RPT-Fitch Affirms Various Michigan Transportation Fund Bonds at 'AA'; Outlook Stable
Aug 1 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings affirms the 'AA' rating on the following Michigan Transportation Fund (MTF) bonds:
-- $1.8 million Taylor, MI: general obligation (GO) limited tax (LT) Michigan Transportation Fund bonds, series 2008;
--$3.1 million Kalamazoo, MI: (Michigan Transportation Fund) GO LT bonds, series 2004 and 2007;
--$3.3 million Manistee County, MI: Michigan Transportation Fund bonds, series 2004;
--$0.5 million Grand Blanc, MI: (Michigan Transportation Fund) GO LT bonds, series 2001; --$2.8 million Wayne County, MI: (Michigan Transportation Fund) GO LT bonds, series 1999.
The Rating Outlook is Stable.
MTF bonds are secured by the local government's allocation of amounts received from the MTF, which is derived primarily from statewide vehicle registration and motor fuel taxes. The respective bonds are also secured by a pledge of each respective local government's full faith and credit and its ad valorem tax pledge, subject to constitutional and statutory limitations, except the Manistee County bonds, for which the county has pledged any legally available funds.
KEY RATING DRIVERS
STRONG COVERAGE: Strong debt service coverage is derived from MTF revenues and supported by an additional bonds test requiring 2x coverage of pro forma debt service from local government pledged revenues.
CONSTITUTIONAL DEDICATION: Highway revenues received in the MTF are constitutionally dedicated to transportation purposes. MODEST FORECAST REVENUE GROWTH: Baseline MTF revenues are forecast by the state to grow only modestly going forward. Revenue collections are subject to broader trends in state economic performance.
RATINGS REFLECT STRONGER PLEDGE: Local governments provide an underlying pledge in addition to the pledge of MTF revenues. The rating reflects the higher of the local government pledge rating or the 'AA' rating assigned to the MTF revenue stream.
STRONG COVERAGE, STABLE ALLOCATIONS: The ratings are sensitive to the maintenance of strong debt service coverage by pledged MTF revenue and the continued stable allocations from the MTF.
SECONDARY PLEDGE UPGRADE: Individual ratings could change if the rating for the secondary pledged security rises above the 'AA' MTF program rating.
Annual debt service cannot exceed 50% of annual MTF revenues, ensuring a minimum of 2.0x coverage of pro forma maximum annual debt service (MADS) at issuance. However, coverage for most bonds is usually higher because funds are also used to pay for routine road repair and maintenance. MTF funds for 2012 provided adequate to ample debt service coverage of MADS for the five local governments: 2.7x for Grand Blanc, 11.4x for Manistee County, 9.8x for Wayne county, 2.9x for Kalamazoo and 10.4x for Taylor. MADS coverage for each of the five communities has been relatively stable to increasing for the last five years.
Michigan's constitution requires no less than 90% of revenues generated from taxes on motor vehicle fuels and registered motor vehicles to be dedicated solely for streets, roads and bridges. Consistent with the constitutional requirement, Act 51 of 1951 (the Act) provides for the distribution of the transportation revenues, including 21.8% to cities and villages and 39.1% to county road commissions, after several initial distributions.
Gross MTF revenues are allocated to several funds and the net revenues are then divided between the State Truck Line Fund, county road commissions, and cities and villages, based on a distribution formula prescribed by the Act. A local government's individual share of MTF funds is formula-based taking into account population, total road mileage and the types of roads relative to the state. The formula has remained stable over the past several decades, although there are no statutory requirements for the allocation of revenues to the individual local governments. The formula is more heavily weighted towards local road mileage rather than population, thus minimizing funding declines due to potential population declines.
Fitch views the legal and constitutional safeguards on the MTF revenue stream as sufficiently isolating program revenues from the risks of the state's budgetary demands. The rating is not capped by the local government's GO rating, as funds are held separate and apart from the general fund, and the statute requires the local government to first expend its MTF allocation for payment of MTF bonds prior to any other expenditure.
MODEST FORECAST REVENUE GROWTH
Motor fuel revenues are currently generated from a 19-cents per-gallon tax imposed on gasoline, diesel fuel, and liquid petroleum gas used by motor vehicles. The tax is collected and deposited into the MTF monthly. Vehicle registration fees are imposed on commercial vehicles based on vehicle weight and on passenger vehicles on a value basis. Miscellaneous fees include motor vehicle title fees, plate transfer fees, and special license plate registration taxes. Motor fuel taxes accounted for just over half of the total MTF revenues in fiscal 2012, vehicle registration taxes accounted for 46%, and miscellaneous revenues accounted for the remainder. Aggregate MTF revenues have been relatively stable over the past three years, but are down nearly 10% since 2004. However, debt service coverage on Fitch-rated bonds remains strong. There has been discussion at the state level about increasing the pool of MTF revenues either through a one-time transfer or via an increase in motor fuel taxes and registration fees. It is unknown whether the distribution formula to individual local governments would change with a new proposal, although Fitch notes that non-impairment language in the Act provides bondholders protection from adverse changes to the distribution formula. Excluding any potential new revenues, the state projects aggregate MFT revenues to increase by a modest 0.7% annually.
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