NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on the following Greater Cleveland Regional Transit Authority, OH general obligation limited tax (GOLT) bonds at 'AA-':
-- $18.6 million GOLT capital improvement and refunding bonds series 2004;
-- $31.3 million GOLT capital improvement and refunding bonds series 2006;
-- $31.4 million GOLT capital improvement and refunding bonds series 2008;
-- $16.6 million GOLT capital improvement and refunding bonds series 2008B.
The Rating Outlook is Stable.
The bonds are secured by the authority's general obligation, limited tax pledge, which levy is subject to the ten-mill limitation as well as a pledge of a 1% county-wide sales tax.
KEY RATING DRIVERS
ENHANCED BONDHOLDER SECURITY; AMPLE COVERAGE: The rating reflects enhanced bondholder security associated with the creation of the sales tax security with bonds effective May 2012. The 1% countywide sales and use tax is now explicitly pledged to both outstanding GOLT bonds and the newly created sales tax bonds and additional debt is now subject to a strong 2.0x additional bonds test. The sales tax generates ample coverage for the bonds and provides diversity to the revenue stream, offsetting fluctuations in fare revenue.
GOLT PLEDGE MARGINALLY BENEFICIAL: Fitch's rating on the GOLTs reflects the terms of the 2012 bond documents which revised the definition of authority indebtedness to include revenue bonds, effectively putting both GOLT and sales tax securities on parity. While GOLT bondholders benefit from the authority's general obligation limited tax pledge, no property tax has ever been used for debt service, as sales tax coverage on all debt exceeds 8.5x.
PROACTIVE MANAGEMENT LENDS RESILIENCE: During the recent economic downturn, in 2008, management took action to ensure financial integrity, including raising fares and cutting services. Recent improvement in sales tax revenues has allowed for modest service expansion and stabilization of fares since 2010.
MANAGEABLE CAPITAL NEEDS: Most of the authority's planned system expansions are complete. Future capital needs are moderate and expected to be manageable, given relatively low debt levels, rapid amortization of current debt and the authority's current resources.
STRONG COVERAGE; SOUND MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics including the authority's very strong debt service coverage and sound financial and operational management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
The Greater Cleveland Regional Transit Authority was created in 1974 and began operations in 1975. It serves Cuyahoga County, OH which includes the City of Cleveland and various other municipalities with an estimated 2013 population of 1.265 million. Operations include integrated bus, heavy rail, light rail and para-transit systems with annual ridership of over 49 million in 2013 and 2,302 total employees.
ENHANCED BONDHOLDER SECURITY
With the series 2012 sales tax bond sale the authority revised outstanding bond documents to enhance bondholder security. The two main changes were the definition of indebtedness that now includes GOLT bonds and authority revenue bonds. Under the new definition, GOLT and revenue bonds are essentially parity obligations with gross sales tax revenues pledged to pay both types of debt. County voters approved the 1% tax in 1975 and the tax has no expiration.
The documents also include a strong additional bonds test requiring 2.0x coverage of existing and planned indebtedness from the strongest of the last 12-18 consecutive months' sales tax collections. Under the old documents there was no ABT and while sales tax revenues were used to pay GOLT bonds, GOLT bondholders had no security interest in sales tax revenues.
Under the terms of the Trust Agreement, the state of Ohio collects the sales and use taxes and makes monthly deposits to the trustee. Each month, the trustee makes deposits sufficient to fund 1/6th of interest and 1/12th of principal on both GOLT and sales tax bonds into the Bond Retirement Fund, and releases the remainder to the authority for operations.
BROAD, STABLE ECONOMIC BASE
The county's economy is diverse (rated 'AAA/AA+' GOULT/GOLT by Fitch), rooted in the long-standing health care and higher education sectors which helped to offset the contraction in the manufacturing sector during the recession. The county's tax base includes a number of wealthy, highly rated cities and suburbs. Cleveland (rated 'A+'; Stable Outlook) is the economic engine of the county, but represents less than 20% of the tax base.
County unemployment rates over the past few years have been below state and national averages but have deteriorated recently due to population, labor force and employment declines. The seasonally unadjusted rate of 8.2% in February 2014 was up considerably over the state's rate of 7.0% and the U.S. rate of 6.7%. County income levels are mixed with per capita income levels above state and national levels and median household income slightly below state and U.S. averages.
