Fitch Rates Virginia Public School Authority's $262MM 2006B Bonds 'AA+'.

NEW YORK -- Fitch Ratings assigns an 'AA+' rating to $262.045 million Virginia Public School Authority (VPSA) school financing bonds (1997 resolution), series 2006B, expected to sell through competitive bids on Oct. 11. Fitch also affirms the 'AA+' rating on $2.5 billion outstanding VPSA 1997 resolution bonds.

The bonds will be issued pursuant to the 1997 resolution, which includes a 'sum sufficient' appropriation from available moneys of Virginia's literary fund and, if those are not adequate, 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, along with Virginia's fundamental credit strengths and the state commitment to education.

Bond proceeds will be used to purchase general obligation school bonds of twenty-one counties and four cities. Local payments of principal and interest are used to pay bond debt service. No local government has defaulted in the VPSA's 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 $167.5 million from these sources in fiscal 2006, up from $160.5 million in fiscal 2005 and $132.5 million in fiscal 2004. The literary fund's cash and investment balance was $119.5 million on June 30, 2006, up from $101.2 million one year prior. Major literary fund appropriations for the teacher retirement fund, alleviating general fund pressures, resumed in fiscal 2002 and continued through fiscal 2006, when $125.9 million was appropriated.

The Commonwealth of Virginia's 'AAA' rating is based on its substantial resources, conservative approach to financial operations, and careful attention to the level of its debt obligations. Financial operations and borrowing are conservatively managed with periodic revenue forecast updates, a constitutional revenue shortfall reserve, and policies calling for debt ratios at below-average levels. Financial pressures from the recession earlier in this decade led to operating deficits in fiscal years 2002 and 2003, but the commonwealth undertook broad counterbalancing actions in order to maintain fiscal stability. Operations have improved markedly since then, with large operating surpluses quickly rebuilding fund balances. The commonwealth benefits from a diverse economic base, with steady growth in personal income and growing employment contributing to the state's high wealth.

The bonds, callable at par on or after Aug. 1, 2016, will mature Aug. 1, 2007-2032.

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