Fitch Rates MARTA, GA's Sales Tax Revenue Bonds 'AA-'; Outlook Stable
--\$100 million sales tax revenue bonds (third indenture series) series 2015A.
The bonds are expected to price via competitive bid on April 14. Proceeds will be used for various capital projects.
In addition, Fitch affirms the following ratings:
--Approximately \$1.7 billion sales tax revenue bonds (third indenture series) at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by sales tax receipts from the levy of a 1% sales tax within Fulton (GOs rated 'AA+' with a Negative Outlook by Fitch) and DeKalb Counties ('AA-'/Outlook Stable) and the city of Atlanta. The bonds have a third priority lien on sales tax receipts. The indentures governing the first two liens are closed to additional new money bond issues. No reserve fund is provided for the series 2015A bonds.
KEY RATING DRIVERS
STRONG DEBT SERVICE COVERAGE: Sales tax collections have increased in each of the last four fiscal years, raising fiscal 2014 coverage of maximum annual debt service (MADS) to a strong 2.3 times (x). Fitch expects coverage will remain strong given a recovering economy and the use of excess sales tax revenues to fund operations.
EXPANDED PARTICIPATION: Last November, voters in Clayton County authorized the county's participation in MARTA's operations. The 1% sales tax was first imposed in March, roughly when MARTA commenced bus service to the county.
BROAD-BASED UNDERLYING ECONOMY: The regional Atlanta economy is characterized by diverse employment opportunities, above average wealth indices and a growing population. Employment continues to recover from the most recent recession.
ESSENTIAL SERVICE: MARTA provides essential transportation services to Atlanta and immediately surrounding Fulton, DeKalb and Clayton counties with an average of over 450,000 passengers per day.
WEAK FINANCIAL OPERATIONS: Despite recent improvement, finances remain challenged by a weak operating revenue base which lacks state financial support and places heavy reliance upon sales taxes and fares to fund operations.
RIDERSHIP STABILIZES: A combination of past fare hikes, service cutbacks and the recession led to sizable declines in ridership from fiscal 2009-2013. With the improved economic climate and service enhancements, ridership trends have since reversed.
RELIANCE ON DEBT FOR CAPITAL NEEDS: MARTA's 10-year capital plan relies upon debt to finance the majority of capital projects through 2024. This dependence stems from the paucity of dedicated capital funding sources available to the authority.
LIMITED SALES TAX DIVERSION RISK: The risk of sales tax diversion is minimal given Georgia law, the dedicated nature of pledged revenues, and the state collection mechanism.
RATING SENSITIVITIES
SALES TAX DECLINES: Significant deterioration in sales tax collections which reduces coverage and further pressure operations could lead to a rating downgrade.
SHIFTS IN FINANCES: A downturn in financial performance would be viewed unfavorably. Conversely, measures that result in a lower cost structure or create new sources of revenues -- and materially increase financial flexibility on a sustained basis -- may result in positive rating action.
CREDIT PROFILE
MARTA operates a rapid transit system which serves primarily the city of Atlanta and Fulton and DeKalb Counties (service area). The main components are a fixed rail transit system and a bus system. The fixed rail passenger system commenced in 1979 and consists of 48 miles of rail lines and 38 stations. Bus service includes more than 500 buses and 211 mobility vans operating in MARTA's service area. MARTA is the ninth largest rapid transit system in the United States. In fiscal 2014, MARTA transported approximately 129 million passengers for an average daily ridership of 450,300.
Last November, voters in Clayton County approved the county's participation in MARTA operations by a three to one margin. As a result, the 1% MARTA sales tax is levied within its borders in exchange for MARTA providing transit services to county residents. Bus service within Clayton County began last month, coinciding with the initial levy of the sales tax; MARTA intends to eventually extend rail service to the county. MARTA officials insist that operating and capital costs associated with Clayton County operations will be funded exclusively from county-derived sales taxes, fare revenues and dedicated federal grants.
SALES TAX DEDICATED FOR RAPID TRANSIT
The authority is currently governed by a board of directors composed of 13 voting members and one non-voting member, representing the four participating jurisdictions. Recently, the state reconstituted the board to stagger terms, give greater representation to municipalities outside of Atlanta and authorize the governor to select one board member. The changes go into effect in 2017. Fitch is neutral regarding the effect these changes will have on MARTA operations.
