TEXT-Fitch rates Utah Transit Authority sales tax revs 'A+'
Oct 19 - Fitch Ratings has assigned an 'A+' rating to Utah Transit Authority, Utah's (the authority or UTA) following bonds: --$296.8 million subordinated sales tax and refunding revenue bonds. The bonds will sell via negotiated sale on or about the week of Oct. 29. Proceeds will be used to fund the remainder of the authority's 2015 capital program and to refund outstanding debt to reduce the agency's variable rate exposure and provide for a more incremental debt escalation schedule. In addition, Fitch affirms the following ratings: --$736.1 million outstanding subordinate sales tax revenues bonds at 'A+'; --$1.2 billion outstanding senior sales tax revenue bonds at 'AA'. The Rating Outlook is Stable. SECURITY The senior and subordinate bonds are secured by a first and second lien, respectively, on certain gross sales and use taxes generated within the service area. The revenues are pledged through interlocal agreements with the counties of Salt Lake and Utah through at least 2045, which is beyond the final maturity date of the bonds. Pledged revenues also include net farebox revenues and interest subsidy payments received by UTA from the U.S. pursuant to the issuance of Build America Bonds (BABs). The bonds are additionally secured by debt service reserve funds. KEY RATING DRIVERS --ADEQUATE SUBORDINATE COVERAGE: The 'A+' rating on the subordinate bonds reflects somewhat low maximum annual debt service (MADS) coverage by fiscal 2011 sales tax revenues of 1.24 times (x), though annual debt service (ADS) is sound at 2.16x, inclusive of debt from this issuance. Based on seven months of fiscal 2012 sales tax data, Fitch expects coverage to rise to adequate levels that can stand up adequately under stress scenarios. --STRONG SENIOR COVERAGE: The affirmation of the senior bonds' 'AA' rating reflects senior MADS coverage by fiscal 2011 sales tax revenues of 2.09x and a strong additional bonds test (ABT) of 2.0x. --SOLID ECONOMY, TAX GROWTH: The ratings also reflect the strength of the service area's economy, which has enjoyed healthy sales tax revenue growth and encompasses nearly 80% of the state's population. The state enjoys a relatively low rate of unemployment, recently promising employment expansion, and a well-diversified economy and tax base. --SMALL PROJECTED OPERATING MARGINS: Issuer projections show a low farebox recovery ratio of below 25%, and UTA's net all-in coverage projections (including operations) hover between 1.08x-1.15x from fiscal years 2012-2017, providing limited financial flexibility. --WEAK DEBT PROFILE IMPROVING: This issuance somewhat improves an otherwise weak debt profile by refunding half of the issuer's variable rate debt with fixed rate debt and including a cash-funded debt service reserve fund (DSRF) on the refunded bonds where none existed before. However, the authority's debt profile remains somewhat weak, with low to adequate MADS coverage, very slow principal amortization, escalating debt service, and a permissive ABT on the subordinate lien. --NO OPEB, PENSION ISSUES: The authority has no other post-employment benefits (OPEB) liability and has been fully funding its pension plan's annual required contribution. Nevertheless, the pension system is poorly funded and will likely require higher contributions going forward as recent years' investment losses are smoothed into funding levels. CREDIT PROFILE The system covers approximately 1,400 square miles in six counties that collectively serve nearly 80% of the state's population (state general obligation bonds rated 'AAA' by Fitch). The service area spans Utah's Wasatch Front, linking the city and county of Salt Lake (both GOs rated 'AAA' by Fitch), the region's cultural and economic hubs, with fast-growing suburban areas, including the counties of Box Elder, Davis, Tooele, Utah and Weber. The system's economic and tax bases are broad, diversified, and contain positive drivers for long-term growth, including historically very high birth and family formation rates that will continue to drive population growth. STATE ECONOMIC PERFORMANCE SOLID AND IMPROVING Recent economic indicators have been solidly positive, suggesting the state is recovering from the recession at a sound pace. August employment was up 3.4% year-over-year, well out-pacing the 1.6% national expansion. This employment expansion resulted in a relatively low 5.4% unemployment rate, an improvement from the prior year's 6.8% rate. Although government employment contracted significantly over the past year, most private employment sectors recorded gains. The biggest employment gains came from leisure and hospitality, professional and business services, and construction sectors. State per capita income levels increased somewhat in 2010 (the most recent date for which data is available) and total personal income levels, adjusted for inflation, surpassed the prior peak set in 2008. Due to large household sizes, the state persistently ranks poorly on a per capita income basis. However, household income levels are moderately above the national rate. SALES TAX REVENUES IMPROVING, BUT LEVERAGE LIMITS COVERAGE BENEFITS The authority's sales tax collections have been performing well, reflective of broader economic gains throughout the state. Sales tax collections rose 6.5% in fiscal 2011, significantly outperforming the authority's original projection of a 4.2% gain. Sales tax revenues for the first seven months of 2012 (the most recent data available) have similarly