NEW YORK--(BUSINESS WIRE)--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:
--$26.3 million sales tax revenue bonds (third indenture series) refunding series 2013A
The bonds are expected to price via competitive bid the week of April 8, 2013. Proceeds will be used to refund the remaining portion of MARTA's outstanding sales tax revenue bonds, series 2003A for savings.
In addition, Fitch assigns the following ratings:
--Approximately $1.4 billion sales tax revenue bonds (third indenture series) at 'AA-'.
The Rating Outlook is Stable.
The bonds are secured by sales tax receipts from the levy of a 1% sales tax within Fulton (rated 'AA+' with a Negative Outlook by Fitch) and DeKalb 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, subject to bonds issued under two prior lien indentures and on parity with sales tax bonds issued under the third indenture. The first two indentures are closed to additional new money bond issues. No reserve fund is provided for the series 2013A bonds.
KEY RATING DRIVERS
STRONG DEBT SERVICE COVERAGE: Coverage by fiscal 2012 sales tax receipts of maximum annual debt service (MADS) is strong at 2.4x and is projected to 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 is recovering slowly from the effects of the recession.
ESSENTIAL SERVICE: MARTA provides essential transportation services to Atlanta and immediately surrounding Fulton and DeKalb counties to an average of over 500,000 passengers per day.
CHALLENGED FINANCIAL OPERATIONS: The authority's finances are pressured by a weak revenue base which lacks state financial support, and places excessive 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 2022. This dependence stems from the paucity of dedicated capital funding sources available to the authority.
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.
SALES TAX DECLINES: Significant deterioration in sales tax collections which reduces coverage and further pressure operations could lead to a rating downgrade.
FURTHER WEAKENING OF FINANCES: A downturn in financial performance could result in a negative rating action.
INCREASED FINANCIAL FLEXIBILITY: Measures which result in a lower cost structure or create new sources of revenues thereby increasing financial flexibility may result in a positive rating action.
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 in 1979 and consists of 48 miles of rail lines and 38 stations. Bus service includes approximately 600 buses operating in MARTA's service area. MARTA is the ninth largest rapid transit system in the United States. In fiscal 2012, MARTA transported approximately 135 million passengers for an average daily ridership of approximately 535,000.
MARTA ORIGINALLY CONCEIVED AS A REGIONAL SYSTEM
MARTA was created in 1964 as a joint venture among Fulton, DeKalb, Clayton, Gwinnett, and Cobb Counties and the City of Atlanta. The levy of the sales tax necessary to fund the system was approved by voters in Fulton and DeKalb Counties, so system operations are almost exclusively confined to those two counties. The authority is currently governed by a board of directors composed of 11 voting members and one non-voting member. Voting members represent the three participating local governments with one membership reserved for Commissioner of the State Department of Transportation. The board has broad authority to operate the system, including the ability to determine service levels and fares.
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. No bonds outstanding currently extend beyond 2040. 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 action over the past ten years have temporarily eased or eliminated this restriction.
Fitch views as a credit positive the negligible risk that authority sales tax revenues would be diverted for general government or other purposes of Fulton or DeKalb Counties. Unlike other states which do not currently permit localities to file for bankruptcy, Georgia statutes explicitly ban local governments from declaring bankruptcy, reducing the likelihood that the state would permit such a filing in the future. Fitch also believes that MARTA's status as a state-created agency, the voted and dedicated purpose of the sales tax revenues, the process by which sales taxes are collected by the state and directly distributed to the trustee, state revenue bond validation process and the importance of transit operations to the region and state economy also argue against the inclusion of sales taxes within a municipal bankruptcy procedure.
RECENT SALES TAX VOLATILITY
Sales tax trends have been volatile since 2000 with several periods of significant declines interspersed with years of solid growth. Annual growth averaged a modest 1.2% since fiscal 2000, well below the 3.2% average annual growth rate reported since fiscal 1986. 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% and year to date sales tax receipts are up 2.7% year over year. Authority projections show minor gains for fiscals 2013 and 2014 but then growth accelerates through fiscal 2018. Fitch considers these projections to be reasonable given positive evidence that the economic recovery within the Atlanta metro area continues to strengthen.
