OREANDA-NEWS. Fitch Ratings has affirmed the 'AA' ratings on the following state of Michigan state trunk line fund (TLF) and comprehensive transportation fund (CTF) bonds rated by Fitch, consisting of:

--\$317 million TLF bonds series 2006 and refunding bonds series 1998A, 2004, 2005B;
--\$74 million CTF bonds series 2003, 2006 and refunding bonds series 2009.

The Rating Outlook is Stable.

SECURITY

The TLF bonds are payable from a pledge of and first lien on funds deposited into the state TLF, consisting of a portion of Michigan transportation fund (MTF) revenues, currently at 39.1% after certain other distributions.

The CTF bonds are payable from a pledge of and first lien on funds deposited into the CTF, consisting of a portion of MTF revenues, currently at 10% after certain other distributions, and a portion of motor vehicle-related sales taxes.

KEY RATING DRIVERS

CONSTITUTIONAL DEDICATION: Highway revenues are constitutionally dedicated to transportation purposes and are received in the MTF, with a portion distributed to the TLF and CTF.

FIRST LIEN ON REVENUES: The TLF bonds are backed by a pledge of and first lien on funds deposited in the TLF. The CTF bonds are backed by a pledge of and first lien on funds deposited in the CTF. Debt service has a first priority claim on TLF and CTF revenues. There is a long history of specific revenue allocations to the CTF, although there have also been various diversions for other state purposes. These diversions have not materially affected coverage.

STRONG COVERAGE: Coverage of TLF and CTF debt service has been historically strong and is expected to remain so. Coverage has been in excess of the additional bond issuance requirement of 2x coverage and the policy target of 4x.

ECONOMICALLY SENSITIVE REVENUES: Transportation-related revenues have been sensitive to broader economic performance. Near-term projections for MTF revenues indicate modest base growth.

RATING SENSITIVITIES

CONTINUED SOLID COVERAGE: The rating is sensitive to continued solid debt service coverage by pledged revenues.

CREDIT PROFILE

The 'AA' ratings on Michigan's state TLF and CTF bonds are based on the pledge and first lien on funds deposited into the TLF and CTF, solid debt service coverage, a 2x coverage test for additional bonds, and the constitutional dedication of motor vehicle-related revenues for transportation purposes. Transportation revenues are economically sensitive, though MTF revenues have stabilized and grown moderately in recent years, matching the state's overall economic and revenue improvement. The state's forecast assumes modest annual growth in MTF revenues of about 1% for fiscal years 2015 and 2016.

The TLF bonds are backed by a pledge of and first lien on funds deposited into the TLF, consisting of a statutory distribution of revenues from the MTF of 39.1%, in place since 1951. The MTF receives motor vehicle-related taxes and fees, which are constitutionally dedicated to transportation purposes. About half of MTF revenues are from the motor fuel tax, with most of the remainder registration taxes. TLF revenues in fiscal 2014, which ended on Sept. 30, 2014, included \$622.2 million from the MTF and \$118.7 million in other receipts, after certain collection, administration and other expenses. Total fiscal 2014 TLF revenues of \$740.9 million covered maximum annual debt service (MADS; in fiscal 2017) by 4.6x.

CTF revenues are derived from two revenue streams: a 10% distribution from the MTF after certain deductions and about 4.65% of sales taxes levied on motor vehicles, motor vehicle fuels, and motor vehicle parts. The MTF allocation totaled \$165.5 million in fiscal 2014 (62%), with the sales tax portion at \$102.0 million (38%). Total fiscal 2014 CTF revenues of \$267.5 million covered MADS (in fiscal 2017) by 11.5x.

As the MTF monies to the CTF have grown in recent years, in line with overall growth in the fund, the sales tax allocation declined by 1% in fiscal 2014 and is projected to decline by 5% in fiscal 2015, reflecting fuel price decreases, before returning to projected growth (1%) in fiscal 2016. Historical trends for CTF revenues have been more volatile than those for the TLF over time, with economic factors including car sales trends and fuel purchases, and state formula adjustments and diversions of receipts to the general fund affecting CTF deposits. There have been no recent diversions, and none are planned in the near term.

For both CTF and TLF bonds, an additional bonds test (ABT) requires 2x coverage. In addition, the Michigan department of transportation by longstanding policy maintains a 4x ABT. The TLF bond program finances state highways. CTF bond proceeds have financed airport, local bus, and passenger and freight rail-related transportation needs. The State Transportation Commission has not authorized any new CTF bond issuances at this time.
MAY 2015 BALLOT MEASURE INCLUDES SIGNIFICANT TRANSPORTATION RELATED PROVISIONS

Legislation that would have a significant impact on state transportation funding was passed by the state legislature, but implementation is dependent on the passage of a May 5th ballot proposal. The proposed changes are expected to significantly increase revenues to the MTF, and thus to the TLF and CTF. Provisions related to the legislative/ballot measure include an increase to the state sales tax rate from 6% to 7%, with an exemption for gasoline and diesel fuel. This would negatively affect a CTF revenue source (motor vehicle fuel sales taxes), but positively affect other CTF sales tax allocations (motor vehicles, motor vehicle parts).

Another provision is a change in fuel taxes from a cent-per-gallon assessment to a rate based on a percentage of the average fuel price per gallon. This is expected to increase MTF revenues significantly (and MTF allocations to other funds) and more than make up for any CTF losses related to sales tax exemptions. In addition, the measure would result in increased registration tax revenues. In total, the resulting annual increase in transportation revenues is projected at about \$1.3 billion. The measure would direct a portion of the new revenues in fiscal years 2016 and 2017 to the reduction of debt. Fitch will monitor the outcome of the upcoming election and assess the ultimate impact of the measure, if passed, on the state's transportation debt programs.