Fitch Rates MARTA, GA's Sales Tax Revenue Bonds 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA-' rating to the following Metropolitan Atlanta Rapid Transit Authority (MARTA or the authority), Georgia's sales tax revenue bonds:

--$273.8 million sales tax revenue bonds (third indenture series) refunding series 2014A.

The bonds are expected to price via competitive bid the week of June 5, 2014. Proceeds will be used to redeem $200 million of outstanding commercial paper and provide about $100 million for capital projects.

In addition, Fitch affirms the following ratings:

--Approximately $1.6 billion sales tax revenue bonds (third indenture series) at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by sales tax receipts from the levy of a 1% sales tax within Fulton (GOs rated 'AA+' with a Negative Outlook by Fitch) and DeKalb ('AA-'/Stable Outlook) Counties and the city of Atlanta and approved by voters of both counties in a 1971 referenda. The bonds have a third-priority lien on sales tax receipts. The indentures governing the first two liens are closed to additional new money bond issues. No reserve fund is provided for the series 2014A bonds.

KEY RATING DRIVERS

STRONG DEBT SERVICE COVERAGE: Coverage by fiscal 2013 sales tax receipts of maximum annual debt service (MADS) is strong at 2.3x and Fitch expects it will remain strong given a recovering economy and the authority's need of excess sales tax revenues to fund operations.

BROAD-BASED UNDERLYING ECONOMY: The regional Atlanta economy is characterized by diverse employment opportunities, above-average wealth indices and a growing population. Employment continues to recover from the most recent recession.

ESSENTIAL SERVICE: MARTA provides essential transportation services to Atlanta and immediately surrounding Fulton and DeKalb counties with an average of over 515,000 passengers per day.

WEAK FINANCIAL OPERATIONS: Despite recent improvement, finances remain challenged by a weak operating revenue base which lacks state financial support placing heavy reliance upon sales taxes and fares to fund operations.

DEMAND SENSITIVITY TO FARE INCREASES: Recent fare rises have led to sizable declines in ridership, calling into question the authority's ability to generate significant revenues from future fare hikes.

RELIANCE ON DEBT FOR CAPITAL NEEDS: MARTA's 10-year capital plan relies upon debt to finance the majority of capital projects through 2023. This dependence stems from the paucity of dedicated capital funding sources available to the authority.

STATE REFORM NARROWS SALES TAX BASE: State legislation eliminating sales taxes on vehicle purchases has had a modestly negative but hard to determine impact upon sales tax collections.

LIMITED SALES TAX DIVERSION RISK: The risk of sales tax diversion is minimal given Georgia law, the dedicated nature of pledged revenues and the state collection mechanism

RATING SENSITIVITIES

SALES TAX DECLINES: Significant deterioration in sales tax collections which reduces coverage and further pressures operations could lead to a rating downgrade.

SHIFTS IN FINANCES: A downturn in financial performance could be viewed unfavorably. Conversely, measures which result in a lower cost structure or create new sources of revenues thereby increasing financial flexibility on a sustained basis may result in positive rating action.

CREDIT PROFILE

MARTA operates a rapid transit system which serves primarily the city of Atlanta and Fulton and DeKalb Counties (service area). The main components are a fixed-rail transit system and a bus system. The fixed-rail passenger system commenced service in 1979 and consists of 48 miles of rail lines and 38 stations. Bus service includes approximately 500 buses and 175 mobility vans operating in MARTA's service area. MARTA is the ninth largest rapid transit system in the United States. In fiscal 2013, MARTA transported approximately 130 million passengers for an average daily ridership of approximately 515,000.

SALES TAX DEDICATED FOR RAPID TRANSIT

The authority is currently governed by a board of directors composed of 11 voting members and one non-voting member, representing the three participating jurisdictions. Recently, the state reconstituted the board to stagger terms, give greater representation to municipalities outside of Atlanta, and authorized the governor to select one board member. The changes go into effect in 2017. Fitch is neutral regarding the effect these changes will have on MARTA operations.

Pursuant to a contract between the authority and its members, Fulton and DeKalb Counties and the city of Atlanta are obligated to levy a sales-and-use tax (sales tax) for rapid transit purposes. The sales tax is levied at the rate of 1% through 2047 after which it is reduced to a 1/2% levy until expiration in 2057. All currently outstanding bonds in addition to this bond issue mature by 2044. The sales tax is collected by the state and then assigned by the participating counties to be paid directly to the bond trustee. The authorizing legislation limits the use of sales tax receipts for operations to 50% (the 50/50 rule), although legislative actions over the past 12 years have temporarily eased or eliminated this restriction.

