AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA' rating to the following Regional Transportation District (RTD or the district), CO bonds:
--$197.4 million sales tax revenue bonds (FasTracks Project), series 2016A-1;
Fitch has also taken the following rating actions:
-- Issuer Default Rating (IDR) on the district assigned at 'AA';
--$1.4 billion outstanding sales tax revenue bonds (FasTracks Project) affirmed at 'AA';
--$1.2 billion outstanding certificates of participation (COPs) upgraded to 'AA-' from 'A;
--$144 million outstanding sales tax revenue bonds downgraded to 'AA' from 'AA+'.
The Rating Outlook is Stable.
Proceeds from series 2016A-1 will fund various FasTracks projects.
SECURITY
The sales tax revenue bonds (FasTracks Project) are secured by a first lien on the district's 0.4% FasTracks sales tax and a subordinate lien on the 0.6% base system sales tax.
KEY RATING DRIVERS
The 'AA' IDR reflects the district's ample liquidity, positive revenue growth prospects and expenditure flexibility, and moderate carrying costs, balanced against an elevated long-term liability burden. Fitch believes that operating and capital costs of the FasTracks expansion will pressure the district's ability to comply with its 1.2x net revenue coverage policy for all debt obligations. Demonstrated commitment to this policy, which Fitch considers an important credit feature, has served to limit RTD's exposure to revenue volatility and budgetary contingencies.
The assignment of the IDR and rating action on the COPs and sales tax revenue bonds reflect application of Fitch's revised criteria for U.S. state and local governments, released on April 18, 2016. The upgrade of the COPs is based on the more focused consideration of project factors in ratings for appropriation-backed debt under the revised criteria; the COPs do not carry any of the additional risk features that Fitch identifies for rating more than one notch below the IDR.
The downgrade of the closed lien sales tax revenue bonds is based on the IDR cap. The ratings on the sales tax bonds can be no higher than the district's IDR because the bonds are exposed to the general operating risks affecting the district as a whole. In Fitch's opinion, the bonds are not likely to be treated as special revenues under Chapter 9 of the U.S. bankruptcy code. As such, the ratings on the closed and open lien bonds are the same despite the substantially higher coverage for the closed lien bonds.
Economic Resource Base
RTD's service area is large and diverse, containing over one-half of the state's population, including the seat of state government, the city and county of Denver (IDR of 'AAA'/Stable Outlook). The service area covers 2,340 square miles in eight counties. The Denver metro area is among the fastest growing regions in the U.S. and benefits from solid incomes and low unemployment rates.
Revenue Framework: 'a' factor assessment
Sales taxes are the district's primary revenue source. This economically sensitive revenue stream has grown consistently above inflation and U.S. GDP gains since rebounding rapidly from the last downturn. The district's independent legal ability to raise revenues is moderate, limited to passenger fares.
Expenditure Framework: 'aa' factor assessment
Expenditure growth is expected to be generally in line with or marginally above the district's revenue gains in the absence of policy actions. Solid expenditure flexibility is derived from managements control over pay-go capital spending, headcount, service levels, and moderate carrying costs. O&M service payments for the Eagle P3 project, which begin in 2016, will offset some of this flexibility, but Fitch expects expenditure control to remain solid. Carrying costs are expected to rise but remain within the moderate range.
Long-Term Liability Burden: 'a' factor assessment
Debt and pension liabilities are modest relative to personal income but elevated relative to funds available for debt service. Debt to net plant is high but will not grow further in the medium term given the system's reliance on pay-go funding.
Operating Performance: 'aaa' factor assessment
The district's financial resilience is solid, derived from a strong unrestricted cash position and expenditure flexibility that enables it to weather revenue volatility through a normal economic cycle. Fitch expects management would respond nimbly to unexpected revenue pressures, based on historical experience, and maintain 1.2x net revenue coverage.
RATING SENSITIVITIES
Operating Performance Drives IDR: The rating assumes continued compliance with RTD's 1.2xs net revenue coverage policy. In addition, the IDR could come under negative rating pressure if the district's financial performance weakens significantly over a sustained period of time. A temporary, moderate decline in revenues would be expected during recessionary periods and would not pressure the rating so long as the district took appropriate actions to stabilize revenues and expenditures at a healthy level. Significant and unexpected increases in leverage could also put downward pressure on the rating.
Stable Coverage: The sales tax revenue bond ratings are sensitive to declines in pledged revenues. Large and sustained declines in sales tax revenues would result in negative rating pressure
CREDIT PROFILE
RTD currently provides primarily bus service and 48 miles of light rail. The district encompasses the Denver metro area, one of the fastest growing MSA's in recent years, and includes 40 cities and towns in eight counties. The district's population of 3.1 million represents approximately 57% of the state's total population. The local economy continues to expand rapidly, with continued sector development in professional and business services, education and healthcare, and tourism. The expansive employment base remains resilient in the face of low oil prices and stalled exploration activity within the Front Range. The MSA's unemployment rate remains well below the national average, aided by large gains in employment. A young population and highly educated workforce are expected to support healthy economic growth over the medium and long term. The city and county of Denver's 2015 per capita personal income of almost $66,000 is 138% of the U.S. average.
