Fitch Rates Minnesota's $468MM Appropriation Bonds 'AA'; Outlook Stable

Fitch Ratings has assigned an 'AA' rating to the following State of Minnesota state general fund appropriation bonds:

--$397,680,000 state general fund appropriation bonds, tax-exempt series 2014A;

--$70,255,000 state general fund appropriation bonds, taxable series 2014B.

The bonds are expected to sell through negotiation the week of Jan. 13, 2014.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a legislative general fund appropriation for debt service.

KEY RATING DRIVERS

--APPROPRIATION RATING LINKED TO STATE: Bond payment is from state legislative appropriations, resulting in a rating one notch below Minnesota's 'AA+' general obligation (GO) rating.

--SOLID ECONOMIC PROFILE: Minnesota's economy is balanced and wealth indicators are positive.

--BELOW-AVERAGE LIABILITY BURDEN: The state's debt levels are on the lower end of the moderate range, with rapid amortization of GO debt. On a combined basis, the burden of debt and unfunded pension liabilities is below average for states rated by Fitch. Other post-employment benefit obligations are minimal.

--IMPROVED FINANCIAL POSITION: Minnesota's revenue structure is subject to volatility, and revenue performance in the recovery has meaningfully improved following a period of sharp declines. The state relied on non-recurring budget-balancing measures over the course of the recession, but positive budget variances have allowed for the replenishment of reserves to full policy funding levels and payment of deferred school aid.

RATING SENSITIVITIES

The rating is sensitive to changes in the state of Minnesota's GO rating, to which it is linked.

CREDIT PROFILE

The 'AA' rating on the bonds reflects the state appropriation security and is directly linked to the state's 'AA+' GO rating. The bonds are secured by a continuous general fund appropriation for debt service; the appropriation will remain in place for the life of the bonds unless the legislature affirmatively chooses to repeal it. Debt service is also subject to the governor's unallotment powers. In the event of such repeal or unallotment, the bonds would be cancelled. The risk of legislative repeal of the appropriation is inherent in appropriation-backed debt and reflected in the rating below that of the state's GO. In addition, despite historical use of executive unallotment powers by the state, debt service has not been affected. Fitch would expect an issuer of the strong credit quality of Minnesota to continue to protect its debt service obligations.

Bond proceeds will fund the state of Minnesota and city of Minneapolis commitments to construction of a new stadium that will be the used by the Minnesota Vikings National Football League team as well as for other events and purposes. The new stadium will replace the Metrodome (current Vikings stadium) and be located on the same site in downtown Minneapolis.

The total project cost is $975 million, and in 2012 the state legislature approved the issuance of state general fund appropriation-backed bonds to fund a $348 million state contribution to the project as well as a $150 million city contribution. The Vikings, which are covering the remainder of project costs, are now bound by a lease on the stadium for 30 years starting with project completion.

The 2012 agreement was the culmination of years of debate on plans for a replacement facility. Although the cost of annual debt service is expected to be offset by identified revenues, including expanded gaming, the general fund appropriation bond security is unrelated to these revenues or the operation of the stadium. Expectations for gaming revenues intended to offset payment of the state's commitment have deteriorated steeply since the time of the 2012 agreement, and in the 2013 session the legislature identified additional revenues. Given that debt service will be paid from the state's general fund, the performance of these offsetting revenues is not a rating factor. The bonds are structured with fixed interest rates and level debt service of about $31 million a year through fiscal 2043.

The 'AA' rating on the series 2014 is the same as that assigned to the state's 2012 state general fund appropriation refunding bonds, which refunded tobacco securitization bonds issued for deficit financing in the downturn. The 2012 bonds were the first appropriation debt to be offered directly by the state. In both cases, the state's commissioner of management and budget was authorized to issue general fund appropriation bonds under statutes that include the standing general fund appropriation for debt service.

Minnesota's 'AA+' GO rating reflects the state's solid debt structure, a broad-based economy with above-average wealth levels, and a track record of management that is sensitive to changes in the state's fiscal environment, with regular reviews of revenue forecasts. For more information on the state's general credit, please see Fitch Research 'Fitch Rates Minnesota's $768MM GOs 'AA+'; Outlook Stable' dated Oct. 15, 2013. Since that time, the state's financial position has improved further with a substantial upward revenue forecast revision last month that reflected overperformance in personal income and corporate taxes.

Additional information is available at 'www.fitchratings.com'.

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813651

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