Fitch Rates $180MM Maryland Dept. of Transportation Bonds 'AA+'

NEW YORK--()--Fitch Ratings assigns an 'AA+' rating to the following Maryland Department of Transportation (MDOT) consolidated transportation bonds:

-- $180 million consolidated transportation bonds, series 2013.

The bonds are expected to sell via competitive sale on Feb. 13, 2013.

In addition, Fitch affirms the following ratings:

-- $1.5 billion in outstanding MDOT consolidated transportation bonds at 'AA+';

-- $69.9 million in outstanding county transportation bonds at 'AA+';

-- $55.5 million in outstanding MDOT certificates of participation at 'AA'.

The Rating Outlook is Stable.

SECURITY

Consolidated transportation bonds are payable by specific pledged tax revenues after certain allocations, and prior to being available for other uses by MDOT. If the pledged taxes become insufficient to meet debt service requirements, other receipts of the department are available for that purpose.

SENSITIVITIES/RATING DRIVERS

SOLID DEBT SERVICE COVERAGE: Consolidated transportation bonds benefit from strong debt service coverage by pledged taxes and net revenues. A solid additional bonds test requires 2x coverage by pledged taxes as well as departmental net revenues. MDOT policy requires a stronger 2.5x coverage level by both measures.

DIVERSE REVENUE PLEDGE: Revenues pledged to debt service are diverse, including transportation-related and certain general fund taxes. Pledged taxes and other available revenues are affected by statutory changes and economic cyclicality, and the state general fund has used transportation funds for general budget relief during periods of fiscal stress. However, bond coverage has remained consistently strong.

STRONG MDOT CONTROL: MDOT has broad authority over state transportation, including the ability to adjust capital projects as necessary based on projected available resources.

CREDIT PROFILE

Security for MDOT's consolidated transportation bonds is broad-based, consisting of a pledge of portions of motor fuel, motor vehicle titling, corporate income, and sales taxes on vehicle rentals, after statutory allocations to other state funds and local governments. The legislature periodically changes tax rates and the distribution of tax receipts among state funds and local governments, most recently in the 2011 legislative session. Pledged taxes have consistently provided ample coverage despite their vulnerability to economic cycles and the impact of statutory changes. Other MDOT revenues, primarily transportation-related fees and operating receipts, are available if pledged taxes are insufficient.

Debt service coverage is above the two parity bond issuance tests, which require 2x coverage of maximum annual debt service (MADS) by prior-year pledged taxes and 2x coverage by prior-year department net receipts. MDOT's internal policy requires more stringent 2.5x coverage by both tests. Including the new bonds, coverage of MADS by fiscal 2012 pledged taxes is 5.4x, and is 3x by fiscal 2012 net revenues, well over the policy threshold.

The state has made periodic rate and distribution changes affecting pledged taxes and other departmental revenues, both to expand resources available to transportation and conversely to relieve state general fund stress. Rates for statewide corporate taxes and general sales taxes were raised in fiscal year (FY) 2008, and the state shifted a 5.3% portion of the general sales tax to the transportation trust fund (TTF). However, state general fund revenues weakened during the 2008-2010 recession and the state reallocated certain TTF receipts intended for local governments to the state general fund. The state had similarly shifted MDOT's allocation of receipts to the state general fund in the previous downturn.

The state general assembly made extensive statutory changes in its 2011 session, the net effect of which modestly increases annual revenues available to MDOT but changes their composition. The deposit of 5.3% of state general sales taxes to the TTF was ended as of July 1, 2011, although these moneys remain pledged if necessary to consolidated transportation bonds issued prior to that date. (Sales taxes on motor vehicle rentals continue to be deposited to the TTF.) Allocations of TTF resources to the state general fund ended in FY 2012, the distribution of receipts among MDOT and local agencies was shifted, with MDOT receiving a higher share, and various fees were increased. Future allocations of TTF revenues to the general fund will be subject to repayment in five years.

Collections of pledged taxes and net revenues are also subject to economic factors. Motor fuel tax collections declined modestly in FY 2009 and 2010 with recessionary weakness. Despite an expected return to growth, forecasted gains through FY 2018 are limited given the slow pace of economic recovery and changing consumption trends. Titling tax collections declined sharply during the downturn but are forecast to rise more quickly through FY 2018.

MDOT updates its revenue forecast twice annually, most recently in January 2013. Through FY 2018, the end of MDOT's capital plan period, pledged taxes are projected to rise an average of 5.2% annually, and net revenues are projected to rise 3.4% annually, reflecting the slow economic recovery and the impact of statutory allocation changes. Following this sale, MADS of $238 million in FY 2017 is expected to be covered by FY 2012 pledged taxes 5.4x, and by FY 2012 net revenues 3x. Including projected future issuances, MADS is forecast to reach $303 million in FY 2018. At this level, prior-year pledged tax coverage of MADS would be 5.6x in FY 2018, while coverage by prior-year net departmental revenue would be 2.9x.

State oversight of consolidated bonds, as with other state tax-supported issues, is strong. The legislature's ceiling on consolidated transportation bonds that may be outstanding is $2.6 billion; a separate annual cap on outstanding bonds as of June 30, the state's fiscal year end, is set at $1.9 billion for fiscal 2013. Prior to the new bonds there are $1.5 billion in consolidated transportation bonds outstanding, and new issuance requires Board of Public Works approval. The state constitution mandates that consolidated bonds mature within 15 years.

MDOT has the discretion to delay capital plan spending to reflect available resources. The FY 2013-2018 capital plan totals $10.1 billion, higher than recent plans that were constrained by the impact of recessionary weakness. MDOT's capital plan focuses primarily on system preservation, with the largest shares of funding directed to highways and mass transit. Federal sources fund about one-third of capital program needs and consolidated bonds fund 18%. Remaining capital program needs are met from departmental net revenues.

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.

Applicable Criteria and Related Research:

'Tax-Supported Rating Criteria', Aug. 14, 2012;

'U.S. State Government Tax-Supported Rating Criteria', Aug. 14, 2012.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

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Contacts

Fitch Ratings
Primary Analyst
Douglas Offerman
Senior Director
+1-212-908-0889
Fitch Ratings, Inc.
One State St. Plaza
New York, NY 10004
or
Secondary Analyst
Eric Kim
Director
+1-212-908-0241
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations
Elizabeth Fogerty
+1 (212) 908 0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Douglas Offerman
Senior Director
+1-212-908-0889
Fitch Ratings, Inc.
One State St. Plaza
New York, NY 10004
or
Secondary Analyst
Eric Kim
Director
+1-212-908-0241
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations
Elizabeth Fogerty
+1 (212) 908 0526
elizabeth.fogerty@fitchratings.com