PLEDGED SALES TAX PROVIDES AMPLE COVERAGE
Sales tax receipts for 2012 generated 8.8x coverage of combined current annual debt service (ADS) and 8.8x coverage of maximum annual debt service (MADS). Unaudited combined MADS coverage for 2013 is 9.7x. The economically sensitive sales tax receipts have exhibited volatility in recent years; the 2009 levels were 11.5% below the pre-recession peak, recorded in 2007. Regional economic improvement has resulted in average annual growth of 5.2% between 2010 and 2013. Management has conservatively budgeted 2% growth for 2014. The authority expects to benefit from a state-wide change effective in 2014 which expands the base to include items not previously taxed. This change is projected to boost the authority's sales tax revenues by over $6 million, or 3% in 2014 and $11 million in 2015.
Fiscal 2014 year-to-date receipts are above budget and the authority expects over 3% growth through year end. The authority has prudently kept projections for 2014 and 2015 at the more conservative 2.0% growth level. Fitch stress testing over the projection period demonstrates strong MADS coverage of at least 7x for existing and planned debt, even if the sales tax were to experience moderate 8.2% annual declines.
The strong coverage of debt service by sales tax receipts is attributable to the authority's reliance upon the residual sales tax revenues for operations. Despite their volatility in recent years, sales tax revenues have provided an important source of diversity to the authority's revenue stream. Sales taxes contributed approximately 80% of operating costs in 2013.
The authority has an internal policy of achieving a 25% farebox recovery ratio, which it has been closer to approaching in recent years. Preliminary 2013 data shows the authority reached the 22% farebox recovery threshold, which also reflects the authority's service reductions.
GOLT PLEDGE MARGINALLY BENEFICIAL
While the outstanding GOLT bonds are secured by the authority's general obligation, limited tax pledge, the levy has not been needed due to strong coverage of debt service and operations provided by the sales tax. Ad valorem tax revenue would be generated from the currently levied 10-mills on all taxable property that is shared by all jurisdictions within Cuyahoga County ('inside millage').
As part of the annual budget process the authority certifies its revenue to the county budget commission and since inception has shown an ability to cover all expenses without the benefit of the ad valorem tax. It is during this annual budget process that the county commission would provide the authority with an adequate portion of the inside millage to provide sum sufficient coverage of LTGO debt service if authority revenues were insufficient.
With such strong coverage of authority debt from sales tax revenues, the added value of the LTGO pledge is not reflected in the rating. Fitch could make a rating distinction in the future in the very unlikely stress scenario should sales tax revenues decline to below sum-sufficient levels.
PROACTIVE MANAGEMENT LENDS RESILIENCE
The authority has demonstrated a willingness to raise revenues to adequately fund operations including fare and fuel charge increases. As a result of raising fares, which have been stable since 2010, and the selective restoration of previously cut services, customer ridership has moderately fluctuated. After consecutive declines of 14.0% in 2009 and 10.4% in 2010, ridership rebounded with average annual increases of 3.3% 2011-13 with an additional 1.1% increase to 49.7 million forecasted for 2014 which remains down 14% from peak ridership in 2008 of 57.9 million.
Management reduced operating expenses significantly in 2009 and 2010 through wage and service cuts. Selective service restorations and contractual costs caused moderate 4 - 5% annual operating expense increases in 2011 and 2012 which stabilized in 2013. Total expenses for 2014 are conservatively budgeted to increase 6% and reflect the costs for the addition of 46 positions (2,348 total, down from 2,653 peak in 2007), a 3% wage increase, increased fringe benefit costs and sound funding of maintenance and repairs and various reserves.
MODERATE BORROWING NEEDS
The authority five-year capital improvement plan (CIP) totals $334 million and is a mix of equipment replacement, preventative maintenance and rail projects. The CIP is largely funded through operating funds, grants and small sales tax backed bond issuances. The authority expects to issue approximately $20 - 25 million sales tax backed bonds in 2015/2016. Fitch expects continued sound operating performance to enable the authority to fund the near term CIP. Longer term needs include rail car replacement which could cost over $200 million in total and likely will be funded with debt; given the authority's rapid debt amortization debt levels should remain manageable.
Additional information is available at 'www.fitchratings.com'.
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 and IHS Global Insight.
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:
U.S. Local Government Tax-Supported Rating Criteria
Tax-Supported Rating Criteria