outperformed, rising 7.5%, versus the authority's original projection of a 4% increase. The issuer is assuming 4% sales tax revenue growth in fiscal 2013 that gradually ramps up to 5% annually from fiscal 2017 onward. The state economist recently revised the fiscal 2013 sales tax growth rate to 5.7% from 4%. Fitch believes the authority's long-term sales tax growth rate assumptions are somewhat aggressive, notwithstanding recently strong performance, as future sales tax growth may not match historically high levels that averaged about 5% since 1982. COVERAGE IS ADEQUATE FOR SUBORDINATE BONDS, STRONG FOR SENIOR BONDS Debt service coverage of senior lien bonds is strong, even on a MADS basis, but all-in coverage is notably weaker due to escalating subordinate debt service levels through fiscal 2021. Fiscal 2011 sales tax revenues of $183 million covered senior and all-in annual debt service (ADS) by a strong 2.72x and 2.16x, respectively. MADS coverage remained strong on the senior bonds at 2.09x, but registered a somewhat low 1.24x on an all-in basis (Fitch calculates MADS coverage assuming the BABs subsidy is treated as revenue and not an offset to debt service). After consideration of UTA's projected 6% sales tax revenue gain (a haircut from the 7.5% year to date gain) in fiscal 2012, MADS coverage levels rise moderately to 2.21x and an adequate 1.30x, respectively. Fitch estimates that sales tax revenues would have to decline 20% from fiscal 2011 levels for all-in MADS coverage to reach 1.0x. By comparison, sales tax revenues declined 10.8% cumulatively during the recession. The additional bonds test (ABT) for senior lien bonds is strong at 2x MADS, however, the subordinate lien ABT is low at 1.1x MADS. This issuance completes the financing for the authority's 2015 Projects CIP and the issuer has no plans to issue additional debt over the short term, thus mitigating concerns over the low ABT. However, other capital projects could result in parity issuances in the intermediate to long term. If UTA were to issue additional debt in a weak sales tax revenue environment, resulting in a material decline in debt service coverage, Fitch likely would downgrade the subordinate lien bonds. While senior lien bonds have a standard-sized DSRF requirement, the subordinate lien bonds are funded at just 50% of the standard level. The 2012 bonds' DSRF is cash-funded. DEBT PROFILE IMPROVED, BUT STILL SOMEWHAT WEAK OVERALL This issuance improves the authority's debt profile somewhat by reducing variable rate exposure and adding a DSRF. However, Fitch regards the authority's overall debt profile as still somewhat weak overall. This issuance will refund variable rate subordinate bonds that had no DSRF with fixed rate bonds that have a cash-funded reserve sized to the 50% level. Although Fitch sees the addition of a DSRF as a credit positive, its presence at the current rating level does not result in a notching distinction. After this issuance, variable rate exposure will fall from 14.3% of overall debt to 6.9%. The issuance also restructures debt service by pushing MADS to fiscal 2021 from fiscal 2018, and more slowly ramping up debt service. While this avoids a major bump up in debt service in fiscal 2018, it also results in somewhat higher MADS. Leverage levels are high and principal amortization is very slow, due to escalating debt service. Debt is 2% and 12% retired after five and 10 years, respectively. The authority's pension is poorly funded at just 58% as of Jan. 1, 2012, and contribution rates likely will rise moving forward as prior years' investment losses are smoothed into funding levels. The authority does not provide OPEB benefits and has no related liability. NARROW PROJECTED FINANCIAL OPERATING COVERAGE In fiscal 2011, the authority's operating revenues covered debt service and operational costs 1.69x on the senior level and 1.31x on an all-in basis. Under a Fitch-designed stress scenario, all-in coverage falls to a low 0.75x-1.02x range in fiscal years 2013-2017 assuming no sales tax revenue growth from fiscal 2012 projections. These concerns are mitigated somewhat by the recent strong economic growth of the authority's service area out of the recession. The farebox recovery ratio was just 21.6% in fiscal 2011, leaving the system highly dependent upon sales tax revenues, which Fitch considers to be a weak pricing framework. Financial operations are currently sound but are vulnerable to escalating debt service and reliant on sales tax revenues consistently growing. UTA's operating pressures are mitigated by two factors. First, 61% of total revenues derive from sales taxes, which have little correlation to UTA's operations. Second, UTA enjoys a high level of community support given high voter approval levels that authorizes the authority's sales tax revenues. Fitch also considers the essentiality of the authority to the community, as measured by the proportion of average daily ridership to the employment base. At 16.6%, Fitch regards UTA's level as somewhat low. However, ridership likely will rise with the opening of new lines, so essentiality may rise to moderate levels over the intermediate term. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope. Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria' (Aug. 14, 2012); --'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012). Applicable Criteria and Related Research: Tax-Supported Rating Criteria U.S. Local Government Tax-Supported Rating Criteria
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