SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AAA' to the following Contra Costa Transportation Authority (CCTA), CA sales tax revenue bonds:
--$166.5 million sales tax revenue bonds (limited tax bonds), series 2015A.
In addition, Fitch upgrades the following CCTA sales tax revenue bonds to 'AAA' from 'AA+':
--$201.5 million limited tax refunding bonds, series 2012A;
--$164.8 million fixed rate limited tax bonds, series 2012B.
The Rating Outlook is Stable.
SECURITY
The sales tax revenue bonds are payable from the one-half-cent retail transactions and use tax (sales tax) authorized by Measure J and levied throughout Contra Costa County (the county), net of the Board of Equalization administrative fee.
KEY RATING DRIVERS
STRONG DEBT SERVICE COVERAGE: The 'AAA' rating reflects the strong coverage at 2.14x maximum annual debt service (MADS) , the ability to withstand severe stress, the economic outlook for Contra Costa County, relatively limited additional issuance plans, and satisfactory restrictions on additional leveraging.
LIMITED OPERATING RISK: CCTA benefits from its limited exposure to operational risks and strong voter support.
HEALTHY SALES TAX BASE: Pledged revenue is a broad-based, voter-approved sales tax that expires after the bonds' final maturity. Fiscal 2015 sales tax revenues established a new high after recording 4.7% annual growth, although significant declines occurred during the recession.
GROWING ECONOMY; SOLID FUNDAMENTALS: The rating incorporates Fitch's expectation for revenue volatility over time with a generally upward trending trajectory given population and employment growth trends. The county's economy is diverse and well-integrated with the dynamic regional economy of the greater San Francisco Bay Area.
SATISFACTORY LEGAL PROVISIONS: Legal protections are solid with a 1.75x additional bonds test (ABT) and additional restrictions limiting the amount of sales tax revenues that can be used for capital projects.
RATING SENSITIVITIES
STABLE REVENUE PERFORMANCE: The rating is sensitive to shifts in fundamental credit characteristics including sales tax volatility within the historical range. The 'AAA' rating incorporates expectations for little to no additional leverage on the existing revenue base beyond what is currently contemplated.
CREDIT PROFILE
STRONG DEBT SERVICE COVERAGE
Debt service coverage is projected to remain ample. MADS is covered at 2.14x based on fiscal 2015 sales tax revenue. Coverage levels are resilient under various Fitch-conducted stress tests, including greater and more persistent revenue declines than recorded historically.
The authority plans on issuing approximately $50 million-$100 million in November 2017. No other new money issuances are currently planned. Debt service coverage is expected to remain satisfactory for the rating following the additional issuance.
VARIABLE-RATE EXPOSURE
The series 2012A bonds are variable-rate obligations that will be either remarketed or privately placed by the Dec. 15, 2015 mandatory tender date. The current ratings reflect Fitch's expectation that the terms of the potential remarketing or private placement will remain favorable to the agency.
Fitch views CCTA's $201.5 million in outstanding variable-rate debt (approximately 44.6% of total debt post issuance) as elevated but manageable. This debt is synthetically fixed through an interest rate swap with Bank of America (rated 'A'/Stable Outlook). Swap termination payments are subordinate to debt service and as of Sept. 1, 2015, the swap's termination value was a negative $47.5 million. Termination events include payment default on the swap, the 2012A bonds, and not complying with collateral posting requirements. Fitch views the authority as well-positioned given a combined $134.3 million in available funds, strong market access implied in the high rating, and already high coverage levels that can withstand significant stress.
SATISFACTORY LEGAL PROTECTIONS
Fitch views bondholders' legal protections as satisfactory. Sales tax revenues are distributed directly from the Board of Equalization, the state's collection agency, to the trustee. The ABT is solid at 1.75x MADS (including outstanding and proposed bonds), based on revenues collected in any 12 consecutive months within the 18 months prior to issuance.
CCTA is restricted by ordinance to allocating no more than 42.5% of annual sales tax revenues (over the life of the program) to capital projects with the remaining revenues allocated to various transportation programs operated by third parties. Fitch views this additional restriction on the leveraging of sales tax revenue as a credit positive.
DIVERSE TAX BASE; VOLATILE REVENUES
Sales tax revenues demonstrated their sensitivity to economic conditions with a cumulative 18.8% decline from fiscal 2007-2010. However, as sales activity in various sectors improved, including auto, retail, and construction, total receipts returned to growth with a cumulative revenue increase of 29.1% over fiscal years 2010-2015. Sales tax revenues set a new high in fiscal 2015 of $79.5 million. The new high reflects 4.7% growth over fiscal 2014. The rating incorporates an expectation for continued cyclical volatility but generally upward trending receipts given the economic resource base.
ECONOMIC IMPROVEMENT
The county's economic indicators continue to improve after experiencing significant weakness during and after the recession. The county's unemployment rate of 4.9% (June 2015) was modestly below the national average of 5.3%. Strong job creation has significantly reduced the unemployment rate from its 2010 high of 11% despite above-average labor force growth in the area.
Local employers are diverse with top employers in industrial, healthcare, biotechnology, and other sectors. In addition, the county benefits from its relatively affordable housing and access to the large labor market in the broad and diverse San Francisco Bay Area economy.
Contra Costa County is the third most populated of the nine San Francisco Bay Area counties, with a growing population of 1.1 million. Wealth levels in the county are a credit positive with the per capita and median household income levels at 36% and 49%, respectively, above the national average. The county covers approximately 802 square miles and includes 19 incorporated cities, including Richmond, Concord, Walnut Creek, and Martinez, which serves as the county seat.
LIMITED OPERATIONAL RISK
Fitch views CCTA's operational risk as low given its relatively narrow role as a planning, coordinating, overseeing, and funding agency. CCTA was formed as the implementation agency in 1988 for Measure J's predecessor, Measure C, and provides funding for public transportation programs within the county and oversees the planning and construction of specified capital projects. Measure J extends the sales tax for 25 years with an expiration date of March 31, 2034. Measure J received strong support with approval by 71% of voters. Measure J projects include the fourth bore of the Caldecott Tunnel (completed November 2013), the eBART extension, highway improvements, and the funding of local transit systems. CCTA does not retain ownership of completed projects or operate transportation programs.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990832
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990832
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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