SAN FRANCISCO--()--Fitch Ratings has assigned 'AA' ratings to the following San Francisco Bay Area Rapid Transit District (BART), CA bonds:
--$131.8 million sales tax revenue bonds, 2012 series A;
--$110.9 million sales tax revenue bonds, 2012 series B (taxable).
In addition, Fitch affirms the following ratings:
--$413 million general obligation bonds at 'AA+';
--$518 million outstanding sales tax revenue bonds at 'AA'.
The Rating Outlook is Stable.
Purpose of current debt issue: Proceeds from the 2012 series A bonds will refund the outstanding 2002 series A (Airport Premium Fare) bonds and sales tax revenue bonds series 2001 and 2006. Proceeds from the 2012 series B bonds will finance the Oakland Airport Connector project. The bonds will be sold via negotiated sale during the week of Sept. 20. The series 2012 bonds have a final maturity date of July 1, 2042.
The sales tax revenue bonds are issued on par with outstanding sales tax revenue bonds and secured by a first lien on 75% of the 1/2 cent San Francisco Bay Area Rapid Transit District (BART) sales and use tax (sales tax) levied in Alameda and Contra Costa counties and the City and County of San Francisco (collectively 'BART counties').
The general obligation bonds are secured by an unlimited ad valorem tax levied on all taxable property within the BART counties.
KEY RATING DRIVERS
STRONG DEBT SERVICE COVERAGE: Coverage remains a strong 3.7 times (x) maximum annual debt service (MADS) and is projected to remain strong based on sales tax revenue past performance, the economic outlook for the BART counties, and management's commitment to maintain relatively low leverage levels by cash-funding capital improvements, including the vehicle replacement program.
HEALTHY SALES TAX BASE: Sales tax revenue is supported by the BART counties' broad and diverse economy, high wealth levels, and growing population. The economically sensitive revenue source declined notably in 2009 and 2010 but has since recovered and approached pre-recession levels in 2012.
ADEQUATE LEGALS: Legal protections are adequate with a moderate 1.5 times additional bonds test that is supported by BART's operational reliance on sales tax revenue, reducing management's willingness and ability to significantly leverage this funding source without affecting operations.
PROACTIVE FINANCIAL MANAGEMENT: BART'S financial management is pre-funding its other post-employment benefit liability and has maintained sound financial and operational trends despite significant and on-going cost pressures from labor and capital needs.
SIGNIFICANT CAPITAL NEEDS: BART's capital needs are significant and include general maintenance and upkeep, system expansion, and the complete replacement of the current vehicle fleet.
ESSENTIAL SERVICE: BART provides an essential commuter transit service to the Bay Area and is vital to the area's mobility and economy.
VOLATILE REVENUE SOURCE; STRONG DEBT SERVICE COVERAGE
Sales tax revenue is collected on taxable transactions in a diverse three county area with above average economic characteristics including high wealth levels, a growing population, and unemployment rates below the state average. The economically sensitive revenue source has a volatile collection history with sharp increases and decreases generally correlated with overall economic conditions. Most recently, revenue levels recovered fairly rapidly following the recession with a cumulative increase of 17.2% in fiscals 2011 and 2012 after a cumulative decline of 17.8% in fiscals 2009 and 2010. Despite the recent growth, fiscal 2012 collections of $195.2 million (unaudited) remain approximately 3.7% below the prerecession high of $202.6 million (fiscal 2008).
Debt service coverage was strong throughout the recession and is projected to remain ample following the issuance of the 2012 bonds. MADS, which occurs in fiscal 2014 at $53.4 million, is covered at 3.66x based on fiscal 2012 sales tax revenue (unaudited). Coverage levels are resilient and remain at healthy levels under various Fitch conducted stress tests, which included greater and more persistent revenue declines than seen in recent history and regular cyclical declines followed by short periods of anemic growth.
Fitch views bondholders' legal protections as adequate. The additional bonds test (ABT) is moderate at 1.5x MADS (based on outstanding and proposed bonds), based on revenues collected in any 12 consecutive months within the 18 months prior to issuance. Management stated that they do not plan on leveraging down to the ABT, which Fitch views as reasonable given BART's history of pay-as-you-go capital financing, its relatively limited use of sales tax revenue bonds to date, and the use of sales tax revenue to support operations. The 2012 bonds do not have a debt service reserve fund, although credit concerns are mitigated by the strong coverage levels, direct revenue transfer from the state to the trustee, and BART's sound financial operations and generally high credit quality.
