Fitch Rates Regional Transportation Authority, IL GO Working Cash Notes 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA' rating to the following Regional Transportation Authority (RTA or the authority), IL obligations:

--$150 million general obligation (GO) working cash notes, series 2016C (taxable).

The bonds are scheduled to sell via competition on April 26. Proceeds will be used by the authority to manage cash flow needs and pay the costs of issuance.

The Rating Outlook is Stable.

SECURITY

The notes are general obligations of the Regional Transportation Authority (RTA), for which its full faith and credit is pledged. The RTA has pledged its allocation of sales tax and public transportation fund (PTF) revenue to repayment of the bonds.

KEY RATING DRIVERS

STEADY SALES TAX GROWTH: Sales tax revenues, RTA's largest revenue source, continue to improve with 2015 collections 4% higher than 2014.

ESSENTIAL SERVICE: RTA serves as a vital component of the regional economy and provides an essential service to roughly 2.5 million riders daily through three transportation systems.

STRONG GROSS DEBT COVERAGE: Historical gross debt service coverage from pledged sales tax and PTF revenues is projected to remain ample at above 7x (excluding cash flow note repayment). The sales tax is assessed on a broad and diverse base, limiting the extent of cyclical sensitivity.

HIGH REVENUE RECOVERY RATIO: The RTA is statutorily required to maintain a strong revenue recovery ratio among the three transportation systems of at least 50%, which is favorable relative to most peer transit systems. However, significant capital needs strain operations.

STATE PAYMENT DELAYS: State PTF payment delays have ticked up, although they remain well below previous highs.

RATING SENSITIVITIES

INCREASED STATE PAYMENT DELAYS: A return to chronic delinquencies could adversely affect system maintenance, and present ongoing risk to the authority's financial health.

CREDIT PROFILE

RTA is the third largest transit system in the nation, serving a population of roughly 8.3 million located within the city of Chicago, suburban Cook County, and the counties of DuPage, Kane, Lake, McHenry, and Will (the collar counties). The authority is responsible for regional transit planning, and has financial and budget oversight over the three separate service boards: Chicago Transit Authority (CTA), Metra commuter rail, and Pace suburban bus. The RTA does not directly provide transportation services, and therefore its direct operations risk is very limited. However, it remains challenged to provide adequate operational and capital support to the aging transportation network.

LARGE SYSTEM SERVES DIVERSE CHICAGO METRO AREA

The service area population has increased modestly over the past decade, primarily due to growth in the collar counties. It is the economic engine for the Midwest region of the United States and residents are afforded abundant employment opportunities within this deep and diverse regional economy. The service area also benefits from an extensive infrastructure network, including the vast rail system, which supports continued growth. The employment base is represented by all major sectors with concentrations in the wholesale trade, professional and business services and financial sectors.

The authority generates revenues primarily from a sales tax levied within Cook and the five collar counties, as well as from PTF revenue, which is a statutorily-required 30% state match of regional sales and real estate transfer tax for CTA generated within the city of Chicago.

Sales tax revenues accounted for 66% of total revenues in 2014 followed by PTF and various state payments that accounted for 34%. Of the sales tax revenues, 46% is generated within suburban Cook County, 31% in Chicago, and 23% in the collar counties. After payment of debt service, excess moneys are used primarily to subsidize the operations of the authority's three service boards.

STATE PAYMENT DELAYS

The timing of state remittance of PTF payments has been irregular since 2008. Arrears in state payments peaked in 2012 at $396 million and now stand at $287 million (about 17% of 2015 revenues).

The delayed state budget has had only a marginal adverse effect on liquidity. RTA has authority for $400 million in short-term borrowing to offset any liquidity impact. This need will be met by the current note offering along with a $150 million directly placed series of working cash notes, subject to draw provisions, which is already in place. The authority may seek state permission to add a $100 million line of credit to supplement its working cash note program.

STRONG DEBT SERVICE COVERAGE BY PLEDGED REVENUES

Gross debt service coverage levels are expected to remain strong given the significant demand on pledged revenues to fund the operating needs of the transit system after payment of debt service. Debt service coverage is expected to be 5.7x in 2016 from sales tax revenues alone, and the addition of pledged state PTF revenue raises coverage to 7.5x.

