AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA' rating on Dallas Area Rapid Transit, Texas' (DART) outstanding debt as follows:
--Approximately $734.8 million senior lien sales tax revenue refunding bonds, series 2007;
--Approximately $714.9 million senior lien sales tax revenue bonds, series 2008.
In addition, Fitch withdraws its implied 'AA' rating on the senior subordinate lien sales tax revenue commercial paper notes. This rating is withdrawn as it is no longer considered analytically meaningful.
The Rating Outlook is Stable.
The bonds are secured by a senior lien on pledged revenues, which consist of gross receipts from the levy and collection of the 1% sales tax within the system's service area, farebox revenues and investment income from the debt service account.
KEY RATING DRIVERS
LARGE AND DIVERSE ECONOMY: Employment trends in the Dallas-Fort Worth metropolitan statistical area (MSA) have continued to strengthen despite accompanying labor force growth. Above-average wealth indices and diverse employment opportunities provide economic stability.
STRONG DEBT SERVICE COVERAGE: There is ample coverage by fiscal 2013 pledged 1% sales tax of 2.5 times (x) senior lien debt service and 2.0x maximum annual debt service (MADS) on senior lien bonds without the federal subsidies on DART's Build America Bonds (BABs) issues.
TREND OF SALES TAX GROWTH: DART has realized a three-year period of solid annual sales tax gains since the recession. Fitch believes management's projections of moderate growth in annual sales tax revenue are reasonable over the near term given the strong economic climate, but this remains balanced against long-term sales tax trends that reflect relatively modest growth.
HIGH BUT MODERATING DEBT LOAD: DART issued over $3 billion of sales tax bonds over 2007-2010 to finance the large-scale expansion of its light rail system. Debt service costs are projected to account for nearly 30% of combined operating expenses and debt service by fiscal 2018. However, as DART has completed the bulk of construction, future planned debt issuance is generally moderate.
FINANCIAL OPERATIONS REMAIN TIGHT: System operating revenues, including sales taxes, are projected to cover operating expenses and debt service marginally over the next five years. Substantial unrestricted cash reserves provide adequate flexibility in the event moderate sales tax growth projected fails to materialize.
SYSTEM RELIANCE UPON SALES TAX REVENUES: DART is dependent on sales taxes for the majority of its resources, and has limited ability to raise revenues given the low farebox ratio of 19% in 2013.
SHIFT IN FUNDAMENTALS: The rating is sensitive to changes in fundamental credit characteristics including sales tax performance, the currently sound coverage levels, and DART's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the near term.
WIDE SERVICE AREA IN DFW MSA
DART is a sub-regional transportation authority that provides bus, light rail, commuter rail, paratransit and general mobility services to a 700 square mile area which includes the city of Dallas and surrounding communities, totaling only a portion of the MSA. The service area incorporates 11 cities and two towns, all of which are voter-approved participating municipalities. Operations are primarily supported by the 1% sales tax levied within the service area net of debt service on DART bonds. Fare revenues have increased somewhat, but historically only account for a moderate portion of operating costs (19% in fiscal 2013).
The area economy has grown steadily since the recession as indicated by sales tax growth and expanding employment and continues to outperform the nation in terms of population, employment, and income growth. Jobs within the MSA grew by approximately 2.5% annually in both 2012 and 2013. Healthy year-over-year gains in employment offset the growth in labor force and unemployment edged down to 5.9% in October 2013 from 6.1% a year ago. Unemployment rates for the MSA have matched those of the state and are well below the national averages. Wealth indices generally exceed the state and national norms.
SOLID DEBT SERVICE COVERAGE
Senior lien debt service coverage remains ample at 2.0x MADS before taking into account federal subsidies on DART's two issues of BABs. This coverage level excludes any long-term amortization of commercial paper. Debt levels grew rapidly since fiscal 2007 as DART issued $3.3 billion of sales tax bonds to finance its extensive capital program. Debt service costs net of federal BABs subsidies grew by $59 million or 64% between fiscals 2009 and 2011 and will increase an additional $21 million or 10% by fiscal 2018 to reach MADS as presently scheduled.
