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Rating Action:

Moody's assigns Aa3 rating and negative outlook to State of Maine's $29.15M Lease Rental Revenue Bonds Series 2013A, issued through Maine Governmental Facilities Authority

22 May 2013

Affirms Aa2 rating and negative outlook on approximately $472M outstanding G.O. bonds and Aa3 rating and negative outlook on approximately $170M lease rental bonds

New York, May 22, 2013 --

Moody's Rating

Issue: Lease Rental Revenue Bonds, Series 2013A; Rating: Aa3; Sale Amount: $29,150,000; Expected Sale Date: 05-24-2013; Rating Description: Lease Rental: Appropriation

Opinion

Moody's Investors Service has assigned a rating of Aa3, with a negative outlook, to the Maine Governmental Facilities Authority's (MGFA) $29.15 million Lease Rental Revenue Bonds, Series 2013A. The MGFA plans to sell the bonds the week of May 27. Proceeds will be used for the construction of a new courthouse in Augusta and renovations to a courthouse in Machias. Moody's has also affirmed the Aa2 rating on the state's outstanding general obligation bonds (approximately $472 million) and the Aa3 rating on the MGFA's outstanding lease rental bonds (approximately $170 million). The outlook is negative.

SUMMARY RATING RATIONALE

The Aa3 rating on the lease rental revenue bonds reflects the security provided by the State of Maine's absolute and unconditional pledge to make lease rental payments, subject to annual legislative appropriation, and the state's established track record of making payments for appropriation-backed debt. The lease rental rating acknowledges the limited remedies available to bondholders in the event of non-appropriation or default. Additional rating factors include the essential nature and strong legislative support of projects that have been funded with lease rental bonds issued through the MGFA, as well as the credit quality of the State of Maine. The one notch distinction from the general obligation bond rating (Aa2) reflects the subject-to-appropriation nature of the lease rental bonds.

The Aa2 rating is supported by Maine's manageable debt levels; the resolution of budget shortfalls in recent years with largely recurring actions; a weak economy; and pension reforms that have improved the state's funded ratios and lowered the annual required contribution (ARC).

The negative outlook reflects Maine's recurring challenges on the spending side of its budget, primarily in the Department of Health and Human Services (DHHS) which includes Medicaid; minimal budget stabilization fund (BSF) balances and chronically negative GAAP-basis combined available reserves, a large portion of which is related to significant Medicaid reimbursements due to hospitals; and a weak General Fund liquidity position reflecting the lack of reserves. The legislature is reviewing the governor's proposal to address the hospital liability with the proceeds of bonds that would be backed by revenue from a new private contract for the state's wholesale liquor business after the existing ten-year contract terminates at the end of fiscal year 2013. Proceeds from that contract for the liquor enterprise provided $125 million in one-time funds to resolve the state's fiscal 2004 budget deficit.

STRENGTHS:

- Historical budget-balancing actions largely based on recurring savings

- Below average debt ratios (per capita and personal income) and rapid 10-year retirement of principal (general obligation bonds) provide flexibility to shift from pay-go to debt capital financing

- Pension funded ratio improved following reforms and recent investment performance

- State makes pension ARC payment each year and often makes additional contributions to retirement systems; ARC reduced by recent pension reform

CHALLENGES:

- Weak GAAP-basis balance sheet reflecting negative position of state's General Fund unassigned balance and significant Medicaid reimbursements owed to hospitals

- Modest BSF balance leaves state with limited options to resolve unexpected shortfalls

- Liquidity remains very narrow due to lack of reserve funds

- Voter initiative activity adds a periodic element of fiscal uncertainty

- Demographic challenges may slow Maine's economic recovery and revenue growth

Outlook

The credit outlook for Maine's long-term obligations is negative reflecting recurring spending challenges, primarily in the Department of Health and Human Services, which includes the state's Medicaid budget; minimal rainy day fund balances and chronically negative GAAP-basis combined available reserves; and a weak General Fund liquidity position reflecting the lack of reserves.

WHAT COULD MAKE THE RATING GO UP

- Achievement and maintenance of higher GAAP-basis combined available reserve levels

- Established trend of structural budget balance

- Evidence of stronger economic performance

- Improved General Fund cash margins

WHAT COULD MAKE THE RATING GO DOWN

- Failure to resolve hospital Medicaid liabilities

- Increased reliance on one-time budget balancing solutions

- Emergence of significant budget shortfalls in the upcoming or future fiscal years

- Absence of meaningful improvement in the state's available reserves

- Cash-flow strain stemming from reduced liquidity

- Slower than average economic recovery leading to weak employment growth and revenue underperformance

RATING METHODOLOGIES

The principal methodology used for rating the General Obligation debt was US States Rating Methodology published in April 2013. The additional methodology used for rating the Lease Revenue debt was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nicole Johnson
Senior Vice President
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Emily Raimes
VP - Senior Credit Officer
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Aa3 rating and negative outlook to State of Maine's $29.15M Lease Rental Revenue Bonds Series 2013A, issued through Maine Governmental Facilities Authority
No Related Data.
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