Pursuant to an amended contract between the authority and its members, Fulton, DeKalb and Clayton Counties and the city of Atlanta are obligated to levy a sales and use tax (sales tax) for rapid transit purposes. The sales tax is levied at the rate of 1% through 2047 after which it is reduced to a 1/2% levy until expiration in 2057. All currently outstanding bonds in addition to this bond issue mature by 2044.
The sales tax is collected by the state and then assigned by the participating counties to be paid directly to the bond trustee. The authorizing legislation limits the use of sales tax receipts for operations to 50% (the 50/50 rule), although legislative actions over the past 12 years have temporarily eased or eliminated this restriction. Last week, the Georgia legislature passed measures that would extend the 1% sales tax through 2057 and permanently waive the 50/50 rule. These measures will go into effect if approved by the governor.
Fitch deems the risk that authority sales tax revenues would be diverted for general government or other purposes of Fulton or DeKalb Counties to be almost negligible due to Georgia's explicit ban on local government bankruptcy; the voted and dedicated purpose of the sales tax revenues, which are collected by the state and distributed directly to the trustee; the state's bond validation process; and the importance of MARTA, a state-created agency, and its operations to the regional and state economies.
SUSTAINED SALES TAX GROWTH
Fiscal 2014 sales tax collections totaled \$345.8 million, for a modest 1.6% increase over fiscal 2013 collections. This represents the fourth consecutive year of sales tax growth, aggregating to 8.8% over this period. Fiscal 2015 seven month sales tax collections are up over 5% year over year, underscoring the quickened pace of economic activity.
In March 2013, the state eliminated the sales tax on vehicle purchases and replaced it with an ad valorem tax on vehicle purchases (title ad valorem tax). The impact of the legislation upon sales tax collections has been difficult to determine but was somewhat offset by MARTA's receipt of \$21 million in ad valorem title revenues in fiscal 2014 and \$11 million year to date fiscal 2015.
Under the current distribution formula title ad valorem tax revenues would have been much smaller in fiscal 2016. However, the recently passed state legislation includes a provision that would provide MARTA with additional title ad valorem taxes and maintain total tax revenues at more than \$20 million annually. The title ad valorem revenues are not pledged to debt service but provide significant operating support.
STRONG DEBT SERVICE COVERAGE
Fiscal 2014 sales tax coverage of MARTA's revenue bonds, including the current offering, remains strong at 2.3x MADS. MARTA debt consists of sales tax revenue bonds issued under multiple liens. Sales tax revenues from Clayton County are not currently pledged to bond debt service. However, the authority plans on amending the bond indenture to incorporate them into the security. Officials project full year Clayton County sales tax receipts at \$46 million, which would increase overall collections by about 13%.
The authority's informal policy is to maintain debt service at no more than 45% of sales tax collections to both limit debt and ensure sufficient operating revenue. The authority is in compliance with this policy.
Bonds outstanding under the closed first and second lien indentures total about \$278 million (not rated by Fitch). Since 2004, MARTA has been issuing bonds under the third lien. Outstanding third lien debt totals nearly \$1.7 billion. The third lien bonds will ascend in lien status upon final maturity of first and second lien bonds in 2021 and 2025, respectively.
Additional issuance is restricted by an adequate two-pronged additional bonds test requiring debt service coverage of 1.5x from historical and 2.0x from projected sales tax revenue. However, MARTA's need of sales tax revenues to fund operations serves as a more effective brake against over-issuance of debt.
CAPITAL NEEDS FUNDED MOSTLY WITH DEBT
The authority has identified in its 10-year capital improvement plan approximately \$2.3 billion of capital needs. The system is relatively mature so capital needs focus mainly on safety improvements, equipment replacement and maintenance. Proposed funding sources include about \$1.3 billion of debt payable from sales taxes. A major reason for funding the capital program mostly through debt issuance is the authority's limited operating margins, leaving few resources for pay-go capital spending.
