Fitch Rates Montana's 2008D Building Program GOs 'AA'

Fitch assigns an 'AA' rating to the State of Montana's (the state) $3,100,000 general obligation (GO) long-range building program bonds, series 2008D. The new issue will be sold competitively on or about May 14 and will mature Aug. 1, 2008-2027. Fitch also affirms the 'AA' rating on approximately $198 million in outstanding GO bonds. The Rating Outlook is Stable.

The state's credit quality is based on conservative financial practices, low debt burden and growing economic diversity. Strong revenue performance in recent years has enabled the state to address longstanding pension and education funding concerns. The state's history of revenue volatility is mitigated by high financial reserve levels.

Strong revenue collections well over conservative forecasts enabled the state to end its fiscal 2006-2007 biennium with a fund balance of $549 million, equal to 32% of fiscal 2007 spending. Much of the ending balance is being dedicated to one-time expenditures, including a $50 million contribution to the teachers' retirement system, $99 million in property tax rebates, and $180 million for capital projects. After a September 2007 special legislative session to dedicate additional funds to wildfire response, the fiscal 2008-2009 biennial budget projects a fiscal 2009 year-end fund balance of $125 million, a prudent 6.4% of fiscal 2009 spending.

The state's high fund balance level is a key credit strength given its history of revenue volatility, which results largely from reliance on personal income, corporation and energy extraction-related tax collections. Ongoing spending remains below projected resources, with appropriations increases addressing priority needs in education, corrections and pensions. Education spending pressures stem from a 2005 Supreme Court decision; despite increases, further court action may require additional state commitments.

Revenues year to date continue to exceed budgeted estimates. Through March 2008, general fund revenues are 6% over comparable prior year amounts, driven in particular by personal income and property tax collections, up 9.2% and 9.4%, respectively. Corporation license taxes are down 21% year to date.

The state maintains several trust funds which Fitch believes enhance the state's fiscal stability. The trusts support spending that would otherwise fall to other general fund resources, and could provide flexibility in an extreme emergency. The largest fund, the coal severance tax trust, holds a sizable $764 million at fiscal year-end 2007. The fund receives one-half of coal extraction taxes, and the corpus cannot be used without approval by three-quarters of each house of the state's legislature. A portion of the interest on the fund flows to the state's general fund. Five other trusts totaled a combined $648 million at fiscal year-end 2007, dedicated to purposes such as education, parks, natural resources programs, and enhanced health care services.

The state's economy is continuing to perform well even as the nation's economy slows, with solid job growth, low unemployment, and further diversification. Employment growth has exceeded U.S. levels during this decade, rising 2.4% in 2007, compared to 1.1% for the U.S. March 2007 employment rose 1.3% over the prior year, compared to 0.4% growth for the U.S. over the same period. Much of the state's wealth and economic activity is resource-based, although the proportion has decreased over time, replaced by growth in tourism, professional services and education and health. Mining and construction sectors nonetheless continue to grow, with employment up 3.6% and 3.4% year-over-year, respectively. Personal income growth also has been strong in recent years, and rose 6.6% in 2007, compared to 6.2% nationally. Nonetheless, the state is less wealthy than average, with 2007 personal income per capita at 84% of the U.S. level.

The state's debt burden is low, amortization is rapid, and issuance practices are conservative. Net tax supported debt is low at $426 per capita and 1.3% of 2007 personal income. Approximately half of net tax-supported debt is GO bonds. Through two state entities, the state maintains debt programs for local government and health facility loans that are well managed and have not needed to draw on state resources available as a back-up security.

Legislative and budget actions during the last biennium enabled the state to put its two largest pension systems on an actuarially sound basis. Through a combination of contribution increases, a cost of living adjustment reduction for new employees and lump-sum contributions, the unfunded actuarial accrued liabilities of the Public Employees' Retirement System and Teachers' Retirement System now will amortize over 22 and 29 years, respectively.

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SOURCE: Fitch Ratings

Fitch Ratings
Douglas Offerman, 212-908-0889 (New York)
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