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To: John Graybill who wrote (116326)	8/9/2001 2:02:49 PM
From: Mark Adams	Respond to of 436258

Fitch Lowers Tennessee's GO Rating To `AA' Business Editors NEW YORK--(BUSINESS WIRE)--Aug. 9, 2001--Fitch has revised its rating on the State of Tennessee's outstanding $1.1 billion general obligation bonds to `AA', downgraded from `AAA' due to an enlarging structural deficit and inadequate measures taken to address it. At the same time the economy is slumping, evidencing increased vulnerability for financial operations. It has been obvious for some time that Tennessee needs a larger or broadened revenue base to support current operations, as revenue pressures in recent years have caused actual collections to lag estimates. The sales tax provides over 60% of revenues, and collections have lagged considerably over the past year and have fallen below estimates over a longer period. The governor has repeatedly proposed an income tax as part of major tax reform and to close the structural deficit but these proposals, as well as others, have consistently been rejected. The fiscal 2002 budget, as it now stands following the legislature's override of the governor's previously vetoed legislatively-amended budget, continues and expands the largely temporizing actions employed over the past two years. These principally include the broadened use of non-recurring revenue, now projected to account for 3.5% of fiscal 2002 revenues. Tobacco settlement funds, including those accumulated as well as the fiscal 2002 expected allocation, provide some 4.7% of total fiscal 2002 revenues, or some $373 million in total, to offset a projected revenue shortfall of some $550 million and preserve balance. In fiscal 2001, the initial projected gap was some $400 million, but the year is now expected to close with about a $150 million operating deficit to be offset by non-recurring revenues. At the end of fiscal 2002, the rainy day fund is expected to remain at the fiscal 2000 level of $178 million, or 2.2% of fiscal 2002 revenues. Economic slowing, now notable, may further exacerbate the state's recurring revenue gap. Employment gained only 0.5% from June 2000 to June 2001, with a 4.4% decline in manufacturing employment. Personal income growth has slowed in recent years approximating 90% of the nation's increases, with per capita income in 2000 of $26,239, ranking the state 34th. The state's debt structure is very sound, essentially all general obligation, and continues to represent a very low burden on resources. Inclusive of the $150 million GO bonds expected to be issued in September, net tax-supported debt of $1.45 billion equals only $255 per capita and 1% of personal income.