STRONG DEBT SERVICE COVERAGE
Fiscal 2012 sales tax coverage of MARTA's revenue bonds is strong at 2.4x MADS. MARTA debt consists of sales tax revenue bonds issued under multiple liens. Bonds issued under the first and second lien indentures total about $356 million outstanding and are closed to additional new money bond issuance. Since 2004, MARTA has been issuing bonds under a third lien. Outstanding third lien debt totals over $1.4 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 from both historic and projected sales tax. However, MARTA's need of sales tax revenues to fund operations serves as a more effective brake against over-issuance. MARTA's informal policy limits 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.
MARTA has substantial swap exposure, with nearly $700 million notional amount of swaps outstanding. Approximately $480 million is represented by a swap with Goldman Sachs (rated 'A' with a Stable Outlook) issued for cash flow purposes without hedging any specific authority bonds. The second swap with Merrill Lynch (rated 'A' with Stable Outlook) totals about $200 million and does provide a hedge for outstanding variable rate debt. The swaps expose the authority to termination risk although the termination triggers for both parties of 'BBB' and 'Baa2' for the Goldman swap and 'BBB-' or 'Baa3' for the Merrill swap from S&P and Moody's, respectively. The most recent market value of the swaps was a modest negative $8 million. Perhaps of greater concern is basis risk as both swaps require payments from the authority based on the SIFMA municipal swap index and payments from the counterparty based on a percentage of LIBOR. Any additional costs incurred by the authority as a result of mismatches in swap payments place added pressure on the authority's already stressed financial operations.
CAPITAL NEEDS FUNDED MOSTLY WITH DEBT
The authority has identified in its 10-year capital improvement plan approximately $1.9 billion of capital needs. The system is relatively mature so capital needs focus mainly on safety improvements, equipment replacement and maintenance. Proposed funding sources include sales taxes, federal grants and about $1.2 billion of debt. A major reason for funding the capital program mostly through debt issuance is the authority's heavy reliance on sales taxes to fund both debt service and operations, leaving few resources for pay-go capital spending. According to the plan, annual debt service would increase by 37% between fiscals 2013 and 2022 as the planned debt is absorbed. It should be noted that management has indicated that the present capital program is aggressive enabling the authority to defer projects, if necessary.
Failure of an Atlanta regional sales tax transportation referendum in July 2012 for MARTA and other entities leaves unfunded about $600 million of various MARTA capital projects intended to extend the useful life of the authority's critical infrastructure. Despite the failure of the referendum, MARTA officials intend to pursue the projects, should funding become available.
System utilization declined by 14% between fiscals 2009 and 2012. Bus ridership experienced the larger fall dropping by 15% while rail passengers decreased by nearly 13%. The ridership losses coincided with the steep recession and two substantial hikes in base fares, the first in eight years. MARTA's long-term ridership trends have generally been negative with the loss of 20% of passenger counts since fiscal 2000. Management expects ridership to grow modestly this year followed by a decline in fiscal 2014, after which projected ridership rises steadily.
SYSTEM FINANCES UNDER PRESSURE
MARTA has managed with significant budgetary shortfalls (between fiscals 2010 and 2012) as a result of the steep drop in sales taxes, the authority's largest source of revenues. In fiscal 2012 sales taxes, after debt service, accounted for 46% of operating revenues. Management has tried to maintain operations through a combination of expense measures including service cutbacks and personnel reductions, fare increases, stimulus funds, tapping of reserves and temporary suspension by the state of the 50/50 sales tax rule. Full time employees fell by 371 or 8% between fiscals 2008 and 2012. Operating expenditure growth was limited to a moderate 2.8% over the past four fiscal years. Most of the present growth is attributable to the rising costs of employee benefits. Budgeted fringe benefits for fiscal 2013 represents a 30% increase over fiscal 2009 levels while MARTA wages grew only 8% during the same period.