Fitch deems the risk that authority sales tax revenues would be diverted for general government or other purposes of Fulton or DeKalb Counties to be almost negligible due to Georgia's explicit ban on local government bankruptcy, the voted and dedicated purpose of the sales tax revenues which are collected by the state and distributed directly to the trustee, the state's bond validation process and the importance of MARTA, a state-created agency, and its operations to the region and state economy.

SALES TAX GROWTH STALLS

Fiscal 2013 sales tax collections totaled $340.5 million, which represents a minimal 0.4% increase over fiscal 2012 collections. The growth in fiscal 2013 sales tax receipts generally matched MARTA's projected 0.75% uptick. Fiscal 2014 sales tax performance is on a similar path, with 10-month fiscal 2014 year-to-date sales tax collections up only 0.3% above prior year receipts.

The lackluster performance of recent sales tax trends is attributable at least in part to state-wide tax reform, which eliminated sales taxes on vehicle purchases beginning in March of 2013. The sales tax was replaced with an ad valorem tax on vehicle purchases (title ad valorem tax). The precise impact of the legislation is difficult to determine; however, 2013 auto sales constituted about 8% of the sales tax base, according to the Georgia Department of Revenue. The authority has received title ad valorem tax revenues in return, offsetting to some extent the loss of sales tax on vehicle purchases over the past two fiscal years. However, title ad valorem taxes are not pledged to the bonds and under the current distribution formula, they will be eliminated by fiscal 2016. While the change in the sales tax structure is not expected to significantly reduce current wide levels of debt service coverage, even a small reduction in the sales tax base could tamp down future growth, hampering the authority's long-term ability to fund its extensive capital needs.

Sales tax trends have been volatile since 2000 with several periods of significant declines interspersed with years of solid growth. Sales tax collections declined by nearly 10% over fiscals 2009 and 2010 due to the impact of the recession. Collections rebounded strongly in fiscal 2012, growing by 6.2% while growth has since slowed. Authority projections, prepared by the Georgia State University Economic Forecasting Center, show annual growth through fiscal 2018 varying from 2% to 4.7%. Fitch considers this forecast to be reasonable given evidence that the economic recovery within the Atlanta metro area continues to strengthen.

STRONG DEBT SERVICE COVERAGE

Fiscal 2013 sales tax coverage of MARTA's revenue bonds, including the current offering, remains strong at 2.3x MADS. MARTA debt consists of sales tax revenue bonds issued under multiple liens. The authority's informal policy is to maintain debt service to no more than 45% of sales tax collections in order to limit debt and thereby ensure more excess sales tax revenues for operations. The authority is just barely in compliance with this policy.

Bonds outstanding under the closed first- and second-lien indentures total about $303 million. Since 2004, MARTA has been issuing bonds under a third lien. Outstanding third-lien debt totals over $1.6 billion. The third-lien bonds will ascend in lien status upon final maturity of first- and second-lien bonds in 2021 and 2025, respectively.

Additional issuance is restricted by an adequate two-pronged additional bonds test requiring debt service coverage of 1.5x from both historical and projected sales tax. However, MARTA's need of sales tax revenues to fund operations serves as a more effective brake against over-issuance.

Fitch views favorably authority actions to eliminate its swap exposure. This past March, the authority negotiated with the two swap counterparties to terminate all of its outstanding basis swaps, representing about $645 million in notional par. The all-in cost to the authority of $13 million was fully funded from monies in a swap reserve. Termination of the swaps removes the authority's exposure to basis risk, a potential cost pressure on the authority's tight finances.

CAPITAL NEEDS FUNDED MOSTLY WITH DEBT

The authority has identified in its 10-year capital improvement plan approximately $2.4 billion of capital needs. Approximately $600 million of outstanding principal amortizes during this period. The system is relatively mature so capital needs focus mainly on safety improvements, equipment replacement and maintenance. Proposed funding sources include about $1.8 billion of debt payable from sales taxes. A major reason for funding the capital program mostly through debt issuance is the authority's limited operating margins, leaving few resources for pay-go capital spending.

According to the plan, annual debt service would increase by 58% between fiscals 2014 and 2022 as the planned debt is absorbed. Management has indicated that the present capital program is aggressive, enabling the authority to defer projects, if necessary.

FALLING UTILIZATION

System utilization declined by 17% between fiscals 2009 and 2013. The ridership losses coincided with the steep recession and two substantial hikes in base fares of 14% and 25% in 2009 and 2011, respectively, after flat fares for eight years. MARTA's long-term ridership trends have generally been negative with the loss of over 20% of passenger counts since fiscal 2000. Management recently increased weekday peak rail and weekend bus service, along with other improvements to the system which they expect will generate additional ridership and reverse the long term trend.

