OREANDA-NEWS. July 28, 2015. Fitch Ratings has affirmed the 'AA' rating on the following Michigan Transportation Fund (MTF) bonds:

--\\$0.5 million Grand Blanc, MI (MTF) general obligation (GO) limited tax (LT) bonds series 2001;
--\\$2.4 million Kalamazoo, MI (MTF) GO LT bonds series 2007;
--\\$1.6 million Taylor, MI (MTF) GO LT bonds series 2008.

The Rating Outlook is Stable.

SECURITY

MTF bonds are secured by the local government's allocation of amounts received from the MTF, which is derived primarily from state-wide vehicle registration and motor fuel taxes. The respective bonds are also secured by a pledge of each respective local government's full faith and credit and its ad valorem tax pledge, subject to constitutional and statutory limitations.

KEY RATING DRIVERS

STRONG COVERAGE FROM MTF REVENUE: Strong debt service coverage is derived from MTF revenues and supported by an additional bonds test requiring 2x coverage of pro forma debt service from local government pledged MTF revenues. Coverage remained strong even through the three to four years of decline during the past downturn.

CONSTITUTIONAL DEDICATION: Highway revenues received in the MTF are constitutionally dedicated to transportation purposes.

RATINGS REFLECT STRONGER PLEDGE: Local governments provide an underlying LTGO pledge in addition to the pledge of MTF revenues. The rating reflects the higher of the local government pledge rating or the 'AA' rating assigned based on the MTF revenue stream.

RATING SENSITIVITIES

STRONG COVERAGE, STABLE ALLOCATIONS: The ratings are sensitive to the maintenance of strong debt service coverage by pledged MTF revenue and continued stable allocations from the MTF.

SECONDARY PLEDGE UPGRADE: Individual ratings could change if the rating for the secondary pledged security rises above the 'AA' MTF rating.

CREDIT PROFILE

STRONG COVERAGE FROM PLEDGED MTF REVENUES

Per a statutory additional bonds test, annual debt service cannot exceed 50% of annual MTF revenues, ensuring a minimum of 2.0x coverage of pro forma maximum annual debt service (MADS) at issuance, though future coverage levels could be affected by revenue losses or changes to the revenue allocation formula. However, coverage for most bonds is usually higher because funds are also used to pay for routine road repair and maintenance. MTF funds for fiscal 2014 provided good debt service coverage of MADS for the local governments: 2.6x for Grand Blanc, 6.4x for Kalamazoo and 10.8x for Taylor. MADS coverage for each of the cities has been relatively stable to increasing for the last five years.

CONSTITUTIONAL DEDICATION

Michigan's constitution requires no less than 90% of revenues generated from taxes on motor vehicle fuels and registered motor vehicles to be dedicated solely for streets, roads and bridges. Consistent with the constitutional requirement, Act 51 of 1951 (the Act) provides for the distribution of the transportation revenues, including 21.8% to cities and villages and 39.1% to county road commissions, after several initial distributions.

Gross MTF revenues are allocated to several funds and the net revenues are then divided among the State Truck Line Fund, county road commissions, and cities and villages, based on a distribution formula prescribed by the Act. The local government distribution considers population, total road mileage and the types of roads relative to the state. The formula has remained stable over the past several decades and is more heavily weighted towards local road mileage rather than population, minimizing funding declines due to potential population declines. A change in the formula would require legislative action to revise statutes governing allocations.

Fitch views the legal and constitutional safeguards on the MTF revenue stream as sufficiently isolating program revenues from the risks of the state's budgetary demands. MTF allocated funds are held separate and apart from the localities' general funds, and the Act requires the local government to first expend its MTF allocation for payment of MTF bonds prior to any other expenditure.

CONTINUED GROWTH FORECAST FOR MTF REVENUES

The MTF receives motor fuels taxes (about 50% of total fiscal 2014 MTF revenues), vehicle registration fees (another 49%), and other miscellaneous fees. Motor fuel revenues are currently generated from a per-gallon tax imposed on gasoline (19 cents), diesel fuel, and liquid petroleum gas (15 cents) used by motor vehicles. The tax is collected and deposited into the MTF monthly. Vehicle registration fees are imposed on commercial vehicles based on vehicle weight and on passenger vehicles on a value basis. Miscellaneous fees include motor vehicle title fees, plate transfer fees, and special license plate registration taxes.

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 through 2017. Legislation is currently pending in the state legislature that could increase MTF funding by over \\$1 billion by fiscal 2019. Both house and senate proposals include near term fuel tax increases and diversions of revenues from the general fund to the MTF. The senate proposal eliminates fuel taxes in 2034. Fitch will monitor the outcome of these proposals and assess the ultimate impact of the legislation, if passed, on MTF backed debt programs.