NEW YORK--()--On Jan. 19, 2012, Fitch Ratings took the following rating actions on the Dallas Area Rapid Transit's (DART) senior lien sales tax revenue bonds as part of its review of tax supported debt of public enterprises:
--Approximately $27 million senior lien sales tax revenue bonds series 2002 upgraded to 'AA' from
'AA-';
--Approximately $751 million senior lien sales tax revenue refunding bonds series 2007 upgraded to 'AA' from 'AA-';
--Approximately $725 million senior lien sales tax revenue bonds series 2008 upgraded to 'AA' from 'AA-';
--$150 million senior subordinate lien sales tax revenue commercial paper notes upgraded to 'AA' from 'AA-' (Implied).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a senior lien on pledged revenues, which consist of gross receipts from the levy and collection of the 1% sales tax within the system's service area, farebox revenues and investment income from the debt service account. The senior subordinate lien sales tax revenue commercial paper notes are secured by a subordinate lien on pledged revenues.
KEY RATING DRIVERS
REFINEMENT TO METHODOLOGY: The upgrade to 'AA' from 'AA-' reflects Fitch's increased focus on operating risk and certain qualitative factors originally outlined in the July 15, 2011 press release 'Fitch Refines Methodology for Rating Tax-Supported Debt of Public Enterprises' and further clarified in the Jan. 19, 2012 press release 'Fitch Takes Various Rating Actions on U.S. Tax-Supported Transit Systems'.
LARGE AND DIVERSE ECONOMY: Dallas-Fort Worth metropolitan statistical area (MSA) employment levels have recovered from relatively modest recession-driven job losses. Above-average wealth indices and diverse employment opportunities provide economic stability.
STRONG DEBT SERVICE COVERAGE: Ample coverage by fiscal 2011 pledged 1% sales tax of 2.3 times (x) senior lien debt service and 1.9x maximum annual debt service (MADS) on senior lien bonds without the federal subsidies on DART's Build America Bonds (BABs) issues.
RESUMPTION OF SALES TAX GROWTH: A sizable increase in year-over-year fiscal 2011 sales tax collections reverses two years of recession-led declines. Long-term sales tax trends have shown only modest growth.
HIGH BUT MODERATING DEBT LOAD: DART issued over $3 billion of sales tax bonds over the past five years to finance the large-scale expansion of its light rail system. Debt service costs are projected to account for 32% of combined operating expenses and debt service by fiscal 2015. However, as DART has completed the bulk of construction, future planned debt issuance is generally moderate.
TIGHT FINANCIAL OPERATIONS: System operating revenues including sales taxes are projected to cover operating expenses and debt service marginally over the next five years. Substantial unrestricted cash reserves provide adequate flexibility in the event sales tax growth fails to materialize.
SYSTEM RELIANCE UPON SALES TAX REVENUES: DART is dependent on sales taxes for the majority of its resources, and has limited ability to raise revenues given the low farebox ratio of 16% in 2010.
CREDIT PROFILE
WIDE SERVICE AREA
DART is a sub-regional transportation authority that provides bus, light rail, commuter rail, para-transit and high occupancy vehicle (HOV) lane services to a 700 square mile area which includes the city of Dallas and surrounding environs. The service area incorporates 11 cities and two towns, all of which are voter-approved participating members. Operations are primarily supported by the 1% sales tax levied within the service area net of debt service on DART bonds. Fare revenues historically have accounted for only about 16% of operating costs.
IMPROVED AREA ECONOMIC OUTLOOK
The area economy appears to be recovering from the recession as indicated by sales tax growth and expanding employment. Jobs within the Dallas-Fort Worth MSA increased by 1.2% in 2010 over the prior year and March 2011 employment is 1.9% over March 2010 levels. Unemployment rates for the MSA have matched those of the state and are well below the national averages. Wealth indices generally exceed the state and national norms.
SOLID DEBT SERVICE COVERAGE
Senior lien debt service coverage remains ample at 2.3x MADS or 1.9x of MADS before taking into account federal subsidies on DART's two issues of BABs. Debt levels grew rapidly since fiscal 2007 as DART issued $3.3 billion of sales tax bonds to finance its extensive capital program. Debt service costs net of federal BABs subsidies grew by $59 million or 64% between fiscals 2009 and 2011 and will increase an additional $31 million or 20% by fiscal 2015.
MANAGEABLE DEBT PLANS
An additional bonds test of 2.0x MADS based on either historical or prospective sales tax revenues provides further security, although the critical need for sales taxes to fund operations guards against over-issuance. Subordinate obligations consist of commercial paper. The current revolving credit agreement limits the amount of commercial paper to $150 million although officials intend to increase the limit to $400 million within a few years. Planned debt over the next five years totals a manageable $545 million and consists of commercial paper and variable-rate bonds to be issued in 2014.
RECENT SALES TAX GROWTH
Sales tax collections rebounded in fiscal 2011, increasing by over 7% over the prior year collections. The increase partially reversed a sharp two-year drop in sales taxes totaling 9% reflecting the area effects of the past recession. Sales taxes have been historically sensitive to economic cycles. However, the most recent decline was significantly lower than the 16% drop in collections experienced during the 2001 recession, perhaps signaling a more resilient tax base. Overall sales tax growth since fiscal 2000, however, has been anemic at less than 1% annually.
TIGHT FINANCIAL OPERATIONS
Because sales taxes comprise over 70% of DART operating revenues, the recent declines have forced officials to cut back on service and scale down future capital plans. The effects of the revenue shortfalls on operations are more pronounced than in the past due to rising operating and debt service costs. In response, officials adjusted the business plan to bring future spending in line with reduced expectations for sales tax growth over the next 20 years.
DART estimates that cost saving measures, which Fitch views as achievable, will produce savings of about $1 billion over 20 years. In addition, officials are considering action to increase long-term revenue. These include a planned fare increase in fiscal 2013, tolls on selected HOV lanes, parking charges at certain stations, and an extension of the 1% sales tax to residential utilities. The sales tax extension would produce an estimated 5% increase in sales tax revenue but requires state legislative approval.
Management projects that resumption of healthy sales tax growth combined with its spending revisions will enable financial operations to achieve structural balance within the next few years. Financial policies have been designed with the goal of achieving operating revenue coverage of at least 1.0x operating and capital expenses. DART's financial flexibility is enhanced by hefty cash reserves, which total well over a year of operating expenses and, as a last resort, the option to reduce service levels, if necessary. Fitch believes that DART's ability to successfully implement its financial plan will be a critical factor in the rating.
LIGHT-RAIL EXTENSION ALMOST COMPLETE
DART is nearing the completion of its light-rail system expansion. In late 2010, the opening of the Green Line addition extended the light-rail system by 24 miles to a total of 72 miles. Completion of light-rail projects presently under construction will further expand the system to 90 miles by 2014.
DART's phased approach to its capital program affords flexibility to adjust project schedules with the availability of funding. With the revised sales tax projections, DART has considerably downsized its future capital program. Capital spending for the next five years has been reduced by nearly 18% from the 2010 financial plan. In addition, some longer term light-rail projects have been either eliminated or put on hold. Larger projects slated for the next few years include bus purchases, for operating flexibility and savings, and completion of the Orange and Blue Line rail extensions.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors,
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated Aug. 15, 2011.
'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 15, 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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