Fitch Rates Washington $634MM GOs `AA'.

NEW YORK -- Fitch Ratings assigns an 'AA' rating to $634.1 million State of Washington general obligation bonds, for bids July 13. Fitch affirms the 'AA' rating on $9.2 billion outstanding State of Washington general obligation bonds.

The bonds, for separate bids, include: $350.1 million various purpose bonds, series 2005A; $173.7 million motor vehicle fuel tax bonds, series 2005B; $65.0 million motor vehicle fuel tax bonds, series 2005C, with compound accreted value of $151.0 million at maturity; and $45.4 million state housing trust fund bonds, series 2005T (taxable). Series 2005A and 2005B bonds will mature July 1, 2005-2029, callable beginning on July 1, 2014. Series 2005C bonds mature June 1, 2008 and 2011-30 and series 2005T bonds July 1, 2005-10; both of these series are noncallable.

The rating reflects the state's use of good debt and financial policies, as well as the breadth of its economy. While diversification away from dominance by the aerospace industry has occurred, and growth was strong for over a decade, economic conditions began to weaken in 2001, leading to recession both more rapidly and deeper than anticipated. Conditions have stabilized, but growth remains slow. Through nonrecurring actions, the biennium ending June 30, 2003 closed with a balance of $462 million, or 4.5% of annual revenue. The budget for the 2003-2005 biennium addressed a gap of over $2 billion through cuts and spending redirection. Biennial revenues have been upwardly revised, and the general fund balance at June 30, 2005 now is projected to be $465 million.

With consistent growth during the 1990s, employment in Washington reached a peak late in 2000. Between 2000 and 2002, employment declined by 2% due to significant losses in manufacturing, trade, services, and construction. In 2003, employment stabilized due to growth outside of Seattle that offset continued weakness in the state's largest metropolitan area. For 2004, 1.9% job growth is forecast, improving to 2.2% in 2005. Aerospace employment of 61,000 is down 45% from its 1998 peak. The Boeing Co. has selected Washington as the site for assembly of its new 7E7 aircraft, and although there will be no effect before 2005, the decision is important to the future of Washington's aerospace industries, as well as for providing a psychological boost.

The economy has affected financial operations. A budgetary gap of about $1.4 billion for the 2001-2003 biennium was closed by expenditure reductions, transfers, use of reserves, and a tobacco settlement securitization. To close a $2 billion gap, the 2003-2005 budget employed revenue measures, such as a redirection to the general fund of property taxes previously flowing to a student achievement account. However, balance was achieved mostly through expenditure cuts and containment, as well as suspension of funding for classroom size reduction and cost-of-living measures mandated by voter initiatives but subject to change by a legislative majority. Incorporating revenue revisions and supplemental spending approved in 2004, the closing balance at June 30, 2005 now is projected to be $465 million instead of the originally projected $482 million.

After this sale, net tax-supported debt will amount to $10.4 billion, or $1,768 per capita, 5.1% of personal income, and 1.8% of estimated taxable property value. The ratios are above average but well within the moderate range. Motor vehicle fuel tax bonds, although general obligation, are serviced from that revenue source, which covers debt service by nearly 6 times (x), following a $0.05 2003 increase in the fuel tax. Over the next decade, issuance of $2.6 billion motor vehicle fuel tax bonds is expected as the state funds a major transportation program from the fuel tax increase.