Fitch Rates Virginia Public School Auth $55.6MM Rfdg Bnds 'AA+'.

NEW YORK -- Fitch Ratings assigns an 'AA+' rating to $55.6 million Virginia Public School Authority (VPSA) school financing bonds (1997 resolution), refunding series 2005 A, to be offered through negotiation with a syndicate led by Morgan Stanley on March 2. The bonds, which are not callable, mature Aug. 1, 2005-2017. Fitch also affirms the 'AA+' rating on approximately $2 billion outstanding VPSA 1997 resolution bonds.

Bond proceeds are entirely for refunding and will redeem bonds from the 1991 resolution. The new bonds will be under the 1997 resolution, which includes a 'sum sufficient' appropriation from available moneys of Virginia's literary fund and, if those are not sufficient, the general fund. The appropriation, which the governor must request from the general assembly pursuant to statute, provides credit enhancement to the local government loan repayments that are the primary source of security. Additional strength derives from state law providing for the withholding of state payments to local governments in the event of a local loan payment default, Virginia's fundamental credit strengths, and the state commitment to education.

Proceeds from previous issues are used to purchase general obligation school bonds of counties and cities. Local payments of principal and interest are used to pay bond debt service. Certain localities receive an interest-rate subsidy from the literary fund. No local government has defaulted in the VPSA's 42-year history, but in the event of a default, state law requires the intercept of state payments due to the local unit until the default is cured. Local payments are due approximately 15 days in advance of bond payments, allowing time for implementation of the intercept. Finally, if required, the 'sum sufficient' appropriation would be expected to be used.

The literary fund is a constitutional perpetual fund for school purposes that receives escheats, fines, forfeitures, unclaimed property, and unclaimed lottery prizes. The fund received $133 million from these sources in fiscal 2004, up from $112 million in fiscal 2003 and $98 million in fiscal 2002. The literary fund's cash and investment balance was $87 million on June 30, 2004, up from $56 million one year prior. Major literary fund appropriations for the teacher retirement fund, alleviating general fund pressures, resumed in fiscal 2002 and will continue at least through the end of the current biennium in fiscal 2006.

Virginia's substantial resources, conservative approach to financial operations, and careful attention to the level and security of its debt obligations support the 'AAA' rating on its general obligation bonds. Economic and revenue trends improved in fiscal 2004, with revenues exceeding revised estimates. Surpluses were applied to existing commitments and additional deposits to the rainy day fund. The 2004-2006 biennial budget incorporated tax reform measures and increases, including one-half cent in the sales tax, providing $1.4 billion in net additional revenues for the biennium. Fiscal 2005 revenues are well ahead of estimates through January and estimates have been raised.