OREANDA-NEWS. Fitch Ratings affirms the state of Vermont's (the state) $31.4 million of special obligation transportation infrastructure bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY
The bonds are special, limited obligations of the state, payable from Motor Fuel Transportation Infrastructure Assessments.

KEY RATING DRIVERS

FIRST LIEN ON DEDICATED TAX REVENUE: The state of Vermont has granted to bondholders a first lien on dedicated gasoline and diesel fuel assessments. Pledged funds are segregated in the Transportation Infrastructure Bond (TIB) Fund. The expenditure of such funds is statutorily limited to debt service and, once debt service has been accumulated for the fiscal year, pay-go capital expenditures for transportation projects.

ADEQUATE ADDITIONAL BONDS TEST: Additional leveraging of the pledged revenue stream requires 2 times (x) coverage of projected maximum annual debt service (MADS).

SOLID DEBT SERVICE COVERAGE: Debt service coverage in the near term is well above the additional bonds test level. Fiscal 2014 revenues provide 8.8x debt service coverage and 8.4x coverage of estimated MADS on current debt issuance in fiscal 2025.

FLEXIBILITY TO CONTROL ISSUANCE TO MAINTAIN COVERAGE: Should revenue growth be slower than projected, Fitch expects issuance would be slowed.

RATING SENSITIVITIES

DEBT SERVICE COVERAGE: The rating is sensitive to ongoing maintenance of solid coverage by pledged revenues.

CREDIT PROFILE

STRONG BOND COVENANTS
The 'AA' rating on Vermont's special obligation transportation infrastructure bonds reflects the first lien on pledged funds, the statutory limitation on the use of pledged funds for transportation purposes, and a satisfactory 2x additional bonds test, as well as the state's careful attention to debt affordability.

Pledged revenues consist of a 2% assessment on the retail price (exclusive of all federal and state taxes, averaged over the preceding quarter) per gallon on motor vehicle gasoline sold in the state (90% of pledged revenues) and a 3-cent per gallon assessment on diesel fuel sales in Vermont. In both cases, the levy is collected at the wholesale level along with other vehicle-related taxes. Both sources are relatively new, authorized and implemented in 2009 to fund transportation improvements across the state.

TIB assessment revenues are segregated from all other Transportation Fund revenue and TIB Fund monies can only be expended for debt service on TIB fund bonds and, once debt service has been fully provided for in a given fiscal year, pay-as-you-go capital expenditures for transportation projects. Vermont has covenanted to fulfill the terms of the Trust Agreement and will not impair the rights or remedies of bondholders. Pursuant to the TIB statute, the assessments shall not be reduced below the rates in effect at the time of issuance of the bonds until the bonds have been paid.

SOLID DEBT SERVICE COVERAGE DESPITE DECLINE IN REVENUES
Pledged revenues are highly sensitive to national gasoline prices, as evident in recent collections, which have both declined on a year-over-year basis and have lagged expectations. For fiscal 2014, pledged revenues totaled $21 million, an 8.5% decline from the previous fiscal year collections. Fiscal 2015 collections are projected to decline a further 7.6% from fiscal 2014. Year-to-date (June) preliminary collections for Fiscal 2015 are $0.8 million above forecast and total $20.2 million. Coverage of MADS ($2.5 million in fiscal 2025) by pledged revenues has remained sound with fiscal 2014 actual receipts covering MADS 8.4x. Revenues would need to decline by 12.4% annually through final maturity on June 15, 2033 to meet 1x coverage.

The state revised TIB revenue projections due to the recent volatility in gas prices. Based on a July 2013 feasibility study, the state expected to receive pledged revenues totaling $22.8 million in fiscal 2014. The state's January 2015 Revenue Outlook report lowered fiscal collections even further for 2015 to $19.4 million. Assuming a continuation of this trend, the state's latest TIB projections estimates annual collections 8-38% lower compared to projections made two years ago, culminating in fiscal 2016 with an estimated TIB assessment low of $16 million. To address the impact of declining gas prices, the state implemented a floor of $0.0396 per gallon to the TIB motor fuel assessment through Act No. 40 of 2015 amended 23 V.S.A. 3106. Fitch does not expect the decline in TIB assessments to be material on the rating as debt service coverage is expected to remain more than ample and remain well above the state's policy of 3x.

Pursuant to the indenture, the issuance of additional bonds requires no less than 2x coverage of MADS, calculated on a historical basis, and it is the state's policy to maintain coverage of no less than 3x. Fitch expects future debt issuance to be slowed should revenue growth notably lag expectations in the future.