OREANDA-NEWS. Fitch Ratings has affirmed the 'AA-' rating on the Port Authority of Allegheny County (PAAC), Pennsylvania's $213.72 million in special revenue transportation bonds, series 2011.

The Rating Outlook is Stable.

SECURITY
The bonds are limited obligations of the authority payable from the authority's allocation of revenues derived from Commonwealth of Pennsylvania fees and taxes levied statewide, which are not subject to appropriation. The allocated revenues, which are deposited into the Public Transportation Assistance Fund (PTAF), include 0.947% of the Commonwealth's sales and use taxes, receipts from a 3% vehicle lease tax, revenues from a $2.00 daily motor vehicle rental surcharge, and monies generated by a $1.00 new-tire fee imposed on the sale of all new tires in the Commonwealth.

KEY RATING DRIVERS

ALLOCATED REVENUES LEVIED STATEWIDE: Debt service is paid from a diverse base of statewide taxes and fees allocated for mass transit in the PTAF. Following a recessionary decline, revenues have grown since fiscal 2010, and Fitch expects the revenue stream to continue to be economically sensitive but generally stable over time.

ROBUST LEGAL PROVISIONS: The statewide allocated revenue stream is not linked to the authority's service area or operations, and pledged revenues flow directly from the Commonwealth's treasury department to the trustee for the bonds. Bondholders enjoy a first lien on the pledged revenues, with senior lien debt prohibited under the indenture. Fitch believes this structure insulates the bonds from any PAAC operating pressures.

EFFECTIVE LIEN CLOSURE THROUGH LEGISLATION: The bonds also benefit from the effective closure of the lien through the passage of Act 44. At that time, the Commonwealth protected the dedicated revenue stream despite changes in statewide transportation funding. The protections remain in place following the enactment of the Commonwealth's most recent transportation funding reform legislation.

SATISFACTORY DEBT SERVICE COVERAGE: Fiscal 2015 allocated revenues provided greater than 2 times (x) coverage of maximum annual debt service (MADS). MADS coverage is projected to remain adequate given the level debt profile and restriction on further leverage of the allocated revenue stream.

RATING SENSITIVITIES
Deterioration in debt service coverage levels or a statutory reopening of the lien could result in downward rating pressure.

CREDIT PROFILE

The 'AA-' rating reflects satisfactory debt service coverage provided by a diverse set of revenues derived from taxes and fees levied statewide and allocated to the authority, through the trustee, which first makes allocations for debt service. Bondholders also benefit from the effective closure of the lien through the passage of Act 44. Timely payment of debt service is unaffected by the state's current budget impasse, as monthly transfers to the bond trustee occur even without a commonwealth budget or specific annual legislative authorization.

Although revenue derived from the allocated fees and taxes declined during the recession, they recovered quickly and increased five consecutive years through fiscal 2015. Maximum annual debt service (MADS) coverage by the authority's allocation of fiscal 2015 revenues was an adequate 2.26x, the highest level since fiscal 2008. During the recession MADS coverage never declined below 1.86x.

While the indenture includes an additional bonds test requiring 1.5x coverage of projected MADS, the passage of Act 44 effectively eliminated PAAC's ability to further leverage the allocated revenues. Further, through Act 44 and Act 46 of 2010, the Commonwealth has pledged that it will not limit or alter the rights vested in the authority in any manner inconsistent with the obligations of the authority to the owners of all bonds secured by such pledge until bonds are fully paid.

DEDICATED STATEWIDE PLEDGED REVENUES

The bonds are secured by four separate revenue streams which are distributed to the PTAF (collectively, the dedicated revenues) pursuant to Section 1310 of the Public Transportation Assistance Law (the Law). These revenues include 0.947% of the Commonwealth's 6% sales tax, a 3% vehicle lease tax, a $2 daily motor vehicle rental surcharge, and $1 new tire fee. After a small portion of the dedicated revenues are set aside for the Pennsylvania Department of Transportation (PennDOT) and small rural systems, the remaining moneys are available for mass transit systems throughout the Commonwealth (available revenues). Of this balance, 25.4% is allocated by statute to class 2 transit systems. As PAAC is the only such system in the Commonwealth, it currently receives the entire 25.4% allocation, and Fitch believes that the addition of another class 2 transit system is highly unlikely.

Included in the legal provisions is a strong flow of funds that requires all allocated revenues be transferred directly from the Commonwealth's treasury department to the trustee. The trustee makes allocations for debt service before revenues are finally transferred to the authority for operating purposes. Revenues are retained for debt service beginning six months prior to interest and principal payment dates of March 1 and Sept. 1.

The state substantially restructured and expanded state funding for public transit systems with the passage of Act 44 (the law), which eliminated the ability to further leverage the allocated revenues securing the bonds and also froze the tax rates. Prior to its passage, the law provided for the distribution of the available revenues from the PTAF to the authority. Act 44 repealed the law and established the PTTF. To ensure that these changes did not affect the allocated revenues securing the bonds, Act 44 provided that despite the repeal of the law, the PTAF would continue to receive all revenues the fund was entitled to receive prior to June 30, 2007.

More specifically, Act 44 stipulates that transit entities with outstanding obligations will continue to receive the allocated revenues flowing into the PTAF. After debt service obligations secured by PTAF revenues have been paid, funds remaining in the PTAF will be transferred to the PTTF. Further, Act 44 effectively closes the lien by specifying that no transit entity may pledge PTAF funds to secure additional obligations. Act 46, passed in July 2010, allows transit entities with outstanding obligations issued prior to June 30, 2007 to issue refunding bonds secured by money from the PTAF. Refundings cannot extend the final maturity of the bonds. Recent enactment of Act 89 provides additional funding for the PTTF but does not affect the commitment to allocate pledged revenues from the PTAF for outstanding bonds.

STEADY DEBT SERVICE COVERAGE

Dedicated revenues supporting the bonds are economically sensitive. A portion of the state's sales tax accounted for 47.0% of the dedicated revenues in fiscal 2013, with the vehicle lease tax as the second largest source at 28.6%. After healthy growth in the total dedicated revenues in fiscal years 2007 and 2008, revenues fell by 4.6% in fiscal 2009, and a more significant 6.8% in fiscal 2010. Since then, dedicated revenues grew by a healthy 7.3% on an average annual basis. Fitch expects MADS coverage to remain solid, and likely near 2x, given the limitation on further leverage. Separately, the Southeastern Pennsylvania Transportation Authority (SEPTA) issued bonds secured by a 70.3% share of available revenues. Fitch rates those bonds one notch higher at 'AA' with a Stable Outlook due to stronger coverage (4.04x coverage of MADS from fiscal 2015 revenues).

STATEWIDE TRANSIT AGENCY

The authority was established in 1958 by the Commonwealth Legislature and commenced operations in 1964. The authority operates bus, light rail and incline service in a 775 square mile area encompassing the city of Pittsburgh and four surrounding counties. The authority is governed by an 11-member board with the county executive appointing six members, and one member appointed by each of the following: the governor of Pennsylvania; the Commonwealth's senate majority leader; the senate minority leader; the majority leader in the Pennsylvania House of Representatives; and the house minority leader.