STEADY SALES TAX GROWTH

Economically sensitive sales tax revenues have rebounded from a 2009 low point and have shown steady year-over-year growth. Sales taxes grew 4.8% in 2013, 4.9% in 2014, and 4% in 2015 (unaudited).

Rising sales tax collections have allowed the authority to increase disbursements to its service boards; projections show disbursements growing at a compound annual growth rate (CAGR) of 2.8%, 2.7%, 2.5% and 5.3% through 2018 for CTA, Metra, Pace and ADA paratransit, respectively. Should economic conditions change, Fitch believes management will continue to demonstrate a willingness to revise its budget.

HIGH REVENUE RECOVERY

RTA continues to meet its statutory requirement of covering at least 50% of expenses from system-generated revenues. System revenues have grown 3.9% on average annually since 2009 and the revenue recovery ratio was a high 52.6% for 2014. CTA accounted for approximately 61.3% of operating revenues (exclusive of public funding), with Metra at 31.9% and the remainder made up of the Pace suburban bus system and ADA paratransit.

RIDERSHIP DECLINING OVERALL; INCREASING FOR RAIL

Total ridership decreased by 2.3% in 2014 and an additional 0.2% in 2015, to 634.9 million. RTA attributes the 2015 decrease to harsh winter weather, lower gas prices and fare increases. CTA Bus ridership has been declining since 2012, following nationwide declines in bus travel and a slight shift in passenger preference to rail. The RTA expects CTA Bus ridership to stabilize following the reestablishment of express buses and the completion of the Loop Link construction project. CTA Rail ridership increased approximately 4% in 2014 and 1.5% in 2015. Total CTA ridership represented approximately 81% of the region's rides in 2015.

Metra's ridership decreased 2.2% in 2015, driven by lower gas prices and a February fare increase. To address rolling stock investment needs, Metra increased overall fares by an average of 2.3% in February, 2016. Pace's ridership decreased 4.9% in 2015 due to lower gas prices and route consolidation. Pace imposed a fare increase of 25 cents for cash fares effective in January, 2016. Pace riders using Ventra Cards continue to pay the same $1.75 fare.

MAINTENANCE OF SYSTEM REMAINS A CHALLENGE

The RTA faces a serious challenge in the condition of its system assets. In particular, roughly 43% of CTA assets are in worn or marginal condition. Authority planning studies show the level of investment required to bring the system to a state of good repair greatly exceeds the authority's resources and borrowing authority.

According to the studies, the individual service boards face a capital investment backlog of $19.5 billion and a continued 10-year capital program totaling $36.1 billion to bring the system back to a state of good repair. RTA's 2016-2020 capital plan totals $3.9 billion, funded primarily by federal grants and additional RTA and CTA bonding. The backlog is thus expected to increase at current funding levels.

PENSIONS NOT A PRESSURE

The RTA participates in the RTA Pension Plan, a cost-sharing multi-employer pension plan for RTA, Metra and Pace. The plan was 72% funded on a market value basis as of Jan. 1, 2015. Fitch estimates the ratio to be somewhat weaker at 66.5% when adjusted to reflect a 7% investment rate of return. The plan has adopted a closed, 30-year amortization period and the authority has contributed well above the actuarially required amounts in recent years. In 2015, the authority, Metra and Pace made a supplemental contribution of $63.5 million (over and above the ARC), equivalent to 90% of the unfunded actuarial accrued liability, which should materially improve the funded ratio.

The limited other post-employment benefits (OPEB) liability consists of full premium coverage for disabled pensioners and an implicit rate subsidy for all other retirees. Combined pension and OPEB costs are negligible at less than 1% of 2014 operating expenses.

Date of relevant rating committee: Dec. 21, 2015.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published at the beginning of the second quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS, and Lumesis.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Contacts

Fitch Ratings
Primary Analyst
Arlene Bohner, +1-212-908-0554
Senior Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Shannon McCue, +1-212-908-0593
Director
or
Committee Chairperson
Marcy Block, +1-212-908-0239
Senior Director
or
Media Relations, New York
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Arlene Bohner, +1-212-908-0554
Senior Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Shannon McCue, +1-212-908-0593
Director
or
Committee Chairperson
Marcy Block, +1-212-908-0239
Senior Director
or
Media Relations, New York
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com