Fitch Rates NJ Trans. Trust Auth's 2016A Fed Highway Reimbursement Rev Notes 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A-' rating to the New Jersey Transportation Trust Fund Authority's (NJTTFA) approximately $2.77 billion in 2016 series A federal highway reimbursement revenue notes. The Rating Outlook is Stable.

NJTTFA also plans to issue $0.5 billion in parity 2016 series B federal highway reimbursement revenue notes, and has $27.6 million outstanding in 2006A grant anticipation revenue vehicle (GARVEE) bonds. Fitch does not rate either of these obligations.

KEY RATING DRIVERS

The rating largely reflects the relative strength of the federal transportation funding program, whose annual receipts underpin the bond's debt service payments. The current program's growing, unsustainable gap between receipts and outlays coupled with the absence of a long-term funding solution have rendered the Highway Trust Fund (HTF) dependent on future general fund transfers to remain solvent; however, future policy uncertainty is somewhat mitigated by the program's long-standing history of short to medium term legislative solutions to meet funding needs. The rating further reflects the NJTTFA's strong additional notes test of 3.0x maximum annual debt service (MADS), which provides additional financial cushion to bondholders. The rating is constrained by the State of New Jersey's appropriation debt rating of 'A-', reflecting the bond's exposure to appropriation risk.

Strength of the Federal Program: Midrange

Continued Dependence on General Fund Transfers: The federal program's transition from a sustainable, multiple-year platform to one experiencing a widening deficit with solely short-term funding solutions has rendered the HTF dependent on future general fund transfers to remain solvent, absent an increase in federal gas tax or a significant reduction in spending. Future HTF-related policy and funding once the Fixing America's Surface Transportation (FAST) Act's funding is depleted in 2021 remains uncertain. Revenue risk is, however, partially mitigated by the reliable formulaic distribution of funds, essential nature of the investment, and history of fund transfers which underscore the importance of transportation funding within the federal budget.

Structural Features: Stronger

Structural Features Afford Flexibility: The security benefits from a first lien on all legally available federal transportation funding, which is set aside on a monthly basis. The bonds also benefit from an additional notes test of at least 3.0x MADS, which affords additional financial cushion to bondholders.

Resources of DOT/Transit Agency: Weaker

Limited Liquidity: The financial resources of the NJTTFA are limited to the discretion of the state legislature to appropriate revenue to the trustee for debt service in the event of a federal funding shortfall, which increases bondholder vulnerability should the HTF experience future gaps or delays in funding. However, low levels of liquidity including the absence of a debt service reserve fund are typical for GARVEE transactions.

Peers: NJTTFA's peers consist of other standalone highway GARVEEs within Fitch's portfolio, all of which are currently rated 'A+' with a Stable Outlook. NJTTFA's lower rating reflects the rating cap imposed by New Jersey's appropriation debt rating of 'A-'/Stable Outlook, while the remainder of Fitch-rated standalone highway GARVEEs are issued by states with an appropriation debt rating of 'A+' or higher.

RATING SENSITIVITIES

Negative/Positive: A material change in Fitch's view of the strength of the federal program to weak or strong from midrange.

Negative/Positive: A change to Fitch's State of New Jersey appropriation debt rating.

SUMMARY OF CREDIT

NJTTFA expects to issue approximately $3.27 billion par in 2016 series A&B federal highway reimbursement revenue notes, with $2.77 billion in series A notes and $0.5 billion in series B notes (unrated by Fitch). Proceeds will provide funds for certain 2017 and 2018 capital projects located within the state of New Jersey. Proceeds will also cover the costs of issuance and funding of the capitalized interest fund. The notes will not have a debt service reserve fund, typical of most GARVEE transactions. The notes are fixed-rate and fully amortizing, with the series A maturing in June 2031.

HTF expenditures have been exceeding revenues nearly every year since fiscal federal year (FFY, ended Sept. 30) 2001, with the deficit widening in recent years and expected to grow over the next 10 years. Fitch believes the trend towards fuel efficient vehicles, as evidenced by the Environmental Protection Agency's (EPA) recently revised Corporate Average Fuel Economy (CAFE) standards, could exacerbate the HTF's deficit without commensurate increases in gas taxes, as historical tax revenue levels could become difficult to obtain should vehicles, on average, utilize less gas. The Congressional Budget Office (CBO) currently projects that the FAST Act's 2016 cash injections will slowly deplete over upcoming years, resulting in insolvency within both the highway and transit trust fund accounts by FFY 2022 absent additional fund transfers, increases in gas taxes, or cuts in transportation spending. Fitch anticipates an additional future general fund transfer will prevent the HTF from becoming insolvent, given the HTF's history of receiving general fund transfers during times of funding need, which should keep the program afloat temporarily beyond FFY 2021; however, though historical fund transfers demonstrate the relative importance of transportation funding within the federal budget, there is currently no guarantee of future commitment by the federal government, which lends to long-term uncertainty regarding sustainability of the federal program.

Under the unlikely yet worst-case scenario in which transportation spending must be cut in order to keep the HTF solvent, Fitch estimates funding support to GARVEEs would decrease by an average of 35% between FFY 2022-2026. Fitch has consequently assumed flat growth of reimbursement revenues through the note's maturity at the historical five-year average of $1.039 billion within its base case, and a 35% reimbursement revenue shock in 2022 within its rating case. Projections result in average and minimum debt service coverage ratios (DSCR) of 3.04x and 3.04x within the base case, and 2.22x and 1.97x within the rating case, respectively.

NJTTFA's DSCR levels are considered adequate; the rating is, however, more reflective of the relative strength of the federal program, the strong additional notes test of 3.0x MADS, and the State of New Jersey's appropriation debt rating which caps the rating at 'A-'.

SECURITY

The 2016 series A federal highway reimbursement revenue Notes are secured by reimbursement revenues, defined as all federal transportation funds received by the New Jersey Department of Transportation (NJDOT) from the United States government which represent a federal reimbursement to NJDOT.

Additional information is available on www.fitchratings.com

Applicable Criteria

Leveraging Federal Transportation Grants (Rating Criteria for GARVEE Bonds) (pub. 01 Dec 2015)

https://www.fitchratings.com/site/re/874011

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013154

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https://www.fitchratings.com/regulatory

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or
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Contacts

Fitch Ratings
Primary Analyst
Jamie Goh
Analyst
+1-212-908-0746
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Tanya Langman
Director
+1-212-908-0716
or
State Analyst
Marcy Block
Senior Director
+1-212-908-0239
or
Committee Chairperson
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Media Relations
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com