SOLID FINANCIAL PROFILE
BART's financial position is healthy and stable with solid cash balances, generally positive operating margins, and prudent financial policies and practices. Operating revenues have increased at a compound average growth rate of 5.4% from fiscal 2007 to fiscal 2012 (unaudited). Farebox revenue, accounting for approximately 54% of operating revenue and financial assistance, is supported by increasing ridership and board approved CPI fare increases that were implemented bi-annually beginning in 2006 and ending in 2012. BART's farebox recovery ratio is in the upper range for U.S. transit systems.
Management has held down expenditures over the past few years by reducing its workforce, negotiating long-term labor contracts without salary increases, and deferring some capital expenses. However, increased expenditure pressures are expected over the short to medium term as an increased workforce is necessary to meet rising demand. Labor contracts will need to be renegotiated as current contracts expire at the end of fiscal 2013. In addition, capital needs are expected to consume and increasing portion of BART's operating budget.
SIGNIFICANT CAPITAL NEEDS
BART's capital needs are significant and include maintenance, expansion, and system revitalization plans. The largest project is the vehicle replacement program, which will replace BART's aging fleet and raise the total number of vehicles to 775 from the current 669. The program's total cost, previously estimated at $3.2 billion, was reduced to $2.6 billion as a result of lower than expected bids for vehicle construction.
Management stated that the vehicle replacement program's first phase, estimated to cost $1 billion, is fully funded through federal grants, as administered by the Metropolitan Transportation Commission, and annual contributions of $45 million that BART is obligated to make over the next five to six years, pursuant to a contract with the supplier of the cars. The remaining $1.5 billion is not yet funded, although management plans on continuing the annual BART contribution for an additional five to six years and seeking additional federal funds.
The 2012 series B bonds will address one portion of BART's expansion plans by funding the remaining costs of the Oakland Airport Connector, a 3.1 mile automated transit system that will connect a current BART station and the Oakland Airport. Management stated that the project is currently on-schedule and is expected to begin operations in Spring 2014. BART has several other expansion plans in various stages of completion and planning, including the Warm Springs Extension, an $890 million project with most of the funding in place, and the eBART extension to eastern Contra Costa County, the first phase of which is fully funded and scheduled to begin operations in 2017.
BART also plans on continuing its Earthquake Safety Program, which is funded through the voter authorized issuance of up to $980 million in GO bonds. Management stated that lower than expected contract bids and better than anticipated system conditions have pushed back the scheduled issuance of the remaining $480 million GO bonds to 2014 from fiscal 2012/2013.
SOUND ECONOMY SUPPORTS RIDERSHIP AND DISTRICT TAX REVENUES
The BART district, created in 1957 to provide rail transit service, encompasses three of the nine counties making up the diverse Bay Area. BART's ridership generally reflects economic conditions in the area. Average weekly ridership was approximately 6.4% lower in fiscal 2010 than fiscal 2008, but rebounded with a cumulative 9.4% increase in fiscals 2011 and 2012.
Each of the three BART counties has a difference economic focus, but all share the influence of the greater Bay Area economy with its emphasis on high technology, finance, business services, healthcare, education, and government. Employment growth picked up speed over the past year with significant gains in each county led by the City and County of San Francisco at 3.9% (June 2012), and Contra Costa and Alameda Counties at 2.5%. The unemployment rate in the BART counties is below the state average, although Alameda and Contra Costa counties remain moderately above the national average.
The largest employers in the area include the City and County of San Francisco (25,488), the University of California, Berkeley (21,139), Kaiser Permanente (16,587), the University of California, San Francisco (11,639), the State of California (9,586), and Wells Fargo & Co. (9,089). Given the state's financial situation and some of these employers' reliance on state funding, employment pressures could increase if the state enacts midyear funding reductions or future budget cuts.
BART receives support from property tax revenue that secures outstanding GO bonds and provides operational support. BART's property tax base is diverse, consisting of the three BART counties. Taxable assessed value (AV) for the district totaled approximately $499 billion in fiscal year 2010 and had a CAGR of 5.5% for fiscal years 2006 through 2010. While San Francisco experienced 8.2% growth in fiscal year 2010, Alameda and Contra Costa Counties saw declines in value of 2.6% and 7%, respectively. The counties saw lower declines in fiscal year 2011 and were essentially flat in fiscal year 2012.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's 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, National Association of Realtors, Underwriter, Bond Counsel.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria