Fitch Ratings assigns an 'AA+' rating to the following Maryland Department of Transportation (MDOT) consolidated transportation bonds:
--$300 million consolidated transportation bonds series 2015.
The bonds are expected to sell via competitive sale on Feb. 11, 2015.
In addition, Fitch affirms the ratings on other MDOT bonds as detailed at the end of this release.
The Rating Outlook is Stable.
SECURITY
Consolidated transportation bonds are payable by specific pledged tax revenues after certain allocations, and prior to being available for other uses by MDOT. If the pledged taxes become insufficient to meet debt service requirements, other receipts of the department are available for that purpose.
KEY RATING DRIVERS
SOLID DEBT SERVICE COVERAGE: Consolidated transportation bonds benefit from strong debt service coverage by pledged taxes and net revenues. A solid additional bonds test requires 2x coverage by pledged taxes as well as departmental net revenues. MDOT practice requires a stronger 2.5x coverage level by both measures, and current coverage is comfortably above these levels.
BROAD REVENUE PLEDGE: Revenues pledged to debt service include transportation-related and certain general fund taxes. Pledged taxes and other available revenues are affected by statutory changes and economic cyclicality. However, bond coverage has remained consistently strong.
STRONG MDOT CONTROL: MDOT has broad authority over state transportation, including the ability to adjust capital projects as necessary based on projected available resources.
RATING SENSITIVITIES
CONTINUED SOLID COVERAGE AND CAREFUL MANAGEMENT: The rating is sensitive to ongoing maintenance of solid coverage by pledged revenues and the state's continued careful management of debt.
CREDIT PROFILE
Security for MDOT's consolidated transportation bonds is broad-based, consisting of a pledge of portions of motor fuel, motor vehicle titling, corporate income, and sales taxes on vehicle rentals, after statutory allocations to other state funds and local governments. The legislature periodically changes tax rates and the distribution of tax receipts among state funds and local governments, including extensive changes in early 2013 that materially expanded pledged revenues available to bondholders as new rates are phased in between fiscal years 2014-2016. Pledged taxes have consistently provided ample coverage despite their vulnerability to economic cycles and the impact of statutory changes. Other MDOT revenues, primarily transportation-related fees and operating receipts, are available if pledged taxes are insufficient.
Debt service coverage on consolidated bonds remains solidly above the two parity bond issuance tests, which require 2x coverage of maximum annual debt service (MADS) by prior-year pledged taxes and 2x coverage of MADS by prior-year department net receipts. MDOT's internal practice requires more stringent 2.5x coverage by both tests. Including the new bonds, coverage of MADS (in fiscal 2018) by fiscal 2014 pledged taxes is 5.6x, and is 3.1x by fiscal 2014 net revenues, well over the policy threshold.
The state has made periodic rate and distribution changes affecting pledged taxes and other departmental revenues, both to expand resources available to transportation and conversely to relieve state general fund stress. The extensive 2013 legislative changes were intended to augment transportation resources and allow the state to address unmet capital needs. Rate changes included an incremental fuel excise tax that adjusts annually based on inflation and a separate sales tax equivalent fuel rate based on average gasoline prices, to be phased in to 3% by July 1, 2015; both new resources are pledged to the bonds. A separate sales tax revenue stream is scheduled to phase in beginning in fiscal 2016 as an expansion of the sales tax equivalent fuel rate, but is not pledged to bondholders.
The state recently made it more difficult to divert transportation monies for general fund relief. A constitutional amendment passed by voters in November 2014 makes any such transfer subject to an emergency declaration by the governor and a three-fifths vote of both legislative houses. By statute, any such reallocation must be repaid in five years.
MDOT updates its revenue forecast twice annually, most recently in July 2014. Through fiscal 2020, the end of MDOT's current capital planning period, pledged taxes are projected to rise an average of 4.7% annually, and net revenues are projected to rise 7.5% annually, reflecting the impact of the 2013 legislative changes. Taxes from fuel consumption are expected to grow given the inflation adjustment, although baseline consumption is expected to continue to reflect the slow economic recovery and changing energy consumption patterns.
Maryland's transportation revenues have been sensitive to broader economic cyclicality. Motor fuel tax collections, which equal about 45% of pledged taxes, declined modestly in fiscal years 2009 and 2010 with recessionary weakness. Titling tax collections, which equal another 45% of total pledged taxes, declined sharply during the downturn and then rose quickly reflecting consumer pent-up demand. The pace of growth is expected to remain elevated through the current fiscal year and then drop to more modest growth for the duration of the forecast.
Including projected future issuances during the capital plan period, debt service is forecast to reach $502 million in fiscal 2020. At this level, prior-year pledged tax coverage of MADS would be 4.1x in fiscal 2020, while coverage by prior-year net departmental revenue would be 2.7x.
State oversight of consolidated bonds, as with other state tax-supported debt, is strong. The legislature's ceiling on consolidated transportation bonds that may be outstanding is $4.5 billion, raised from $2.6 billion as part of the tax rate changes noted earlier. A separate annual cap on outstanding bonds as of June 30, the state's fiscal year end, is set at $2.5 billion for fiscal 2015. Prior to the new bonds there are $1.7 billion in consolidated transportation bonds outstanding, with new issuance requiring Board of Public Works approval. The state constitution mandates that consolidated bonds mature within 15 years. Fitch rates the state of Maryland's GO bonds 'AAA' with a Stable Rating Outlook.
MDOT has the discretion to delay capital plan spending to reflect available resources. The fiscal 2015-2020 capital plan totals $15.8 billion, well over the $10.1 billion plan in place prior to the 2013 legislative changes, reflecting additional capital projects to be addressed given expanded resources. MDOT continues to have the discretion to reduce capital outlays in light of revenue underperformance, one of the means by which it responded to revenue weakness during the last downturn.
MDOT's capital plan focuses primarily on system preservation, with the largest shares of funding directed to highways and mass transit. Over the 2015-2020 plan period, forecast federal funds are expected to provide about 31% of capital program needs and consolidated bonds about 23%. Remaining capital program needs are met from departmental net revenues.
RATING AFFIRMATIONS
In addition to assigning the 'AA+' rating to the new bonds, Fitch affirms its ratings on outstanding MDOT bonds as follows:
--$1.7 billion in outstanding MDOT consolidated transportation bonds at 'AA+';
--$54.4 million in outstanding county transportation bonds at 'AA+'; and
--$46.5 million in outstanding MDOT certificates of participation at 'AA'. The 'AA' rating on the COPs reflects an appropriation pledge of the state of Maryland from the state's transportation trust fund.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978769
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