Fitch Rates MTA's $500MM Dedicated Tax Fund Bonds 'A+'; Outlook Negative

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to the following $500 million Metropolitan Transportation Authority (MTA) dedicated tax fund (DTF) bonds:

--Series 2010A-1 (tax-exempt);

--Series 2010A-2 (federally taxable-issuer subsidy-Build America Bonds).

The par amount of each series will be determined based on market conditions at pricing. The bonds are expected to sell via negotiation the week of March 15, 2010.

In addition, Fitch affirms the following ratings at 'A+':

--$5.1 billion outstanding dedicated tax fund bonds.

The Rating Outlook is Negative.

RATING RATIONALE:

--Given the annual state legislative appropriation requirement for bond payment as well as the state's discretion regarding revenues flowing to the dedicated tax fund, the rating is capped at the appropriation debt rating of New York State (currently 'A+' with a Stable Outlook, one notch below the state's general obligation rating).

--The dedicated taxes are diverse and derived from a broad, wealthy state and regional economy, although tax revenues are sensitive to economic cycles and to periodic legislative actions.

--Dedicated revenues provide ample coverage of maximum annual debt service (MADS) and there is a strong incentive to limit leveraging of the dedicated tax fund given the demands on surplus revenues for operating support of transit and commuter rail.

--The state has a track record of providing a generally reliable revenue stream to the dedicated tax fund, although as part of a gap-closing plan in late 2009 the state legislature reduced the dedicated tax appropriation for 2009 by $123 million, the first time an existing appropriation to the MTA from a dedicated tax that had already been collected by the state has been reduced.

--Appropriation debt plays a prominent role in the state's overall debt structure, mitigating the risk of non-appropriation.

--The security for the dedicated tax bonds is somewhat insulated from the operations of the MTA, although excess DTF revenues are needed to support transit operations.

--The Negative Outlook reflects the greater than expected financial stress the MTA is facing due to a combination of adverse events as well as the authority's diminished financial flexibility, which exacerbate concerns about habitually narrow margins and projected outyear budget gaps.

WHAT COULD TRIGGER A DOWNGRADE?

--Actions by the financially strained state or authority that threaten the financial flexibility within the DTF to cover debt service on the DTF bonds adequately while providing the sizable transfers to MTA that are used to support transit and commuter rail operating needs.

--Underperformance of dedicated tax collections and/or significant delays or reductions in monthly payments to the MTA.

SECURITY:

The DTF bonds are secured by a gross lien on the Mass Transportation Trust Fund (MTTF), which is funded from an allocation of the state's petroleum business tax, motor fuel tax and motor vehicle fees, subject to annual appropriation by the state legislature. In addition, a standby gross pledge of the Metropolitan Mass Transportation Operating Assistance Account (MMTOA), which is funded from a regional sales tax, the state petroleum business tax, a state franchise tax and a regional franchise tax surcharge, subject to appropriation, provides further security. The federal subsidy associated with the Build American Bonds is not pledged.

CREDIT SUMMARY:

Underlying the 'A+' rating on the DTF bonds is the amount and diversity of revenues that are pledged to the DTF for debt service on its bonds, subject to state legislative appropriation, the record of state support of the fund, and the expectation that the MTA will continue to maintain sufficient financial flexibility within the DTF to not only cover DTF bond debt service adequately but also provide sizable transfers to the MTA to support transit and commuter rail operating needs.

The bonds are special obligations secured by state taxes deposited in the pledged amounts account from MTTF and MMTOA receipts. The state legislature established the MTTF in 1991 to address the need for continued capital investment in the state's transportation infrastructure. MTTF revenue is derived from statewide petroleum business taxes (about 55% of fiscal 2010 MTTF taxes), motor fuel taxes (16% of total), and motor vehicle fees (29% of total). The MMTOA was created in 1980 in anticipation of continuing ongoing operating deficits of state mass transportation systems. Four categories of special taxes are deposited into the MMTOA: a temporary regional franchise tax surcharge on business activity carried out within the MTA transportation district that, though temporary, has been regularly extended since 1982 (about 54% of fiscal 2010 MMTOA taxes), a 3/8% regional sales tax imposed on sales and uses of certain tangible property and services within the transportation district (38% of total); a portion of franchise taxes on certain transportation and transmission companies statewide (4% of total); and an additional portion of statewide petroleum business taxes (4% of total). While MTTF receipts to the MTA are equal to a fixed percentage allocation, the percentage of MMTOA revenues received by the DTF varies. MMTOA receipts not deposited into the DTF are generally provided to the MTA and other transit systems by the state in the form of operating subsidies.

Tax revenues allocated to the DTF are subject to annual appropriation by the state legislature. As part of the state's fiscal 2010 gap-closing plan, in late 2009 the state legislature reduced the dedicated tax appropriation to the MMTOA for 2009 by $123 million, the first time an existing appropriation to the MTA from a dedicated tax that had already been collected by the state has been reduced. The state is not bound or obligated to continue imposition of taxes and fees from which trust fund revenues are currently derived and can amend, modify, repeal, or otherwise alter statutes imposing or relating to the fund or the taxes or appropriations that are the source of fund revenues.

Total MTTF and MMTOA receipts of about $1.9 billion in state fiscal year 2010 (ending March 31, 2010), although down more than 16% from fiscal 2009, provide 4.7 times (x) coverage of maximum annual debt service after this issuance (assuming level debt service for the series 2010A bonds). MTTF receipts alone provide coverage of about 1.6x.

An additional bonds test requires not less than 1.35x historical coverage of MADS by MTTF receipts and investment income, and not less than 2.5x coverage of MADS by combined MTTF and MMTOA receipts and investment income. As MTA issues additional bonds to finance its large transit and commuter rail capital needs, debt service coverage is expected to fall but still be strong based on MTA's need to sustain operating subsidies. This necessity provides practical limits on the amount of debt issued in the future.

Receipts are transferred to the debt service account monthly in the amount of 1/5 of the next interest payment and 1/10 of the next principal payment. Surplus MTTF and MMTOA receipts are used by the MTA for capital and operating needs of the transit and commuter rail systems, including debt service on the MTA's transportation revenue bonds (rated 'A' with a Negative Outlook by Fitch). The transportation revenue bonds are also secured by MTA's operating receipts and other sources.

While the security for the DTF is somewhat insulated from the operations of MTA, Fitch recognizes the necessity of excess DTF revenues to support transit operations. The MTA is responsible for North America's largest transit network, serving 2.7 billion riders annually. The authority's network is essential to the economic well-being of the region, handling 80% of all daily trips to Manhattan's business district. The authority has closed near-term budget gaps through service reductions, cost savings, and other measures; however, ongoing near- to-medium-term operating and capital needs are likely to face continued pressure. For more information on the MTA, see the Fitch releases 'Fitch Rates MTA's (NY) Transportation Rev Bonds 'A'; Outlook Negative' dated Jan. 28, 2010 and 'MTA Faces Additional Financial Pressure Following Increased Payroll Tax Shortfall Projections' dated Feb. 3, 2010. For more information on the state of New York, see Fitch's release 'Fitch Rates New York State's $448MM GOs 'AA-'; Outlook Stable' dated Feb. 19, 2010. Both are available on Fitch's web site at 'www.fitchratings.com'.

Applicable criteria available on Fitch's website at 'www.fitchratings.com' include:

'Tax-Supported Rating Criteria', dated Dec. 21, 2009.

'U.S. State Government Tax-Supported Rating Criteria', dated Dec. 28, 2009.

Additional information is available at 'www.fitchratings.com'.

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