LACK OF FINANCIAL FLEXIBILITY
MARTA is burdened with a limited and restrictive revenue structure and little financial flexibility. The authority receives virtually no state support and a highly elastic demand structure renders it difficult to raise fares sufficiently to offset the state funding gap. Furthermore, the 50/50 rule hinders management discretion, although this restriction was temporarily suspended through state legislative action for three years from fiscal 2011 through the end of this fiscal year.
LACK OF STATE FUNDING INCREASES RELIANCE ON SALES TAXES
MARTA is the only major mass transit system in the nation that does not receive dedicated state funding, limiting the revenue base while increasing reliance upon sales taxes and fare revenues to support operations. In fiscal 2012, sales tax and fare revenues accounted for 83% of system funding. The authority does receive federal funding but it provides only 12% of revenues. Fare revenues were maintained at a relatively low level throughout the 2000s; a fare increase in 2009 was the first one since the beginning of 2001. The fare hikes of 14% and 25% in 2009 and 2011, respectively raised the authority's below average farebox recovery ratio up to 32% in fiscal 2012, more in line with other mass transit systems. Management is planning on another fare rise in fiscal 2015, possibly up to $2.75 per ride and is considering instituting zone pricing which Fitch considers to be a viable option as a significant portion of rail ridership derives from outside of the immediate service area.
THIN FINANCIAL MARGINS
Financial margins are thin. Net coverage from available revenues of operating and debt service expenses in fiscal 2012 was a narrow 1.19x. Fitch's base projections for fiscals 2014 through 2018 assume flat sales tax growth, a 6% increase in fare revenues across fiscals 2013 and 2014 and 3% annual increases in operating expenses. Under these assumptions, system revenues would fail to cover operating expenses and debt service by fiscal 2015, with deficits widening rapidly through fiscal 2018. The authority is relatively constrained in terms of its ability to generate significant revenue growth and must look to reduce its cost structure to achieve structural balance.
PROPOSED LAW WOULD REQUIRE OUT-SOURCING
In 2011, the authority commissioned the consulting firm KPMG to review operations to determine if greater efficiencies could be obtained. KPMG's report determined that MARTA's healthcare and retirement costs were higher than the national average for private and public sector enterprises and that back office operations could be privatized for significant savings. The report led to proposed state legislation which, among other measures, would require MARTA to outsource many of its operations, convert from a defined benefit to a defined contribution retirement plan, restrict debt issuance and permanently suspend the 50/50 rule. The legislation passed the Georgia House but has languished in the Senate. Current bills would suspend the 50/50 rule for one year and change the composition of the MARTA board, shifting the appointment of commissioners from the county commissions to the mayors of incorporated cities in those counties. It is uncertain whether other measures will be part of the next legislative session.
Fitch is neutral as to the projected benefits of outsourcing, at least until these benefits are demonstrated. However, Fitch believes that if the 50/50 rule is not suspended or eliminated in fiscal 2014 and beyond, the authority will likely be forced to make even deeper service cuts and raise fares, further impinging on both utilization and financial flexibility.
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 2011 population within the service area is 1.65 million. The city of Atlanta with a population of approximately 432,000 accounts for about 25% 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 same year was close to 13%. Since 2010, the area has experienced a modest gain in jobs but employment remains below 2003 levels. A 2.2% increase in employment in December 2012 from the prior year and recent growth in sales tax receipts may be indicative of a recovery that is beginning to strengthen.
Wealth indices in Fulton County are significantly above the state and national averages with 2011 per capita income at 149% and 135% of the state and national averages, respectively. Income levels in DeKalb County are not as high as in Fulton, but remain modestly above both the state and national benchmarks.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria