OREANDA-NEWS. September 29, 2015.  Fitch Ratings has affirmed the 'AA' rating on the Colorado Department of Transportation's (CDOT) approximately \\$149 million of transportation revenue anticipation notes (TRANs) series 2002B and 2004B. The Rating Outlook is Stable.

The rating is driven by the pledge of state matching funds that are largely derived from the highway users tax fund (HUTF), which includes the state portion of the motor fuel tax and vehicle registration fees. In addition, under certain conditions and limitations, CDOT is also entitled to receive up to 2% of gross general fund revenues. This pledge mitigates the risk of a disruption of federal funding.

KEY RATING DRIVERS

DUAL PLEDGE PROVIDES STRONG COVERAGE: The TRANs are secured solely from the trust estate, consisting of annual allocations from federal transportation funds and state match funds at the sole discretion of the Transportation Commission. State matching funds are largely derived from the HUTF, which includes the state portion of the motor fuel tax and vehicle registration fees. Under certain conditions and limitations, CDOT is also entitled to receive up to 2% of gross general fund revenues. There are no state appropriation risk for federal revenues and HUTF that are constitutionally required to be used for highways.

PAYMENT REQUIRES ANNUAL COMMISSION ALLOCATION: The Transportation Commission, consisting of 11 members appointed by the governor with the state senate's consent, has complete discretion on the amounts to be allocated to debt service annually. Offsetting this risk, Fitch notes that transportation is a core state function and would expect an issuer of the strong credit quality of Colorado to continue to protect its debt service obligations.

UNCERTAINTY OF THE FEDERAL PROGRAM: The federal program, which was once a program funded on a multiyear basis, has now morphed into a program for which future policy is less certain. This means funding levels are less predictable, and the program is more dependent on frequent action to extend authorization and on general fund transfers that will likely need to be continued indefinitely barring an increase in the federal gas-tax or a significant reduction in spending. The program still maintains a formulaic based method of aid distribution.

PROTECTION AGAINST LEVERAGE: The voter-approved authorization limits note issuance to \\$1.7 billion, including a cap of \\$2.3 billion in total debt service. The issuance of the series 2004 notes brought total debt service to the \\$2.3 billion cap. As such, no additional issuance is currently authorized. In addition, the indenture requires that at the date of issuance of additional TRANs, anticipated debt service in any fiscal year cannot exceed 50% of federal funding from prior year.

RATING SENSITIVITIES

Negative: State matching funds could be negatively affected by changes in state laws and voter ballot initiatives.

Negative: Failure by the state to appropriate state highway revenues if needed to cover a shortfall in federal funds.

Positive: Positive rating action is unlikely at the current time given the uncertainty surrounding the federal program and the already elevated credit quality of the state matching funds.

SUMMARY OF CREDIT

The unsustainable trajectory of federal highway trust fund (HTF) expenditures exceeding receipts over the past several years has not been addressed by Congress. Instead the recent legislation relying on general fund transfers to keep the program afloat has recently been extended three months, now through October 2015. The future of the program beyond October 2015 is uncertain, but it is Fitch's view that significant changes are needed either on the expenditure side or on the revenue side to put the program on a longer-term sustainable trajectory. In Fitch's view, the more unsustainable the program becomes, the greater the possibility of policy changes that could adversely impact bondholders.

There are some hopeful signs of progress towards a longer-term bill with the U.S. Senate's recent passage of the Developing a Reliable and Innovative Vision for the Economy (DRIVE) ACT, a six-year authorization bill which would fund federal highway and infrastructure projects for three years. Fitch will continue to monitor legislative developments with respect to authorization and funding to assess their impact on the overall strength of the federal program.

While the continued General Fund transfers have underscored the relative importance of transportation funding within the Federal Budget to this point, they do not guarantee future commitments. Complicating matters is a significant increase in corporate average fuel economy (CAFE) standards from the current 29 miles per gallon (mpg) to 54.5 mpg by 2025 that was approved on Aug. 28, 2012. Such a standard puts further pressure on HTF receipts from taxes imposed on passenger cars, leading to an estimated 13% reduction from today's levels by 2032, requiring even larger general fund subsidies to maintain the status quo.

CDOT's federal reimbursements provide strong maximum annual debt service coverage of 4.06x and coverage inclusive of state matching funds is significantly higher. The department has already obligated all the debt service payments for the TRANs through 2016. Delay in federal reimbursement would not impact repayment of bonds because of the forward delivery agreement which prefunded debt service with state funds.

SECURITY

The TRANs are special, limited obligations of CDOT payable solely from the trust estate, consisting of federal transportation and state matching funds.