Fitch Rts State of Maine $51.4MM GOs 'AA'.

NEW YORK -- Fitch assigns a rating of 'AA' to approximately $51.4 million State of Maine general obligation bonds expected by negotiation June 6 through a syndicate led by UBS Investment Bank and Bear Stearns & Co. Inc. Fitch Ratings also affirms the 'AA' rating on outstanding general obligation bonds. The ratings outlook is stable. Also affirmed is the 'F1+' rating on $123.6 million general obligation tax anticipation notes due June 30, 2006.

Maine's 'AA' general obligation debt rating reflects the state's low debt burden and strong debt structure, with rapid amortization, as well as institutionalized financial reforms, including expenditure and debt controls and reserve funding provisions. Economic performance has been flat and increasing education/property tax relief requirements are an ongoing pressure, however balanced financial operations have been maintained and reserves are rebuilding. The Rating Outlook is Stable.

Maine continues to have a strong debt posture with low debt ratios and rapid amortization. Net tax-supported debt totals $821 million and equals 2% of 2005 personal income, and general obligation bonds are due within ten years. While the state's pension system is funded at less than 70% there is a funding plan in place and in recent years, the state has exceeded its annual required contribution for pensions.

Maine's economy traditionally has relied on manufacturing (primarily nondurable), tourism, and natural resources, although the trade and services sectors have expanded. Employment growth proceeding the most recent recession was strong, outpacing national gains. During the downturn, manufacturing losses were offset by gains in other areas, resulting in flat employment levels. Employment rose 0.8% in 2004 but stagnated in 2005, with no growth that year even as U.S. employment rose 1.5%. The manufacturing sector continues to decline, dropping over 4% in April 2006 from a year ago. The federal government's decision to forego closure of the Portsmouth Naval Shipyard eliminates a significant risk to the state's economic outlook. Good gains in business and professional services and construction are stabilizing employment losses. Employment rates in April 2006 are now 98% of the national figure. Maine's 2005 personal income growth of 4.5% now lags the national rate of 5.6%. Personal income per capita is 90% of the U.S. level, ranking it 34th among the states. Maine's median age of 40.7 is the oldest among the states, raising uncertainty about future work force growth.

Maine has experienced fiscal pressures since the most recent downturn, when the state relied on spending restraint as well as general and rainy day fund balances to support operations. Financial controls and moderate revenue growth have enabled the state to absorb increased education costs providing tax relief while beginning to rebuild balances. Surpluses were depleted in fiscal year 2003 and now expected to reach $127 million in fiscal year 2007. Nevertheless, while reduced, a structural imbalance continues, largely due to a June 2004 voter initiative directing the state to assume a larger share of education costs to provide relief from high local property taxes. The legislature, which has the authority to modify voter initiatives, has opted to phase in the provision over four years. The current 2006-2007 biennial budget absorbs the $240 million increase in education requirements through deeper cost reductions, operating efficiencies, and increases in cigarette taxes and other fees. The projected funding gap has fallen from $1.2 billion in 2004-2005, and is projected to be $450 million in the next biennium, or about 6% of revenues. Economic gains are evident as both sales tax and personal income taxes are above budget estimates through April 2006 with fiscal year end balances now estimated at just under a $100 million or 3.5% of revenues. The initiative process remains active in Maine, especially for tax and expenditure limits. A taxpayer bill of rights (TABOR) has now been approved for inclusion in this year's ballot.

The state is issuing general obligation bonds to redeem a like amount of bond anticipation notes. The bonds include $12,905,000 taxable bonds due June 15, 2007-2016 and $38,495,000 tax-exempt bonds due June 15, 2007-2016. The bonds are not callable.

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