Nov 15 - Fitch rates the following series of Contra Costa Transportation Authority (CCTA or the authority), CA’s sales tax revenue bonds ‘AA+':
--$201.4 million variable rate sales tax refunding bonds, series 2012A;
--$169 million sales tax bonds, series 2012B.
Proceeds from the series 2012A bonds will refund the outstanding sales tax revenue bonds, series 2010. Proceeds from the series 2012B bonds will finance a portion of the costs associated with certain projects authorized by the agency’s expenditure plan and pay the costs of issuance for both bond series.
The bonds will be sold via negotiation sale during the week of Dec. 3rd. The series 2012A bonds will be issued as variable rate bonds in the SIFMA or Index Mode with a mandatory tender date of March 1, 2015. The series 2012B bonds reach final maturity on March 1, 2025.
The Rating Outlook is Stable.
The sales tax revenue bonds are secured by revenue from the 1/2 cent retail transactions and use tax (sales tax) authorized by Measure J and levied throughout Contra Costa County (the county), net of the Board of Equalization administrative fee.
STRONG DEBT SERVICE COVERAGE: Coverage is a strong 2.5 times (x) maximum annual debt service (MADS) and is projected to remain ample based on sales tax revenue’s past performance, the economic outlook for Contra Costa County, and satisfactory restrictions on additional leveraging.
HEALTHY SALES TAX BASE: Pledged revenue is a broad-based, voter-approved sales tax supported by the county’s rebounding economy and solid economic fundamentals. The economically sensitive revenue source recently returned to growth after declining significantly during the recession. The tax expires after the bonds’ final maturity.
RECOVERYING ECONOMY; SOLID FUNDAMENTALS: The county’s economy is diverse and well-integrated with the dynamic regional economy of the greater San Francisco Bay Area. The county’s economic characteristics are solid with above average wealth levels, a sizeable and growing population, and solid employment growth despite a still elevated unemployment rate.
SATISFACTORY LEGAL PROVISIONS: Legal protections are solid with a 1.75x additional bonds test (ABT) and additional restrictions limiting the use of sales tax revenues for capital projects.
LIMITED OPERATING RISK: CCTA benefits from its limited exposure to operational risks, the essential nature of Measure J’s approved capital projects, and transportation programs, and strong voter support.
Debt service coverage is projected to remain ample. Maximum annual debt service (MADS), calculated using the swap payment amount as a proxy for the variable rate debt service, occurs in fiscal 2017 at approximately $27.5 million, is covered at 2.5x based on fiscal 2012 sales tax revenue (unaudited). MADS coverage is still solid at 2.24x based on fiscal 2010 revenues of $61.5 million, the lowest revenue year since fiscal 2000. Coverage levels are resilient under various Fitch conducted stress tests, including greater and more persistent revenue declines than recoded historically and 2012A debt service based on the penalty rate.
A preliminary estimate of additional debt equals approximately $61 million in fiscal 2014. Debt service coverage is expected to remain satisfactory following the additional issuance.
Fitch views bondholders’ legal protections as satisfactory. Sales tax revenues are distributed directly from the Board of Equalization, the state’s collection agency, to the trustee. The additional bonds test (ABT) is solid at 1.75x MADS (including outstanding and proposed bonds), based on revenues collected in any 12 consecutive months within the 18 months prior to issuance. The bonds are issued without a debt service reserve fund, although rating concerns are mitigated by the strong coverage levels.
CCTA is restricted by ordinance to allocating no more than 42.5% of annual sales tax revenues to capital projects with the remaining revenues allocated to various transportation programs operated by third parties. Fitch views this additional restriction on the leveraging of sales tax revenue as a credit positive.
Sales tax revenues demonstrated their sensitivity to economic conditions with a cumulative 18.8% decline from fiscal 2007-2010. However, as sales activity in various sectors improved including auto, retail, and construction, total receipts returned to growth with a cumulative revenue increase of 11.7% over fiscal years 2011-2012. Despite the recent improvements, fiscal 2012 revenues remain 9.3% below the peak year in fiscal 2007. Fitch expects future revenue to continue to be volatile but not severely so given the tax base’s economic strength and the diversity of revenue generating transactions.
The county was significantly impacted by the recession with significant declines in property values and high unemployment, but recent economic indicators point to an on-going recovery. The county’s unemployment rate fell 1.7% over the past year to 8.4% (September 2012) due to 3% employment growth that exceeded state (1.5%) and national (2%) levels. Local employers are diverse with top employers in industrial, healthcare, biotechnology, and other sectors. In addition, the county benefits from its relatively affordable housing and access to the large labor market in the broad and diverse San Francisco Bay Area economy.
Contra Costa County is the third most populated of the nine San Francisco Bay Area counties with a growing population of 1.1 million. Wealth levels in the county are a credit positive with the per capita and median household income levels at 31% and 51%, respectively, above the national average. The county covers approximately 802 square miles and includes 19 incorporated cities, including Richmond, Concord, Walnut Creek, and Martinez, which serves as the county seat.
The series 2012A bonds are variable rate obligations that will be issued in either SIFMA or Index Mode with a mandatory tender on March 1, 2015. The bonds are not subject to acceleration nor are they covered by a liquidity facility. In the event of a failed remarketing, the bonds will carry a penalty interest rate of 8%-12%. CCTA has synthetically fixed the interest rate through a swap agreement with Bank of America (LIBOR based) that had a negative mark-to-market value of $56.6 million on Oct. 29, 2012.
CCTA was formed as the implementation agency in 1988 for Measure J’s predecessor, Measure C, and provides funding for public transportation programs within the county and oversees the planning and construction of specified capital projects. Measure J extends the sales tax for 25 years with an expiration date of March 31, 2034. Measure J received strong support with approval by 71% of voters.
Fitch views the wide range of capital projects and transportation programs funded by the Measure J as essential. These projects include the fourth bore of the Caldecott Tunnel, the eBART extension, highway improvements, and the funding of local transit systems. CCTA does not retain ownership of completed projects or operate transportation programs. Fitch views CCTA’s operational risk as low given its relatively narrow role as a planning, coordinating, overseeing, and funding agency.