Revenue Framework
Sales taxes account for a large 71% of operating revenues, followed by fare revenues (16%) and federal operating grants at 10%. RTD has a low fare box recovery rate, relying instead on excess sales tax revenue to cover operating costs. The fare box recovery rate has been trending up, and at 24% in 2015 is above RTD's stated 20% goal. Ridership trends have been volatile recently given a history of fluctuating gas prices, moderate fare increases, and the addition of new rail lines.
The district's main revenue source, sales and use taxes, grew by an annual average of 3.4% from 2005-2015, a rate that exceeded inflation and U. S. GDP gains. Current-year sales tax receipts are budgeted to grow by 5%, following gains of 9.8% and 5.2% in 2014 and 2015, respectively. Year-to-date date sales taxes are up by a lower 3.4% through August, due partly to a one-time refund for taxes collected over a period of years.
Fitch expects sales tax revenue gains to remain strong but trend closer to U.S. GDP growth. Along with home prices, rental rates are rising rapidly due to population pressures on the real estate market. Zillow reports that Denver metro's median rent rose by 43% over the last four years to $2,028 per month in Aug. 2016, a level 44% higher than the current U.S. average of $1,410. These rising housing costs will consume larger shares of incomes, leading to reduced disposable income for taxable goods and services.
Fare revenues are poised to increase with this year's opening of several FasTracks projects such as the University of Colorado A Line from Denver Union Station to the Denver International Airport (DIA). Fare revenues are up through mid-2016 by 8.2%.
The district's sales tax rate cannot be increased without voter approval. The district does have the statutory authority to impose a property tax levy in the event of revenue shortfalls but voter approval is still required by the Taxpayer Bill of Rights (TABOR).
Fares can be adjusted independently and are typically increased every three years. Effective Jan. 1, 2016, the board approved an average 13% fare increase. Prior to this, system-wide fare increases were imposed in 2009 and 2011 to offset declining sales tax revenues. Partly due to the fare hikes, ridership declined by 6.6% in 2009 and remained flat through 2011. Notably, revenue boardings increased modestly by 2.4% in 2012 despite an 8% service reduction that was imposed to accommodate nearly flat projected sales tax growth. Ridership continued to grow annually through 2014 then declined by 2.3% in 2015 due to low gas prices.
Expenditure Framework
Capital expenditures are the district's primary driver of spending. On an operational basis, spending is led by salaries, wages, and benefits which account for 45% of expenditures (net of depreciation). Contracted service providers, who account for 54% of RTD's bus drivers, account for 22% of spending.
RTD's natural pace of spending is expected to remain generally in line with or marginally above revenue growth, but pressured by the operating costs of new FasTracks projects, five of which are scheduled to begin operations this year. The majority of these new FasTracks projects is part of the Eagle public private partnership (P3) and will incur significant O&M portion payments beginning in 2016, averaging $65 million over the first five years, a 12% increase in total operating costs over 2015 levels.
The district's expenditure flexibility is derived from its ability to temporarily defer pay-go capital spending and adjust service levels within its base system (which represents the bulk of RTD's operations) during downturns. RTD last reduced its service levels in 2012 by 8% in response to a projected revenue shortfall. Management reports that it reviews service levels three times a year to accommodate seasonal changes in ridership.
Management retains control over its workforce headcount although pay hikes are negotiated in a collective bargaining agreement (CBA). About 55% of the district's workforce is represented through a five-year CBA that expires in 2018 and provides annual pay hikes indexed to inflation. District employees retain the ability to strike and did so in 2006. About 54% of vehicle operators of the base system are staffed through a service contract, providing limited capacity below the 58% maximum allowed by state law.
Carrying costs, comprised of debt service and pension contributions, represent a moderate 14.6% of spending, including capital outlays. With the addition of Eagle P3 capital portion payments starting in 2017 (averaging $41.6 million through 2020), carrying costs will remain within the moderate range at about 17%.
Long-Term Liability Burden
A variation from the referenced criteria was applied in this analysis. The committee assessed the long-term liability burden via a modification to the debt metrics supporting the long-term liability assessment. The district is a local, tax-supported government enterprise. Fitch's credit opinion is that the district's debt burden is best analyzed by combining measurement methods typically used in self-supporting enterprises (debt-to-funds available for debt service and debt-to-net plant assets) and the approach usually applied to local governments (debt-to-service area personal income).
The district's long-term liability burden is comprised primarily of sales tax revenue bonds, COPs, P3 capital portion payment commitments and a moderate unfunded pension liability. The direct debt burden (including unfunded pension liabilities of $322 million) equaled a low 2.4% of personal income in 2015. Given its expansion mode, other measures of RTD's long-term liabilities have been trending up with debt-to-funds available for debt service at 14.8x and debt-to-net plant at 62%. Metrics should improve over time given the district's lack of debt plans over the medium term.
