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Fitch Rates Massachusetts School Building Authority's $725MM Senior Bonds 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA+' rating to the following Massachusetts School Building Authority bonds:

--$725 million senior dedicated sales tax refunding bonds, 2012 series B.

The bonds are expected to sell via negotiation the week of Oct. 8, 2012.

In addition, Fitch affirms the following ratings:

--$5 billion outstanding senior dedicated sales tax bonds at 'AA+';

--$293 million outstanding subordinated dedicated sales tax bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an irrevocable dedication of one cent of Massachusetts's 6.25-cent sales tax, with some exclusions. Revenue flows to pay debt service on the subordinated bonds after payments related to the senior bonds.

KEY RATING DRIVERS

BROAD DEDICATED REVENUE SOURCE: The bonds are secured by an irrevocable dedication of one cent of Massachusetts's 6.25-cent sales tax. Although performance in the recession was weak, the sales tax has been a relatively stable revenue source over time and recent results are improved.

STRONG STRUCTURAL PROTECTIONS: Bondholders benefit from the statutory dedication of the tax for school capital purposes. Dedicated revenues are segregated from the commonwealth general fund, and the authority has no role in funding school operations. Strong legal covenants protect against diversion of revenues or lowering of the tax rate, although the base can be changed.

ADEQUATE COVERAGE: Both current debt service coverage and the additional bonds test are adequate.

STRONG AND WEALTHY ECONOMY: Massachusetts has a broad and diverse economy, with the second highest personal income per capita in the nation.

SUBORDINATED BOND RATING LOWER: The lower rating on the subordinated bonds reflects the junior pledge to the senior bonds and the difference in the additional bonds test protections on the two liens; additional issuance requires 1.4x maximum annual debt service (MADS) coverage for the senior bonds as compared to 1.3x aggregate coverage for the subordinated bonds.

CREDIT PROFILE

The ratings are based on the historical reliability of sales tax revenue, the adequacy of debt service coverage and the additional bonds test, and structural protections afforded, including the statutory dedication of the tax for school capital purposes. The commonwealth has imposed a sales tax since 1966, and although performance in the recession was weak, coverage of MADS remains solid at 1.8x for senior bonds and 1.7x for aggregate debt service, based on fiscal 2012 revenues and without consideration of refunding savings expected from the current transaction or the federal interest subsidies associated with Build America Bonds and Qualified School Construction Bonds. Revenue results have returned to modest growth since the recession.

Additional bond issuance under a $10 billion authorization requires 1.4x maximum annual senior debt service coverage for senior bonds and 1.3x coverage of total MADS for subordinated bonds; the rating distinction between the liens reflects the subordinate pledge and the weaker additional bonds test. Dedicated revenues are segregated from the commonwealth general fund, and the authority has no role in funding school operations. Strong legal covenants protect against diversion of revenues or lowering of the dedicated tax rate, although the base can be changed.

Dedicated sales tax revenues are credited to the School Modernization and Reconstruction Trust (SMART) fund, which is held by the commonwealth treasurer exclusively for the purposes of the authority, and disbursed to the bond trustee on a monthly basis. The revenues in the fund are not commingled with commonwealth funds and are not subject to appropriation. Bondholders have first claim on the dedicated sales tax.

The dedication of the full one-cent sales tax was fully phased in for fiscal 2011, resulting in receipts of $655 million for the year. Average annual sales tax growth has been about 6.5% since the inception of the tax in 1966, with the largest one-year drop of 7.1% occurring in 1990. However, in the recent recession sales tax revenues dropped 6.2% in fiscal 2009 and another 1.7% in fiscal 2010, not considering the increase in the commonwealth sales tax rate from 5% to 6.25% that became effective on Aug. 1, 2009 but did not benefit the bonds. After growth of 2.8% in fiscal 2011 and 2.4% in fiscal 2012, the authority expects year-over-year growth of 4.7% for the current fiscal year 2013.

The authority can choose to transfer excess dedicated sales tax revenues to the commonwealth, but the commonwealth has relinquished all claims to the revenue. The authority consists of seven members: the Commonwealth Treasurer (chair), four treasurer appointments, and two ex-officio members. The authorizing legislation specifies that the treasurer shall act as trustee as it relates to the SMART fund and not on account of the commonwealth.

The authority was created in 2004 to address a substantial backlog of programs funded under the commonwealth's prior school building assistance program and create a sustainable system for school capital funding going forward. Prior contract assistance commitments to localities, a declining obligation through 2023, are paid annually from dedicated revenues after payment of debt service. The authority was authorized to fund up to $500 million in new projects annually starting in fiscal 2008 (with the limit adjusted up or down each year by the lesser of the dedicated sales tax revenue increase/decrease or 4.5%); approval of new projects is contingent upon the availability of funds for this purpose. The authority does not have a waiting list.

Massachusetts has a fundamentally strong and wealthy economy. At 129% of the U.S. average, the Commonwealth's personal income per capita is the second highest of the states. After experiencing among the steepest employment drops in the country from 2002-2004, the Commonwealth's performance in the recent recession was significantly better than the national experience. Employment losses in 2009 were less severe than those of the U.S. (3.3% versus 4.4%), and Commonwealth employment rose 0.3% in 2010 while U.S. employment fell 0.7%. Employment continued to grow in 2011, with year-over-year growth of 0.6% in Massachusetts equaling about half the increase for the nation, and employment was up 1.4% year-over-year in August 2012, in line with the U.S. Massachusetts' unemployment rate of 6.3% for August 2012 was 78% of the U.S. level.

For more information on the commonwealth, see Fitch's press release 'Fitch Rates Massachusetts' $400MM GO Bonds 'AA+'; Outlook Stable' dated Sept. 21, 2012, available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from IHS Global Insight.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

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Source: Fitch Ratings