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The following is a press release from Moody's Investors Service: STATE'S STABLE OUTLOOK APPLIES TO CURRENT ISSUE AND APPROXIMATELY $170 MILLION OF SIMILARLY SECURED OBLIGATIONS Alabama Building Renovation Finance Authority State Alabama Moody's Rating Issue Rating Building Renovation Revenue Refunding Bonds Series 2010 Aa2 Sale Amount $29,655,000 Expected Sale Date 07/20/10 Rating Description Building Renovation Revenue Bonds NEW YORK, July 16, 2010 -- Moody's Investors Service has assigned a rating of Aa2 and a stable outlook to the State of Alabama's $29.7 million Building Renovation Revenue Refunding Bonds Series 2010, issued through the Alabama Building Renovation Finance Authority. The bonds are scheduled for sale by auction on July 20. Proceeds will be used to redeem debt issued by the authority in 1999 that is now callable. The refunding bonds will generate substantial interest savings, most of which will be allocated to the state's current fiscal year, without extending debt maturity. The bonds are secured by a lease agreement between the Alabama Building Renovation Finance Authority and the state's Department of Finance. The lease agreement requires annual renewal and legislative appropriation of funds for payment. The rating assigned to this issue is a notch lower than the state's Aa1 general obligation rating because of these requirements. Alabama's G.O. rating is supported by the state's conservative financial practices and modest debt burden, balanced against below-average wealth levels and comparatively large liabilities for retiree health and pension benefits. Strengths: -Conservative financial management practices based on constitution and statute -History of rapid fund balance rebuilding during economic recoveries -Expected long-term employment gains in manufacturing and government through, respectively, foreign direct investment and U.S. military relocations Challenges: - Economic weaknesses such as high poverty level and non-durable goods manufacturing job losses -Continued financial pressure from sources such as liability for retiree health benefits -Reliance on extension of Medicaid provisions in federal economic stimulus law for coming fiscal year -Likely need to lower revenue forecast prior to October 1 start of 2011 fiscal year CONSERVATIVE FISCAL PRACTICES ARE CENTRAL TO STATE'S RATING Conservative fiscal practices, enforced by statutory and constitutional provisions, are the primary support for Alabama's credit rating. The executive branch must monitor revenue and spending and impose cuts pro-rata against appropriations when revenue falls short of forecast. The proration mechanism has stabilized Alabama's finances through prior economic cycles. Amendment 26 to the Constitution of Alabama was enacted to prevent deficit spending, by allowing expenditures only from appropriated funds on hand in the state treasury. If available funds are less than spending requests at fiscal year-end, funding granted for the requests must be cut in proportion to the shortfall, and any unpaid appropriations must be voided. A 1932 state law reinforces Amendment 26, directing the governor to restrict appropriated fund allotments in proportion to any revenue shortfall projected. The law requires the governor to use this proration power so that the state does not encounter fiscal year-end deficits that, under Amendment 26, would interrupt the ability to make payments. The Alabama Supreme Court has determined that the statute does not apply to debt service on state bonds. The state has prorated its budget about two dozen times since the mechanism was implemented. In advance of the current fiscal year, the governor prospectively declared a 7.5% proration of the state's largest operating fund, the Education Trust Fund (ETF), to save $427 million, after a larger proration (17.9%) the preceding year. The state also reduced most general fund spending by about 12% (or about $200 million) from budgeted levels through quarterly allocation hold-backs of 3%. The governor in April declared a general fund proration of 12% to formalize these expenditure reductions for the full year, while protecting spending levels in Medicaid and corrections. Alabama's fiscal year ends September 30. To the extent any shortfall in the current or coming year's budget cannot be offset by reserves, the state is likely to impose additional proration. Alabama's otherwise strong management features are offset by the absence of certain practices characteristic of more highly rated states, such as binding consensus revenue estimating, multi-year financial plans, and debt-affordability analyses. FUND BALANCES HAVE BEEN DEPLETED IN RECENT YEARS Available balances of Alabama's general fund and the ETF (on a GAAP basis) were fully depleted in the year ended September 