The FasTracks project includes the addition of 122 miles of new light rail, 18 miles of bus rapid transit, 57 rapid transit stations, over 21,000 new parking spaces, and Denver Union Station improvements. Cost estimates for the project, now estimated at $7.4 billion, have risen substantially over time. The initial estimate of $4.7 billion for the full system was approved by voters in November 2004, along with the 0.4% additional sales tax needed to fund it.
RTD has responded to the increase in cost estimates by revamping its financing plan to include significantly more in federal funds, as well as private equity through a P3 that was established in 2010. RTD's Board of Directors has prioritized projects within the full FasTracks program, and is proceeding with only system expansion that can be built and operated within the existing revenue base, as projected in a comprehensive financial model.
Considerable progress has been made on the FasTracks expansion but the construction of one northern rail line and the extension of two existing rail lines remain delayed until funding is identified. The current new money offering will finance the Southeast Rail Extension ($68 million) plus other FasTracks capital projects. Remaining FasTracks bond authority totals approximately $150 million, a modest amount compared to the district's current long-term debt liability of $3.4 billion. Additional leveraging is not anticipated until 2023 or later.
The district's board recently revised its medium-term debt plans in response to revised sales tax projections that point to more moderate growth (averaging 4.7% through 2020) in the near term. A previously planned COP issuance of $50 million for bus fleet replacement will now be funded with current resources.
Salaried non-union employees participate in a single-employer defined benefit pension plan which was closed to new enrollment in 2008. Union employees participate in a separate union pension plan with an assets-to-accrued liability ratio of a low 41%. The combined net pension liability of both plans is $322 million or 0.2% of personal income. RTD contributes to the union plan in accordance with the union agreement but RTD has no legal liability beyond its contributions. RTD's contributions to the union plan rose in 2015 to 13% of payroll from 8% and union members' contributions rose to 5% up from 3%.
Operating Performance
The district's financial resilience to sales tax revenue volatility in a moderate economic downturn is derived from a solid unrestricted cash position and expenditure flexibility within its base system. Unrestricted cash and investments, plus restricted cash allocated as the TABOR reserve, equaled a solid $280 million, or 201 days cash and 55% of operating expenses, in 2015. This metric compares favorably to the 3.8% revenue decline that the Fitch analytical sensitivity tool (FAST) suggests that the district may experience in a moderate downturn (U.S. GDP decline of 1%). The 3.8% revenue decline is based on Fitch's analysis of RTD's 0.6% base sales tax, a proxy for underlying operating revenue performance given sales taxes' dominant revenue position.
RTD will face additional operating expenses, starting in 2016, in the form of O&M service payments to the operator of the Eagle P3 project which is comprised of major elements of the FasTracks expansion. Fitch believes the O&M service payments will pressure RTD's ability to comply with its 1.2x net revenue coverage for all debt obligations which approximates a level of liquidity in excess of the 'aaa' financial resiliency assessment. RTD's financial model assumes sales tax revenues grow by a compound annual average of 4.7% over the next five years, which Fitch views as somewhat optimistic. However, RTD's management has proven responsive to weaker performance, taking actions such as delaying capital projects, making service adjustments and restructuring fares.
Although pressured by the expansion mode of the district, RTD's budget management during the current period of economic growth has been strong with no meaningful deferral of necessary spending based on its reprioritized capital plan. Substantial unrestricted cash and investments have been amassed during this period time for use on capital projects in recent years. Total net revenue coverage for all debt obligations averaged 1.33 from 2011-2015. Adjusting for capital outlays via an IGA with other parties, net revenue coverage averaged 1.55. The adjusted net revenue coverage for 2015 equaled 1.44.
Sales Tax Revenue Bonds
The combined 1% sales and use tax is expected to continue a solid growth trajectory based on the rapid population growth and economic expansion of the district's large service area. MADS coverage of FasTracks bond is ample, able to withstand the moderate volatility projected by FAST. The pledged revenues declined sharply by a cumulative 11.3% in 2008 & 2009 before rebounding quickly. Based on historical data, FAST suggest pledged revenues may decline by 3.8% in the first year of a moderate U.S. recession in which the nation's GDP declines by 1%.
The lien for the 0.6% sales and use tax is closed, resulting in high MADS coverage of 11x. Fitch estimates that the structure could tolerate a large 91% drop in sales tax revenues before MADS coverage reaches 1.0x. The 91% decline is equivalent to 24x the scenario results and 9x the largest actual revenue decline in the review period. Fitch believes that these results are consistent with an 'aaa' level of financial resilience or coverage cushion.
Including the estimated debt service of the remaining $150 million of FasTracks bonding capacity, MADS coverage is ample at 2.8x, well above the 2x ABT. Fitch estimates that the structure could tolerate a large 68% drop in sales tax revenues before MADS coverage reaches 1.0x. The 68% decline is equivalent to 18x the scenario results and 6x the largest actual revenue decline in the review period. Fitch believes that these results are consistent with an 'aaa' level of financial resilience or coverage cushion.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478
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