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Rating Action:

Moody's assigns Aa3 to Kentucky State Property and Buildings Commission $456.2 million Revenue and Revenue Refunding Bonds, Project No. 108

20 Jan 2015

Outlook stable

New York, January 20, 2015 --

Moody's Rating

Issue: Revenue Bonds, Project No. 108 Series A; Rating: Aa3; Sale Amount: $150,800,000; Expected Sale Date: 1/27/2015; Rating Description: Lease Rental: Appropriation

Issue: Revenue Refunding Bonds, Project No. 108 Series B; Rating: Aa3; Sale Amount: $305,400,000; Expected Sale Date: 1/27/2015; Rating Description: Lease Rental: Appropriation

Opinion

Moody's Investors Service has assigned a rating of Aa3 to the Kentucky State Property and Buildings Commission's (the Commission) $456.2 million Revenue Bonds, Project No. 108 Series A and Revenue Refunding Bonds, Project No. 108 Series B.

SUMMARY RATING RATIONALE

The rating on the bonds is derived from the issuer rating of the Commonwealth of Kentucky (Aa2 stable), as the Commission's ability to make payment on the bonds comes solely from rental income derived from a biennially renewable lease with the Kentucky Finance and Administration Cabinet and a biennially renewable sublease with various state agencies. The rent is subject to biennial general fund appropriation by the General Assembly and is therefore rated one notch off the issuer rating for appropriation risk. The rating reflects the credit quality of the commonwealth and Kentucky's significant reliance on such appropriation-backed financings to fund capital investments.

The rating also reflects Kentucky's record of proactive financial control and an economy that has benefitted from auto sector recovery. Low per-capita income levels, above-average state debt and very large unfunded pension liabilities contribute to a below-average credit profile compared to most other states. Because the commonwealth retired the last of its general obligation bonds in 1995, the Aa2 issuer rating represents the state's implicit general obligation rating.

The commonwealth struggled fiscally during the economic downturn, drawing down reserves and relying on deficit financing. Revenues have since improved and the budget is close to structural balance after significant expense cuts over the past three budget cycles. The commonwealth recently passed reforms to its general employees pension plan, reducing benefits for new hires and increasing state contributions. Unfunded liabilities remain large, however, and the reform did not address the teachers retirement system, which also has a growing unfunded liability. Kentucky's outlook is stable based on the expectation it will continue to manage its finances responsibly and work to improve the financing of teacher pensions, against a background of continued below-average state economic growth.

OUTLOOK

Kentucky's credit outlook is stable. The commonwealth's sizable budget deficits during the economic downturn led to a reduction in reserve balances and borrowing for budget relief, but have moderated in the past two biennial budgets. Revenues have improved, though growth will remain modest as Kentucky's sluggish economic recovery trails the nation's. Modest pension reforms have slowed the growth in the state's unfunded liability and the actuarially determined contribution (ADC) is fully funded in the adopted fiscal 2015 and 2016 budgets. Lack of pension reform for the Kentucky Teachers' Retirement System in the fiscal 2014 legislative session means pension contributions will continue to be below the ARC for the next biennium and that the commonwealth's large unfunded liability will continue to grow, but closing the estimated gap between the ARC and current statutory funding level should be manageable with modest revenue growth.

WHAT COULD MAKE THE RATING GO UP

-Sustained economic and revenue growth, with structural balance in state finances and limited reliance on non-recurring resources

-Build-up and maintenance of reserves

-Significant improvement in pension funding levels

WHAT COULD MAKE THE RATING GO DOWN

-Sustained economic slowing, even after a national upturn, resulting in weaker revenue performance that strains commonwealth finances

-Depletion of reserves with no replenishment in step with other comparably rated states

-Continued reliance on non-recurring resources, particularly use of additional deficit financing, to balance the commonwealth's budget

-Trend of negative GAAP basis ending balances

-Indications of strained liquidity

-Failure to address declining pension system funded levels

-Failure of the commonwealth to pass a timely budget, leading to an extended shutdown of state government, even if debt service continues to be paid

-Failure to appropriate funds for debt service

OBLIGOR PROFILE

The Commonwealth of Kentucky has a population of 4.4 million people and a gross state product of $150 billion. It has a large and diverse economy, but relatively low wealth levels.

The Commission is an independent agency of the commonwealth. It finances the acquisition of real estate and construction and equipping of building projects and other public projects for any agency of the commonwealth. The Commission has statutory authority to issue bonds secured by and payable solely from revenues from the leasing of financed projects to state agencies.

The cabinet is a statutory administrative organization of the commonwealth. The Secretary of the cabinet is appointed by the governor and is the CFO of the commonwealth. Cabinet functions include coordination and supervision of the fiscal affairs of the commonwealth; construction, maintenance and operation of public buildings; investment and management of all commonwealth funds other than pension funds; and oversight of the issuance and management of all debt of the commonwealth or any agency thereof.

LEGAL SECURITY

REVENUES SUPPORTING BONDS DERIVED FROM PAYMENTS UNDER BIENNIALLY RENEWABLE LEASES

The bonds are limited obligations of the commission and are payable solely from lease rental payments from the commonwealth's Finance and Administration Cabinet to the commission and sublease payments from various commonwealth agencies to the cabinet. The cabinet and agencies' obligations to pay are unconditional under the lease agreements. Subject to biennial appropriation, rental payments are made pursuant to the terms of the lease agreements, which are automatically renewable for successive biennial periods unless terminated in writing by the cabinet or agencies. The leases require the cabinet and agencies to seek sufficient legislative appropriations to make rental payments for each biennial period. The General Assembly has no obligation to make appropriations for rental payments, and the cabinet and agencies have no obligation to renew the leases. The commonwealth is highly reliant on lease-appropriation financings for capital projects, which makes non-appropriation less likely. Kentucky has no history of non-appropriation for these financings.

USE OF PROCEEDS

The bonds are being issued to refinance a short term loan taken out by the Kentucky Asset/Liability Commission to lengthen the amortization schedule and achieve debt service savings, refund prior debt for debt service savings and fund the costs of various state agencies' new public projects.

RATING METHODOLOGY

The principal methodology used in this rating 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 this methodology.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Lisa Heller
Vice President - Senior Analyst
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

Nicholas E Samuels
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 to Kentucky State Property and Buildings Commission $456.2 million Revenue and Revenue Refunding Bonds, Project No. 108
No Related Data.
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