30, 2009, according to the state's audit. The general fund's unreserved, undesignated fund balance (UUFB) of $ 216.6 million was more than offset by the ETF's $224.9 million deficit. This extended a trend of fund balance declines caused by revenue underperformance that began in fiscal 2007. At the end of fiscal 2008, the combined UUFB for the general fund and ETF was $808.5 million, about half the amount reported two years earlier. Total available balances remained positive, reflecting available budgetary reserves. ALABAMA EXPECTED TO REBUILD RESERVES AS CONDITIONS ALLOW We expect Alabama will continue its practice of rebuilding fund balances and financial reserves as economic conditions stabilize. The state's reserves include the Education Trust Fund Rainy Day Account and the General Fund Rainy Day Account, constitutionally authorized reserves within the state's $3 billion Alabama Trust Fund, which was formed from oil and gas revenues. The ETF Rainy Day Account may be drawn on to make up shortfalls in ETF revenues, with repayment required in six years. The ETF's negative position at the end of fiscal 2009 reflected $437 million payable to the state's Education Trust Fund Rainy Day Account. This account was used to mitigate the need for proration of the state's ETF budget in fiscal 2009. ETF Rainy Day Account withdrawals must be repaid within six years. The state in fiscal 2007 finished paying back $180 million borrowed from the account four years earlier. Alabama also has a statutory rainy day fund for the ETF that is known as the ETF Proration Prevention Account. This account was fully depleted during fiscal 2008. The budget enacted for fiscal 2011 requires that three quarters of any ETF surplus revenues be allocated to rebuilding, in equal portions, the constitutional and statutory reserve funds. The state still has capacity to draw on the General Fund Rainy Day Account, up to 10% of the prior fiscal year's appropriations (about $178 million), which may be used to offset the need for general fund proration. FISCAL 2011 BUDGET USES SOME NON-RECURRING MEASURES The state's $1.6 billion general fund budget for fiscal 2011 was signed by the governor on April 22. The state's fiscal 2011 projection anticipates that recurring revenues will recover by almost 13% (or $167 million), to $1.48 billion. It is likely that the state will revise its fiscal 2011 revenue forecast lower before the fiscal year begins. The projection is outdated and anticipates not only improving economic growth but large revenue gains in interest earnings (58%) and oil and gas tax collections (31%). The budget includes $78 million of unrealized gains on investments of the Alabama Trust Fund and $33 million of expenditure reductions to meet general fund appropriations of $1.57 billion. Like other states, Alabama has relied on special federal aid provided in the American Recovery and Reinvestment Act of 2009 (ARRA). The general fund budget as enacted anticipates extension of enhanced Medicaid benefits received under ARRA. If the federal government fails to extend the enhanced Medicaid reimbursement provisions, the state will have to manage a $195 million loss, on top of any downward revenue forecast revision, through proration and further reserve expenditures. The ETF budget as initially proposed assumed $345 million of additional federal education funding under the Jobs for Main Street Act of 2010. The proposed budget also included $298 million of ARRA funds for education that had been preserved from prior-year allocations, reflecting saving of these funds in fiscal 2009. The enacted budget eliminated the additional $345 million of federal education aid and instead assumes improvement of $50 million in various revenue sources as the economy recovers, as well as savings of more than $250 million from increased premiums and other changes to employee health plans. Total appropriations increase 2.3% to $5.45 billion. COLLEGE SAVING PLAN APPROVED; TRANSPORTATION FUNDING PLAN TO BE PLACED ON BALLOT As part of the budget for the coming fiscal year, the state passed legislation to stabilize its Prepaid Affordable College Tuition Program (PACT). This effort will cost an estimated $548 million over the 13 years starting in fiscal 2015. The highest annual cost is projected to be $88.7 million in fiscal 2020. In addition, the legislature approved a measure that will place a referendum on the ballot this fall providing for a $1 billion, 10-year road and bridge construction program funded from the Alabama Trust Fund. Under the proposal, the legislature starting in fiscal 2011 would make $100 million annual transfers to the state's Department of Transportation for construction and maintenance projects. Any given year's transfer amount would be capped if (MORE TO FOLLOW) Dow Jones Newswires July 16, 2010 17:06 ET (21:06 GMT)