OREANDA-NEWS. October 07, 2015. Fitch Ratings has affirmed the 'AA+' rating on the North Dakota Department of Transportation's (NDDOT) approximately \\$23 million of outstanding grant and revenue anticipation bonds (GARVEEs). The Rating Outlook is Stable.

The rating is driven by the strong backup pledge of state highway revenues, which includes the state portion of the motor fuel tax and vehicle registration fees. This mitigates the risk of a disruption to federal funding.

KEY RATING DRIVERS

Dual Pledge Provides Strong Coverage: NDDOT's bonds are secured by the first lien on North Dakota's federal highway funds and the legislatively mandated subordinate lien on state highway funds, which helps offset reauthorization risk. The back-up pledge is subject to appropriation.

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.

Strong Covenants and Timing Mechanisms: Additional leverage is limited by a strong additional bonds test of 5.0 times (x) maximum annual debt service (MADS). Administrative allocation of federal transportation funds for debt service at the beginning of each federal fiscal year prior to other uses provides additional security. A cash funded debt service reserve provides additional support.

Additional Leverage Not Anticipated: NDDOT is not planning on issuing any more debt in the short-term.

RATING SENSITIVITIES

Negative: Additional leveraging or a significant change in the basket of state highway revenues that weakens the secondary pledge.

Negative: Legislative action that impairs the amounts and rates of revenues credited to the state highway fund and flowing through to NDDOT would lead to negative pressure on the rating.

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.

CREDIT UPDATE

The unsustainable trajectory of federal highway trust fund (HTF) expenditures exceeding receipts over the past several years has not been addressed by Congress. Instead 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.

A memorandum of agreement between the FHA and NDDOT establishes as the first priority in the flow of federal transportation funds a sum-sufficient payment stream equal to no less than an 80% annual federal share of debt service. However, the pledge of federal transportation funds under the indenture is more broadly defined to provide coverage in the unlikely event the programmed obligation authority results in a deficiency.

The remaining annual share of debt service is backed by pledged state highway funds, mainly comprised of gasoline tax, gasohol tax, special fuels tax, and motor vehicle registration fee revenues. These funds are also available in the event federal transportation funds are insufficient to pay the federal share of debt service. NDDOT covenants to include in each biennial budget request to the governor an appropriation from pledged state highway funds in an amount equal to debt service on the bonds. Total pledged state highway funds equalled \\$196 million in fiscal 2015 (state fiscal year ending on June 30). Unless expressly excluded from the budget, debt service is automatically appropriated. Exclusion of debt service from the budget triggers an event of default under the indenture.

In fiscal 2015, total state highway funds increased by 6.1% and federal receipts increased by 3.3%. The pledged federal aid and the subordinate pledge of state highway fund tax revenue covered the annual debt service of \\$5.3 million more than 82x in 2015.

In 1990, NDDOT was legislatively created to embrace the multi-modal philosophy of the state and the nation. NDDOT oversees the development of the state's surface transportation and is responsible for 8,414 miles of state highways, of which 1,147 miles are on the interstate system.

SECURITY

The bonds are special, limited obligations of NDDOT payable solely from the trust estate, consisting of federal transportation funds and pledged state highway funds.