MANAGEABLE DEBT PLANS
An additional bonds test of 2.0x MADS based on either historical or prospective sales tax revenues provides further security, although the critical need for sales taxes to fund operations guards against over-issuance. Subordinate obligations on the pledged revenues consist of commercial paper that has historically been fixed into senior lien long-term debt. DART presently utilizes a self-liquidity commercial paper program, up to a maximum of $150 million, which is supported by DART's substantial liquidity that totaled approximately $765 million at Dec. 31, 2013.
Management indicates moderate near-term debt plans of $125 million consist primarily of commercial paper and TIFIA (U.S. Department of Transportation) financing that support predominately capital renewal and replacement needs. In addition, moderation in DART's debt needs has been bolstered by healthy cost savings in its recent capital projects according to management. Fitch expects gross sales tax revenues to minimally cover annual debt service at 2.0x going forward based on DART's established financial policy floor and as forecast in its 2014 20-year financial plan.
SALES TAX GAINS
Sales tax collections have continued to gain momentum since rebounding in fiscal 2011 from the recession. A strong 7.5% gain in fiscal 2011 reversed the two years' roughly 9% recessionary decline and a comparable gain was realized in fiscal 2012. Sales tax growth moderated slightly in fiscal 2013, but remained solid at 5.5% and totaled $456.5 million on an unaudited basis. Sales taxes have historically been sensitive to economic cycles. However, this most recent recessionary decline was significantly lower than the 16% drop in collections experienced during the 2001 recession, which Fitch believes may signal a more resilient tax base. Overall sales tax growth since fiscal 2000, however, has been modest at 1.5% annually.
TIGHT FINANCIAL OPERATIONS
The effects of recessionary revenue shortfalls over fiscals 2009-2010 were significant to DART because sales taxes comprise over 70% of DART operating revenue. The shortfalls were addressed by management with cut backs in service and adjustments to the long-range business plan in order to bring future spending in line with reduced expectations for sales tax growth. Future capital plans were also scaled down.
These multi-year cost-saving measures in addition to some modest, long-term revenue enhancements available to DART (a fare increase in fiscal 2013, parking charges at certain stations) and the resumption of healthy sales tax growth have favorably allowed DART to regain structural operating balance. Structural operating balance, defined as achieving operating revenue coverage of at least 1.0x operating and capital expenses per DART's financial policies, is projected to be sustained in conjunction with measured expectations of comparable 4%-5% sales tax growth annually over the next five years.
Fitch believes this assumption is reasonable given the area's strong economic climate, although the effects of any future sales tax revenue shortfalls on the system's finances are more pronounced than in the past, reflective of a maturing system and fairly modest revenue-raising options available to DART. In Fitch's stress scenario, an extended period of flat sales tax revenues would pressure DART's finances given the rising and largely fixed operations and debt service costs. Nonetheless, DART's financial flexibility is enhanced by hefty cash reserves, which total well over a year of operating expenses. As a last resort, DART maintains the option to reduce service levels, if necessary.
LIGHT-RAIL EXTENSION ALMOST COMPLETE
DART is nearing the completion of its light-rail system expansion slightly ahead of schedule. Completion of light rail projects presently under construction will expand the system to 90 miles by 2014, which has nearly doubled in length since 2009. An extension of the light rail Orange Line to the DFW Airport is projected for revenue service in 2014. The Blue Line rail extension is fully funded and programmed to be completed slightly later in the capital program by 2016, which includes a four-mile segment that will connect the light rail system to the University of North Texas-Dallas Campus. Fitch believes once service is established, both light rail extensions appear promising to eventually boost DART's ridership.
DART's phased approach to its capital program affords flexibility to adjust project schedules with the availability of funding. DART's $1.1 billion capital plan through fiscal 2018 is down by about $382 million or roughly 26% from the previous plan. Larger projects slated for the next few years include completion of the aforementioned light rail projects and bus purchases for replacement.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, Texas Municipal Advisory Council, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, 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