) and GO refunding bonds (2007 refunding series A), and affirms the 'AA-' rating on $789 million outstanding GO bonds. The bonds are expected to price during the week of March 26 via negotiation led by Loop Capital Markets, LLC. The new issue bonds are expected to mature annually each April 1, 2008-2027, and the refunding bonds are expected to mature annually each April 1, 2017-2022. Call provisions for both series have yet to be determined. The Rating Outlook is Stable.

The bonds are issued by and carry the general obligation pledge of UConn, but their security rests with the State of Connecticut's debt service commitment. Principal and interest are paid annually from the state's general fund, appropriated and obligated for payment by the State Treasurer without requiring further legislative approval. The bonds are not general obligations of Connecticut (GO bonds rated 'AA', Stable Outlook by Fitch) and its faith and credit are not pledged. General fund obligations, with the strength of continuing appropriations, are seen as slightly less well secured, and the UConn bonds fall within this category. Since the state's original, 1995 legislation for the program, the state has committed to $2.3 billion in bonds through 2015. With this issue, approximately $1.2 billion in debt service commitment bonds will have been sold for project funding, excluding refunding bonds.

Connecticut's credit quality is based on its fundamental wealth and economic resources, although its debt burden remains high. Net tax-supported debt of $13.5 billion measures 8.1% of 2005 personal income; amortization is rapid, with 69% retired in 10 years. Debt levels are expected to remain high given this program and following legislative approval in 2005 and 2006 of $2.3 billion in transportation capital improvements, to be issued over 10 years.

Revenue performance has been strong; fiscal 2006 marked the third consecutive year of substantial surpluses, bringing the budget reserve balance to $1.1 billion, or 7.5% of general fund appropriations. Fiscal-year (FY) 2007 actual revenues show continued strength, with the state now projecting a surplus of more than $500 million. The governor's proposed FYs2008 and 2009 biennial budget, released last month, foresees revenue growth of 5.2% in FY2008 and 5% in FY2009; growth is driven by tax changes, particularly a phased-in, 0.5% increase in personal income taxes, to 5.5%, which would generate $618 million in FY2008 and $650 million in FY2009. Spending increases of 7% in FY2008, to $16.2 billion, and another 5% in FY2009, to $17 billion, are driven by a phased-in rise in local education grants through 2012. Other spending pressures remain, notably from the state employees and teachers' retirement systems, currently funded at 53% and 60%, respectively.

Since the recession earlier in this decade, the state's economy has improved, but employment remains below pre-recession levels. Employment is growing steadily, albeit below U.S. levels, up 1.1% in 2006, compared to 1.8% for the U.S. January 2007 employment is up 1% over January 2006, versus 1.6% for the U.S. Service sector growth has been strongest, with leisure and hospitality rising 3.3%, education and health up 2.5%, and professional and business services up 2%. Manufacturing employment was down 0.5% in January, 2007 compared to the prior year.

The UConn capital program, designated UConn 2000 and extended by the 21st Century UConn Act, totals $2.598 billion, of which $2.262 billion is being financed from bonds supported by the state debt service commitment, $18 million from state general obligations, and the remainder from other university sources. The program is subject to periodic executive and legislative review. Higher education is constitutionally a state responsibility and state appropriations provide much of the university's operations (37% in FY2006), in addition to debt service support.

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