TEXT - Fitch affirms Illinois Regional Transportation Auth

Fri Jan 11, 2013 4:27pm EST

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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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