STEADYING UTILIZATION
System utilization stabilized in fiscal 2014 after declining by 17% between fiscals 2009 and 2013. The ridership losses coincided with the steep recession, two substantial hikes in base fares of 14% and 25% in fiscals 2009 and 2011, respectively, and significant service reductions.
In response, the authority delayed another planned fare increase in fiscal 2014 until fiscal 2017 and implemented service improvements; these moves have helped steady ridership. Fiscal 2015 year to date ridership is up by 6.1 million passengers or 8% over the same period in fiscal 2014, due to a combination of service upgrades, substantial conference activity and fewer weather-related down days. Fitch regards favorably the authority's plan following fiscal 2017 for modest fare increases every two years. More incremental fare hikes should maintain ridership while providing modest but frequent growth in fare revenues.
FINANCES IMPROVE BUT REMAIN PRESSURED
MARTA reported an operating surplus for fiscal 2014 of approximately \$18 million (less depreciation) or 4.5% of spending, representing the second consecutive year of surplus operations following years of deficits. The positive results were driven by the receipt of more than \$21 million of ad valorem title taxes (\$18 million budgeted) and more than \$4 million of alternative fuel taxes. Operating costs incorporated a 3% lump sum salary payment to workers but otherwise limited cost growth. A regular wage hike is not planned until fiscal 2016.
Management is projecting another small operating surplus of approximately \$10 - \$15 million for fiscal 2015, buoyed by greater than budgeted title ad valorem tax revenues and below budget spending (despite an increase in personnel).
Financial margins remain tenuous despite recent improvement. The authority is burdened with a limited and restrictive revenue structure which hampers flexibility. MARTA receives virtually no state support, the only major mass transit system in the nation not receiving dedicated state funding. Further, a highly elastic demand structure renders it difficult to raise fares sufficiently to offset the absence of state funding. Moreover, MARTA's dependence on debt for its capital program creates significant fixed costs that further limit flexibility.
Positively, the state-imposed 50/50 rule which had hindered management spending discretion is slated for elimination if the recent legislation becomes law. Officials have also stepped up efforts to promote transit-oriented development opportunities on MARTA-owned land near rail stations, which could provide some diversification to the authority's revenue base. Moreover, the authority does have limited ability to delay capital projects should revenues fail to meet expectations.
DIVERSE AND BROAD-BASED SERVICE AREA ECONONMY
Fulton, DeKalb and Clayton Counties have a diverse economic base benefiting from Atlanta's role as the state capital and center of a broad regional economy. The area serves as a corporate headquarters for large employers including Coca-Cola, Bell South, Home Depot, and Delta Air Lines. Also located within the service area is the U.S. Centers for Disease Control and Prevention and Emory University. Hartsfield-Jackson International Airport (Hartsfield), the world's busiest airport, is located in Fulton and Clayton Counties. In addition, Mercedes Benz recently announced it is moving its U.S. headquarters to the Atlanta area.
Estimated 2013 population within the service area is about 1.9 million. The City of Atlanta, with a population of approximately 444,000, accounts for about 23% of the total. Service area population growth over the past decade has been modest, increasing at an average annual rate of slightly less than 1%. Atlanta experienced a slight population dip over this period.
MARTA's service area was hit hard by the last recession, with a cumulative job loss of more than 14% between 2007 and 2010. In 2010, unemployment rates in Fulton, DeKalb and Clayton Counties soared to 11%, 10.6% and 12.4%, respectively. Atlanta's unemployment rate that year was close to 13%. Since 2010, the area has experienced a significant gain in jobs but employment remains below 2007 levels. A .4% increase in employment in December 2014 from the prior year has lowered unemployment rates in Fulton, DeKalb and Clayton Counties to 7.3%, 6.7% and 7.9%, respectively, all above the state and national averages.
Wealth indices in Fulton County are significantly above the state and national averages, with 2011 per capita income at 153% and 131% of the state and national averages, respectively. Income levels in DeKalb County are below those of Fulton County but above those of the state and nation. Clayton County is not as affluent as the other two counties with per capita income at 71.3% and 63.8% of the state and national benchmarks, respectively. Clayton County's individual poverty rate of 24% is well above average.
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