TEXT - Fitch affirms Illinois Regional Transportation Auth
Jan 11 - Fitch Ratings has affirmed the ratings on the following Regional Transportation Authority, IL bonds: --$2.086 billion general obligation (GO) bonds at 'AA'; --$111.1 million GO variable-rate notes (extendable reset securities) series 2005B at 'F1+'. The Rating Outlook for the bonds is Negative. SECURITY The bonds are general obligations of the Regional Transportation Authority (RTA), for which its full faith and credit is pledged. The RTA has pledged its allocation of sales tax and public transportation fund (PTF) revenue to repayment of the notes. KEY RATING DRIVERS NEGATIVE RATING OUTLOOK: The Negative Outlook reflects the continuing financial pressure both on operations and capital spending due to the state's persistent financial challenges and delinquent payments to RTA. IMPROVING TAX COLLECTION: Sales tax revenues, RTA's largest revenue source, continue to improve with increased month-over-month performance, compared with the year prior, for 31 consecutive months. ESSENTIAL SERVICE: RTA serves as a vital component of the regional economy and provides an essential service to roughly 2.3 million riders daily. ADEQUATE NET DEBT COVERAGE: Historical gross debt service coverage from pledged revenues is projected to remain ample. Coverage from net revenues is engineered to produce slightly more than 1x coverage. ECONOMICALLY SENSITIVE REVENUES: Sales taxes are vulnerable to economic cyclicality, which can adversely impact available revenues to support transit system operations after payment of debt service. HIGH FAREBOX RECOVERY RATIO: The RTA is statutorily required to maintain a strong farebox recovery ratio among the three transportation systems of at least 50%, which is favorable relative to most peer transit systems. WHAT COULD TRIGGER A RATING ACTION PERSISTENT CAPITAL MAINTENANCE DEFERRAL: RTA's inability to execute a plan in the near term that has the support of the service boards, and maintains adequate levels of operational funding while also addressing the mounting capital needs of its three transportation systems could exert negative rating pressure. FISCAL IMBALANCE: RTA's inability to maintain financial equilibrium under the presumption that state funding delays will continue, at least for the near term, could result in a rating downgrade. CREDIT PROFILE RTA is the third largest transit system in the nation, serving a population of roughly 8.5 million people located within the city of Chicago, suburban Cook County, and the counties of DuPage, Kane, Lake, McHenry, and Will (the collar counties). The authority is responsible for regional transit planning, and has financial and budget oversight of the three 'service boards': Chicago Transit Authority (CTA), Metra commuter rail, and Pace suburban bus. LARGE SYSTEM SERVES DIVERSE CHICAGO METRO AREA The service area population has increased modestly over the past decade, primarily due to growth in the collar counties. While the area's credit fundamentals remain largely positive, improving but still elevated unemployment and a stagnant housing market, among other issues, continue to pressure the area's economic profile. The authority generates revenues primarily from a sales tax levied within Cook County and the five collar counties, as well as from PTF revenue, which is a statutorily required 30% state match of sales tax revenues and real estate transfer taxes generated within the city of Chicago. Sales tax revenues accounted for 66% of total revenues in 2011 followed by various state payments that accounted for 33%. Of the sales tax revenues, 47% are generated within suburban Cook County, 30% in Chicago, 9% in DuPage County, and the remainder in the four other collar counties. After payment of debt service, excess moneys are used primarily to subsidize the operations of the authority's three component transportation systems. CHRONIC STATE PAYMENT DELAYS PRESSURE RATINGS The state has been as much as nine months delinquent in remitting PTF payments, which historically had been remitted on a monthly basis to RTA. Since 2008, the state remittance has been irregular. State payments are currently six months in arrears. While the amount of the delinquency fluctuates, it has generally stabilized, and management appears to have weathered the operational stress to date through short-term financing. However, in Fitch's opinion, the chronic delinquencies have adversely affected system maintenance and capital expansion, and present ongoing risk to the authority's financial health. If PTF delinquencies worsen, management has indicated the authority could strategically reduce service, increase fares, and issue more working-cash notes. MAINTENANCE OF SYSTEM REMAINS A CHALLENGE Fitch believes that timely action and proactive cost controls will be necessary to maintain adequate levels of service, safety, and state of good repair on existing facilities. The RTA has proposed a plan to address the system's state of good repair by leveraging the expected future increases in sales tax with $2.5 billion of bonds. Implementation of the plan is uncertain, given the lack of full support from the service boards and the need for state legislative approval. If the bonds were issued, the RTA would adjust the revenue allotments it makes to the service boards, which are paid after debt service, to continue to produce net debt service coverage slightly higher than 1x. Gross debt service coverage on current and anticipated debt is projected to remain strong, in the 6x to 7x range, assuming modest annual growth in pledged revenues. STRONG DEBT SERVICE COVERAGE BY PLEDGED REVENUES Debt service coverage levels are expected to remain strong given the significant demand on pledged revenues to fund the operating needs of the transit system after payment of debt service. Debt service coverage is expected to be 4.5x in 2012 from sales tax revenues, and the addition of pledged state PTF revenue raises coverage to 5.9x, assuming the state distributes PTF funding at scheduled rates, which is unlikely. STEADY SALES TAX GROWTH Economically sensitive sales tax revenues are rebounding from the 2009 lows and have increased month over month, compared with the year prior, for 28 consecutive months. Sales tax revenues for 2011 increased by 4.7% over 2010. The 2012 budget assumes 2.3% growth, which Fitch considers reasonable, given recent trends. Sales tax receipts grew 5.3% year over year through August, suggesting a continuation of steady growth. Should economic conditions change, Fitch believes management will continue to demonstrate a willingness to revise its budget as conditions warrant. HIGH FAREBOX RECOVERY AND UNCERTAIN ELASTICITY RTA continues to meet its statutory requirement of covering at least 50% of expenses from system- generated revenues. Farebox revenue has grown 2.5% on average annually since 1997 and the recovery ratio is estimated at a high 57.3% year-to-date through October 2012. CTA accounted for approximately 65% of total fares, with Metra at 30% and the remainder comprised of the Pace suburban bus system and ADA paratransit, which is largely unchanged since 1997. RTA has budgeted 2012 fare revenues to grow nearly 9%, reflecting Metra's largest fare increase in history of 25% in February 2012. Demand elasticity is still uncertain. The 2013 operating budget assumes a ridership drop of 1.7% due to CTA fare increases, but Fitch notes ridership exhibited a 2.8% year-over-year increase through October 2012. SHORT-TERM BORROWING NEEDED TO FUND OPERATIONS Each year, RTA is required to adopt an annual budget and a two-year financial plan. The budget includes RTA's direct expenditures and funding of each service board's operating deficit. Beginning with the 2012 budget, RTA ended its practice of transferring capital funds to cover operating expenses. The three service boards helped RTA achieve this with labor savings, the fare increase, and other various adjustments. Importantly, service reductions were not included in any of the 2012 budgets. However, RTA will continue to use debt financing to provide for operating funds on a short-term basis. RTA's current five-year capital program from 2012-2016 totals $4.3 billion, which continues efforts to bring the system to a state of good repair. STRONG LEGAL PROVISIONS Legal covenants are good, with an additional bonds test whereby one-half of the sales tax revenues for the past 24 months must at least equal 2.5x pro forma MADS, including short-term obligations and amounts necessary to satisfy debt service reserve requirements. There is no debt service reserve for the notes.
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