SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings upgrades the following San Francisco Bay Area Rapid Transit District (BART), CA's sales tax revenue bonds:
--$728.9 million sales tax revenue bonds, series 2005A, 2006, 2006A, 2010, 2012A, and 2012B to 'AA+' from 'AA'.
In addition, Fitch affirms its 'AA+' rating on the following BART general obligation (GO) bonds:
--$408.3 million GO bonds, series 2005A and 2007B.
The Rating Outlook is Stable.
The sales tax revenue bonds are secured by a first lien on 75% of the 1/2 cent San Francisco Bay Area Rapid Transit District (BART) sales and use tax (sales tax) levied in Alameda and Contra Costa counties, and the City and County of San Francisco (collectively, the BART counties).
The general obligation bonds are secured by an unlimited ad valorem tax levied on all taxable property within the BART counties.
KEY RATING DRIVERS
STRONG DEBT SERVICE COVERAGE: The upgrade of the sales tax revenue bonds to 'AA+' reflects high maximum annual debt service (MADS) coverage of 3.78 times (x), the strong tax base and economic growth prospects supporting bond repayment, and management's commitment to maintain relatively low leverage levels by cash-funding capital improvements, including the vehicle replacement program.
HEALTHY TAX BASE: The BART counties' tax base benefits from the broad and diverse regional economy, its increasing population and labor force, and high wealth levels. Fiscal 2014 growth in sales tax revenue and assessed value was above historical levels at 6% and 4.6%, respectively.
SOLID FINANCIAL PERFORMANCE: Financial results have been largely positive with sufficient surplus cash flow to set aside funds for current and future capital needs. The system is positioned to continue its sound financial trends due to increased ridership, the board's demonstrated willingness to increase fares, and rising tax revenues. However, budgetary pressures are expected to remain due to rising labor costs and significant capital needs.
SUBSTANTIAL CAPITAL NEEDS: BART's capital needs include the complete replacement of the current vehicle fleet, various system expansion projects, and the maintenance and upkeep of the aging system's infrastructure. Approximately half of the $9.6 billion 10-year capital plan is unfunded, although management plans on meeting those needs through operating funds and grants from local, state, and federal sources.
ESSENTIAL SERVICE: BART provides an essential commuter transit service to the Bay Area and is vital to the area's mobility and economy.
WEAKENING IN FINANCIAL PERFORMANCE: An unexpected weakening of financial performance that would reduce the system's ability to cash-fund its capital plan could pressure the rating.
STRONG TAX REVENUE BASE
Sales tax revenues are collected on all taxable transactions in a diverse three-county area with above average economic characteristics including high wealth levels, a growing population and labor force, and above average employment growth. The relatively quick economic recovery led to a new sales tax high in fiscal 2014 (unaudited) of $221.1 million (9.1% above the previous high set fiscal 2008)and up approximately 6% from fiscal 2013. Sales tax revenues accounted for approximately 28% of the district's total revenues in 2013.
MADS coverage is projected to remain ample at 4.15x fiscal 2014 revenues. Coverage levels are resilient and remain at healthy levels under various Fitch-conducted stress tests, which include greater and more persistent revenue declines than seen in recent history and regular cyclical declines followed by short periods of anemic growth.
ASSESSED VALUE INCREASE
BART receives support from property tax revenue (4% of total revenue) that secures outstanding GO bonds and provides operational support to the district. BART's property tax base includes all three counties and is diverse with the top 20 taxpayers accounting for 3.4% of fiscal 2014 assessed value (AV). AV gains in fiscal 2013 and 2014 reflect the improving economic conditions in the region with increases of 2.4% and 4.6%, respectively.
STRONG ECONOMY DRIVES RIDERSHIP
Each of the three BART counties has a different economic focus, but all share the influence of the greater Bay Area economy with its emphasis on high technology, finance, business services, healthcare, education, and government. Above-average employment growth in each of the counties continued in 2013 led by the City and County of San Francisco at 2.9%, and Contra Costa and Alameda Counties at 2.3%.
BART's ridership generally reflects economic conditions in the area. Average weekly ridership has picked up significantly since the recession as employment gains translate into increased numbers of daily commuters. Ridership was up by 6.5% or more in both fiscal 2012 and 2013, well above the historical average growth rate of 2.5%.
SOLID FINANCIAL PROFILE
BART's financial position is healthy and stable with solid cash balances, generally positive operating margins, and prudent financial policies and practices. Operating revenues cover approximately 78% of operating expenses due to the district's high farebox recovery ratio of a high 72%, providing the district with greater control over financial performance relative to many other transit systems in the nation.
Ongoing financial pressures for the district come from increasing labor costs and the system's significant capital needs. The district's labor negotiations made national headlines in late 2013 when workers went out on a cumulative seven day strike.
The labor contract that emerged from the negotiations, which expires in 2017, included annual pay increases of approximately 3%-4% and increased employee pension contributions. While the increased pay and the district's need to increase its workforce to support higher ridership appears manageable, the additional commitments are likely to reduce management's budgetary flexibility, especially given the system's capital needs.
SIGNIFICANT CAPITAL NEEDS
BART's large capital needs include fleet replacement, system expansion, and the maintenance of aging infrastructure. Approximately half of the district's $9.6 billion 10-year capital plan is currently funded with the remainder expected to come from annual set-asides of operational funds and local, state, and federal funds.
The largest project is the vehicle replacement program, which will replace BART's aging fleet and raise the total number of vehicles to 775 from the current 669. The program's total cost is estimated at $3.3 billion, of which BART is expected to pay approximately 18% from annual funds and the remainder from the Metropolitan Transportation Commission and other federal and state sources.
ADEQUATE LEGAL PROTECTIONS FOR SALES TAX BONDS
Fitch views sales tax revenue bondholders' legal protections as adequate. The additional bonds test (ABT) is moderate at 1.5x MADS (including outstanding and proposed bonds), based on revenues collected in any 12 consecutive months within the 18 months prior to issuance. Management stated that they do not plan on leveraging down to or near the ABT, which Fitch views as reasonable given BART's history of pay-as-you-go capital financing, its relatively limited use of sales tax revenue bonds to date, and the use of sales tax revenue to support operations.
Additional information is available at 'www.fitchratings.com'.
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