Fitch U.S. Public Finance Outlook: Continued Stable into 2007.

NEW YORK -- Stable credit conditions should remain for the balance of 2006 and the first part of 2007 despite some indications that the U.S. economy may be losing steam, according to Fitch Ratings. The gross domestic product (GDP) grew at an annualized rate of only 2.5% during the second quarter of 2006, a sharp decline from the first quarter's 5.5% annualized gain and below last year's second-quarter annualized gain of 3.2%.

Personal consumption growth slowed dramatically in August, growing just 0.11% in the month, well below the 0.35% to 0.88% range experienced since the start of the year. Despite a general consensus of a slowdown, non-farm employment and personal income measures are showing resiliency, growing August year-over-year 1.3% and 6.3%, respectively, similar to levels seen in 2005. Year-over-year employment growth was widespread, with only two states, Michigan and Louisiana, experiencing declines. The Rocky Mountains and Southwest regions have experienced the most job growth in the same time period, increasing the number employed by 3.3% and 2.7%, respectively. Other positive signs were a significant uptick in the September Conference Board Consumer Confidence Index, driven by recent declines in energy prices, and a pause in interest rate hikes by the Federal Open Market Committee (FOMC).

Weakness in the housing market is becoming increasingly apparent. A preliminary U.S. Census report showed 433,000 housing unit starts for the second quarter of 2006, a 10.7% year-over-year decline. Fitch U.S. Public Finance continues to closely monitor housing market activity, particularly for credits with a large dependency on housing-related revenues (e.g. property taxes or property transfer taxes) or a concentration of labor force in construction or other housing-related sectors. Other areas of concern potentially affecting public finance credits include weakness in the auto manufacturing industry, health care and other post-employment benefits (OPEB), and cost of insurance for natural disasters.

In the third quarter of 2006, Fitch U.S. Public Finance upgraded 41 credits totaling $12.4 billion while downgrading only seven credits, totaling $1.9 billion. This resulted in an upgrade-to-downgrade ratio of 5.9:1 in terms of number of rating changes and a ratio of 6.7:1 on a par basis. This marks the sixth time in eight quarters that the number of upgrades has exceeded the number of downgrades. Fitch believes this trend has been driven by improved financial performance, given the positive economic environment over the last two to three years.

Of the 41 upgrades in the third quarter, 28 were tax-supported credits, with seven of these issued by local governments in Texas. Nearly $2 billion, or 16% of the total par upgraded were from three New Jersey county issuers - Essex, Hudson, and Ocean to 'A-', 'A+', and 'AA+', respectively. Other notable tax-supported credits upgraded include $899 million of State of Missouri appropriation-backed bonds and $1.1 billion of Missouri Highway & Transportation Commission first lien state road bonds (both upgraded to 'AA+' from 'AA').

Five of the upgrades were in the health care sector including $674 million Mount Sinai - NYU Health System (NY) bonds upgraded to 'BBB-' from 'BB+' and $821 million Norton Healthcare, Inc. bonds upgraded to 'A-' from 'BBB+'. Two transportation credits, Virginia Port Authority and Hillsborough County Aviation Authority - Tampa International Airport (FL), were upgraded one notch to 'A+' and 'AA-', respectively. In public power, electric system revenue bonds of Bryan, TX and Anaheim Public Utilities Department, CA were upgraded one notch to 'A+' and 'AA-', respectively.

Of note, in September Fitch removed six New Orleans credits from Rating Watch Negative and concurrently upgraded two of them, the New Orleans Audubon Commission general obligation bonds and New Orleans Sewerage & Water Board drainage utility system bonds, both to 'BB' from 'B'. The rating actions reflect federal and state assistance for debt service and signs of accelerating rebuilding progress.

Only seven credits got downgraded in the third quarter, the lowest number since Fitch started publishing its quarterly action commentary in 2002. Of these seven, four are healthcare credits (Hackensack University Medical Center and Saint Barnabas Health Care System in New Jersey, Salem Hospital in Oregon, and Presbyterian Villages of Michigan Obligated Group); one is a higher education credit (Texas Southern University); one is a stadium credit (South Florida Stadium Corp. or Dolphin Stadium), and the other is an airport credit (the Commonwealth of Northern Mariana Islands).

As of September 30, 21 credits were on Rating Watch Negative (RWN) and two were on Rating Watch Positive (RWP), vs. 35 on RWN and two on RWP at the end of the second quarter. The number of credits on RWN has been declining steadily from the high of 49 in the fourth quarter of 2005, mostly due to the removal from RWN of the 22 credits that were affected by Hurricane Katrina; the last six Katrina-affected credits were removed from RWN on September 1, 2006. Other credits unrelated to Hurricane Katrina that were removed from RWN during the quarter include Philadelphia (PA) gas works revenue bonds, Pocahontas Parkway (VA) toll revenue bonds, and Saint Barnabas Health Care System (NJ) hospital revenue bonds. Credits added to RWN during the quarter were Harrisburg International Airport (PA) revenue bonds and the State of New Jersey cigarette tax bonds. The RWN listing of the airport bonds was due to a draw from the debt service reserve fund. The cigarette tax bonds were placed on RWN due to recently passed legislation that requires a substantially higher health care subsidy transfer that is senior to debt service and hence weakens bondholders' protection.

The ratio of credits on Positive Rating Outlook-to-Negative Rating Outlook is at its highest level since US Public Finance started publishing the ratio in 2002. As of September 30, 2006, the Positive-to-Negative Rating Outlook ratio was 0.83:1, with 89 credits having a Positive Rating Outlook and 107 credits having a Negative Rating Outlook. The improvement from the second quarter's ratio of 0.78:1 is mostly attributable to revisions to Stable from Negative of nine Louisiana credits, including those of the State of Louisiana, itself, and Jefferson Parish. The transportation sector, has 24 credits, mostly airports, that are assigned Negative Rating Outlooks vs. only five with Positive Rating Outlooks. Many of Negative Rating Outlooks on the airport credits, including O'Hare and Midway in Chicago, IL and Hartsfield - Jackson in Atlanta, GA are due to the restructuring activities of the airports' major tenant airlines.

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