FINANCES IMPROVE BUT REMAIN PRESSURED

MARTA finances improved in fiscal 2013 as operations generated a small increase in reserves, the first in at least five years. The operating surplus totaled $8.6 million or 2.2% of operating expenses (less depreciation). The positive results are attributable to a 4.9% increase in operating revenues and a 2.6% reduction in operating costs. Revenue growth stemmed from fare increases, and the partial-year receipt of title ad valorem revenues. Measures to reduce expenses included service cutbacks, wage freezes, and personnel reductions. Full-time employees fell by 412 or 9% between fiscals 2008 and 2013.

Management is projecting another small operating surplus of approximately $10 million for fiscal 2014, buoyed by a small increase in sales taxes, higher passenger revenues and an unbudgeted full-year receipt of title ad valorem tax revenues ($18 million or 4.3% of forecast revenues). The fiscal 2014 budget includes a lump-sum 3% of salary payment to workers but otherwise limits cost growth. A regular wage hike is not contemplated until fiscal 2016.

Financial margins remain tenuous despite recent widening. Title ad valorem tax revenues drop off completely by fiscal 2016. Fitch's sensitivity analysis, the base case, for fiscals 2015 through 2018 show system revenues failing to cover operating expenses and debt service by fiscal 2015, with deficits widening rapidly through fiscal 2018. Conservative assumptions include 1% annual sales tax growth, no increase in fare revenues, 3% annual increases in operating expenses and additional debt as shown in the authority's capital plan. Since the authority's operations are constrained it would have the flexibility to restructure debt service or delay additional debt issuance to achieve structural balance.

The authority is also burdened with a limited and restrictive revenue structure which hampers flexibility. MARTA receives virtually no state support - the only major mass transit system in the nation not receiving dedicated state funding - and a highly elastic demand structure renders it difficult to raise fares sufficiently to offset the state funding gap.

Furthermore, the state-imposed 50/50 rule hinders management discretion, although the authority's recent financial difficulties led the state to temporarily suspend this restriction a number of times, most recently in fiscal 2014. In spite of the waivers, management's recent policy has been to adhere to the 50/50 rule for fiscals 2013 and 2014.

Officials are looking into other revenue opportunities including joint development possibilities with the private sector on MARTA-owned land near rail stations.

NEW MARTA LEGISLATION ADDS SOMEWHAT TO FLEXIBILITY

While the state legislature failed to pass a bill last year which would have required MARTA to outsource many of its operations and impose other restrictions, the authority views recent state actions more favorably. Provisions in the 2014 legislation allow MARTA to enter into public/private partnerships and impose and collect fines against those who violate the authority's code of conduct. In addition, the legislation suspends the 50/50 rule for three more years, overhauls the composition of the board of directors, streamlines the arbitration process with the union, and enables Clayton County and other adjacent counties to join MARTA upon voter approval of the MARTA one-cent sales tax. Fitch views many of these provisions positively as they provide the authority with some additional flexibility in running its operations.

DIVERSE AND BROAD-BASED SERVICE AREA ECONOMY

Fulton and DeKalb Counties have a diverse economic base benefiting from Atlanta's role as the state capital and center of a broad regional economy. The area serves as a corporate headquarters for large employers including Coca-Cola, Bell South, Home Depot, and Delta Air Lines. Also located within the service area is the U.S. Centers for Disease Control and Prevention and Emory University. Hartsfield-Jackson International Airport (Hartsfield), the world's busiest airport, is located within Fulton County.

Estimated 2013 population within the service area is 1.7 million. The city of Atlanta with a population of approximately 444,000 accounts for about 26% of total population. Population growth over the past decade has been modest, increasing at an average annual rate of 0.8%. Atlanta experienced a slight population dip over this period.

MARTA's service area was hit hard by the recession with over a 14% job loss between 2007 and 2010. In 2010, unemployment rates in Fulton and DeKalb Counties soared to 11% and 10.6%, respectively. Atlanta's unemployment rate that year was close to 13%. Since 2010, the area has experienced a significant gain in jobs but employment remains below 2007 levels. A 2.1% increase in employment in March 2014 from the prior year has lowered unemployment rates in Fulton and DeKalb counties to 7.6% and 7.1%, respectively, but both remain above the state and national averages.

Wealth indices in Fulton County are significantly above the state and national averages with 2011 per capita income at 153% and 131% of the state and national averages, respectively. Income levels in DeKalb County are not as high as in Fulton, but above those of the state and nation.

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, IHS Global Insight, National Association of Realtors,

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Tax-Supported Rating Criteria

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

Additional Disclosure

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http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832053

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Contacts

Fitch Ratings
Primary Analyst
Larry Levitz
Director
+1 212-908-9174
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Raymond Wu
Analyst
+1 212-908-0845
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Larry Levitz
Director
+1 212-908-9174
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Raymond Wu
Analyst
+1 212-908-0845
or
Committee Chairperson
Amy Laskey
Managing Director
+1 212-908-0568
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com