NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for the following stand-alone grant anticipation revenue vehicle (GARVEE) bonds:
--Alaska Railroad Corp. at 'BBB';
--Chicago Transit Authority at 'BBB';
--Georgia State Road & Tollway Authority at 'A+';
--Idaho Housing and Finance Association at 'A+';
--Kentucky Asset Liability Commission at 'A+';
--Maine Municipal Bond Bank at 'A+';
--New Jersey Transit Corp. at 'BBB';
--Oklahoma Department of Transportation at 'A+';
--Rhode Island Economic Development Corp. at 'A+';
--State of California at 'A+';
--State of Michigan at 'A+';
--State of North Carolina at 'A+';
--State of Ohio at 'A+';
The Outlook on all bonds above is Stable.
KEY RATING DRIVERS
--Growing Dependence on General Fund Transfers: In Fitch's view, what was once a formula-driven program funded on a multiyear basis has now morphed into a program where future policy is less certain, funding levels are less predictable, and the program is more dependent on frequent action to extend authorization and on continued transfers from the general fund that will likely need to be continued indefinitely barring an increase in the Federal gas-tax or a significant reduction in spending. The strength, stability, and reliability of the programmatic framework underpins the ratings on GARVEE bonds backed by future federal receipts from the Highway Trust Fund (HTF), and, though Moving Ahead for Progress in the 21st Century (MAP-21) provides funding certainty through the end of Federal Fiscal Year (FFY) 2014, it does not address longer-term issues regarding the sustainability of the Federal program or solvency of the HTF.
Strength of the Federal Program - Midrange.
--Highway GARVEEs Maintain Significant Flexibility: In the event of a decline in federal resources following the expiration of MAP-21, state capital improvement programs overall could be materially affected as a larger portion of funding needs would fall to the responsibility of the states and would require increased state gas taxes or mean deferral of large capital projects. Fitch's analysis of such a scenario indicates that outstanding state highway GARVEE bonds would experience some reduction in debt service coverage ratios but since these bonds tend to have leverage limitations of at least 3.0 times (x) current receipts eligible to pay debt service they retain sufficient flexibility at the 'A+' level.
Structural Features - Strong.
--Transit GARVEEs Limited by ABT Provisions: In contrast to highway GARVEEs, the three transit GARVEEs rated by Fitch have materially lower leverage limitations of 1.5x or below and would thus have much less flexibility to protect against declines in federal program revenues.
Structural Features - Weak/Midrange.
--View of Federal Program Alters: A material change in Fitch's view of the strength of the Federal program to weak or strong from midrange;
--Lower Federal Revenues: Declines in federal revenues below projected levels that assume implementation of 54.5 mile per gallon (mpg) corporate average fuel economy (CAFE) standards.
--State Decisions to Increase GARVEE Leverage beyond Current Expectations: Additional state leveraging that leads to debt service coverage ratios below current projections.
The unsustainable trajectory of HTF expenditures exceeding receipts over the past several years will not change during the term of MAP-21. Instead as a result of the bill the HTF received $6 billion in general fund transfers in FFY 2013 and relies on an additional $12 billion in FFY 2014 to remain solvent. The Congressional Budget Office (CBO) has projected a combined shortfall of as much as $11 billion in the Highway and Transit subaccounts of the HTF by 2015 if current spending levels are maintained. The future of the program beyond 2014 is hard to predict, but it is Fitch's view that significant changes are needed either on the expenditure side or on the revenue side to put the program on a sustainable trajectory. In Fitch's view the more unsustainable the program becomes, the greater the possibility of policy changes that could adversely impact bondholders.
While the continued General Fund transfers have underscored the relative importance of transportation funding within the Federal Budget to this point, they do not guarantee future commitments. Complicating matters is a significant increase in corporate average fuel economy (CAFE) standards from the current 29 miles per gallon (MPG) to 54.5 mpg by 2025 that was approved on August 28, 2012. Such a standard would put further pressure on HTF receipts from taxes imposed on passenger cars, leading to an estimated 13% reduction from today's levels by 2032, requiring even larger general fund subsidies to maintain the status quo.
Fitch has previously performed an analysis of the federal grant program that assumes the CBO projection for outlays, translating into a 1.4% compound annual growth rate in HTF spending. In addition, Fitch estimates a CAGR of negative 0.5% in HTF receipts through 2030 based on a fuel consumption forecast for passenger cars run by the Environmental Protection Agency (EPA) given revised CAFE standards. Under such a scenario, the annual gap between HTF spending and receipts could be on average $19.2 billion from 2015 to 2030, meaning that by 2032 nearly half of the funding for HTF outlays would need to come from the general fund.
Under the scenario above, the FHWA would have to cut outlays to the states in aggregate by 22% in 2015 in order to match the receipts coming into the HTF, cutting outlays annually thereafter through FFY 2030. Because highway GARVEEs maintain such robust additional leveraging provisions, such a haircut in 2015 would result in MADS coverage across the board in excess of 2x. However, the same reduction for transit GARVEEs would result in coverage levels in the mid-1x range, approaching the lower ABT covenants.
Assuming state DOTs and transit agencies fully leverage their GARVEE programs, debt service coverage ratios on standalone highway GARVEEs could drop to approximately 2.3x by 2032. Coverage ratios on standalone transit GARVEEs would fall to a much lower 1.03x, thereby rendering the transit GARVEEs that much more susceptible to significant declines in federal funding.
The above 22% haircut would be more severe than the magnitude of any cut to the HTF from the General Fund of the US Treasury that the Office of Management and Budget (OMB) has identified as subject to sequestration, and GARVEE bonds should maintain financial flexibility through such cuts.
For more information, please see Fitch press release 'Fitch Revises View of Strength of the Federal GARVEE Program; Changes Standalone Ratings' dated Sept. 12, 2012, and report entitled '2013 Outlook: U.S. Transportation Infrastructure (Stable in Face of Macro Challenges)' dated Dec. 13, 2012.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);
--'Leveraging Federal Transportation Grants: Rating Criteria for GARVEE Bonds' (Aug. 15, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Leveraging Federal Transportation Grants: Rating Criteria for GARVEE Bonds