SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating for the following San Francisco Bay Area Rapid Transit District (BART), CA's sales tax revenue bonds:
--$199.0 million sales tax revenue bonds 2015 refunding series A.
In addition, Fitch has affirmed the 'AA+' rating on the following BART sales tax revenue bonds and general obligation (GO) bonds:
--$674.9 million sales tax revenue bonds series 2005A, 2006, 2006A, 2010, 2012A, and 2012B;
--$401.6 million GO bonds series 2005A and 2007B.
The Rating Outlook is Stable.
SECURITY
The sales tax revenue bonds are payable from 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 GO bonds are backed by an unlimited ad valorem tax levied on all taxable property within the BART counties.
KEY RATING DRIVERS
STRONG DEBT SERVICE COVERAGE: The rating on the sales tax revenue bonds reflects high maximum annual debt service (MADS) coverage of 4.18x, the healthy tax base and good economic growth prospects supporting bond repayment, and management's commitment to maintain relatively low leverage levels.
HEALTHY TAX BASE: The BART counties' tax base benefits from the broad and diverse regional economy, an increasing population and labor force, and high wealth levels. Sales tax revenues reached a new high in fiscal 2015 (unaudited) after recording annual growth of 5.4%.
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 amount to approximately $9.6 billion over 10-years, about half of which is unfunded. Management plans on meeting those needs through a combination of local, state, and federal sources along with the possibility of issuing additional debt, including the district's preliminary research into voter approved GO bonds of up to $3 billion in Nov. 2016.
ESSENTIAL SERVICE: BART provides an essential commuter transit service to the Bay Area and is vital to the area's mobility and economy.
RATING SENSITIVITIES
UNEXPECTED WEAKENING IN FINANCIAL PERFORMANCE: An unexpected weakening of financial performance could pressure the rating.
CAPITAL NEEDS: An inability to identify and secure funding for the system's significant capital needs may negatively affect the rating.
CREDIT PROFILE
HEALTHY TAX 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. Economic growth drove sales tax revenues to a new high in fiscal 2015 (unaudited) of $233.1 million, a 5.4% increase compared to fiscal 2014. Sales tax revenues accounted for approximately 26% of the district's total revenues in fiscal 2014.
MADS coverage is projected to remain ample at 4.18x from fiscal 2015 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 reflects the regions diverse employment and economic base. AV gains in fiscal 2016 and 2015 were 1.9% and 6.7%, reflecting on-going development and rising property values in the area.
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. Unemployment rates in the three counties continued to compare favorably to both the nation and state through May 2015.
BART's ridership generally reflects economic conditions in the area. Average weekly ridership has grown significantly since the end of the recession as employment gains translate into increased numbers of daily commuters. Ridership was up by 6% in fiscal 2015 and the cumulative increase from fiscal 2009 through fiscal 2015 was 18.6%.
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 83.4% of operating expenses due to the district's high farebox recovery ratio of 75%, 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 at least 775 from the current 669. The program's total cost is estimated at $2.6 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.
FEDERAL FUNDS WITHHELD
BART, like many California transit districts, has not yet received federal funds for capital needs that it expected this year due to an on-going dispute with the U.S. Department of Labor (DOL) regarding California's Public Employee's Pension Reform Act of 2013 (PEPRA). DOL argues that PEPRA infringes upon transit workers' collective bargaining rights and refuses to certify federal funding grants in response. DOL certification is required for the funds to be distributed.
Approximately $91.7 million in federal funds have not been distributed to BART, an amount that is expected to increase as the dispute continues. Legal action against DOL is being pursued by the state and other transit districts in California. However, at this point a timeframe and ultimate resolution to the dispute is unclear. Fitch views the impact of the delay as manageable over the short-term as most of the capital projects are somewhat flexible in timing and can be temporarily delayed. However, a prolonged impasse in the dispute could reduce sources of funding for BART's substantial capital needs, further pressuring the budget.
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
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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Dodd-Frank Rating Information Disclosure Form
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990415
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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