OREANDA-NEWS. January 26, 2016. Fitch Ratings has assigned an 'A' rating to the following issue of the Rhode Island Turnpike and Bridge Authority (RITBA):

--\\$128.295 million Rhode Island motor fuel tax revenue bonds, series 2016A.

The bonds are expected to sell via negotiation on or about Jan. 28, 2016.

The Rating Outlook is Stable.

SECURITY

The bonds are special and limited obligations of the state of Rhode Island payable from and secured by pledged motor fuel taxes, which consist of three and one half cents of the state's 33-cent motor fuels tax, subject to annual legislative appropriation.

KEY RATING DRIVERS

ADEQUATE DEBT SERVICE COVERAGE: Estimated pledged revenues (motor fuel tax allocation to the RITBA was effective in fiscal 2015) have exhibited flat to declining performance since fiscal 2005, driven by overall trends facing per-gallon fuel taxes and the state's tepid economic growth. The revenue trend improved in fiscal years 2014 and 2015 and fiscal 2015 revenues provide 1.68 times (x) coverage of maximum annual debt service (MADS). The state expects revenue to soften slightly in fiscal 2016 and then remain fairly steady. This level of coverage provides moderate cushion above the 1.25x additional bonds test (ABT).

ADDITIONAL BORROWING REQUIRES AUTHORIZATION: Borrowing authorization is expected to be exhausted with this issuance. The RITBA is updating its capital improvement plan and expects future needs to be largely funded through pay-go spending and its toll revenue security although it could seek additional authorization under the gas tax indenture, potentially moving future debt service coverage closer to the ABT.

IMPROVING ECONOMIC INDICES: Rhode Island's economic decline was among the worst of the states in the downturn and its recovery trailed the nation for several years. However, the gap has narrowed in recent months with solid job growth and unemployment rates that are slightly above the nation, even as the labor force has exhibited strong growth.

SEVERAL PLEDGED RESERVES IN INDENTURE: The issue is structured with a fully funded debt service reserve fund in addition to monies contained in other operating reserve funds that are pledged and available to bondholders.

RATING SENSITIVITIES
The rating is sensitive to the performance of pledged revenues and debt service coverage.

CREDIT PROFILE
The 'A' rating reflects the flat to declining performance of the state's motor fuel tax revenues in recent years and Fitch's expectation that this pattern of modest declines will continue. The Stable Outlook incorporates Fitch's expectation that debt service coverage will remain comfortably above the ABT despite the potential for slow revenue erosion. The state dedicated three and one half cents (\\$0.035) of the 33-cent state motor fuel tax to the RITBA for its capital program, effective July 1, 2014, and the current offering is the first under a new bond indenture. The \\$0.035 dedication to RITBA and new indenture are separate from a \\$0.02 dedication of motor fuel tax to the Rhode Island Economic Development Corporation (now known as the Rhode Island Commerce Corporation), which support motor fuel tax bonds issued under another indenture (rated 'A' with a Negative Outlook).

Fiscal 2015 revenues were the second consecutive year of increase (3.8% growth) in the motor fuel tax; fiscal 2014 revenues recorded growth of 2.4%. These positive years followed eight years of consecutive losses prior to fiscal 2014 that accelerated during the most recent recession. Through November 2015, fiscal 2016 collections are down 0.27% year-over-year (YOY) and the state's revenue estimating conference (REC) recently forecast a 0.5% decline for the fiscal year. The state's base case for expected revenues estimates a larger, 4.5% decline for fiscal 2016 that will still provide 1.6x coverage of expected debt service requirements on this obligation.

The state enacted inflation indexing to its motor fuel tax, effective in fiscal 2016, that will stabilize revenue collections moving forward, although it has no impact on the \\$0.035 allocation to the RITBA. Over the long term, Fitch views RITBA's revenue allocation to be a flat to declining source of revenues given the state's slow economic improvement, improving fuel economy of new vehicles, and increased use of alternative fuel and hybrid vehicles.

SLUGGISH ECONOMIC PERFORMANCE
Current economic indicators point to an economy that will be very slow to recapture employment lost in the last recession. Rhode Island's peak-to-trough nonfarm employment losses during the recession of 8% exceeded the national decline of 6.3%. The state's employment recovery has been weak since then. Through November 2015, Rhode Island had regained just 77.39% of the lost jobs, ranking 40th amongst states. National employment exceeded its pre-recession peak in May 2014 more than a year ago.

In recent years, the state's pace of jobs growth has proved relatively volatile with a high of 1.8% YOY in May 2014 versus a low of 0.6% in November 2014. The three-month moving average indicates a narrowing gap with the national trend; in November 2015, Rhode Island's three-month average YOY growth of 1.4% was 71% of the national rate of 1.9%, while one year earlier Rhode Island's growth of 0.8% was 40% of the national 2.1% growth rate. The gap between Rhode Island's and the nation's unemployment rate likewise continues to narrow. Rhode Island's November 2015 unemployment rate of 5.2% improved notably from 6.9% the prior year, and is now 104% of the national level versus 119% in May 2014.

The state's consensus economic forecast (last updated in November 2015) calls for modest employment growth of 1.6% for fiscal 2016, with the recovery improving further in fiscal 2017 (1.7% employment growth). Fitch anticipates the state's growth will remain below national levels over at least the medium term, particularly given its weaker demographic profile of very slow population growth and a slightly older than average population.

DECLINING REVENUE STREAM
Pledged motor fuel tax receipts declined from fiscal 2005 at an average rate of 1.52% per annum to fiscal 2013, until improving in fiscals 2014 and 2015. Receipts dropped over 4% in both fiscal years 2008 and 2009 due mainly to the recession, and declined more modestly every year until fiscal 2014.

Pledged revenues from fiscal 2015 provide an estimated 1.68x coverage of expected annual and maximum annual debt service (MADS), declining to 1.61x from a conservative expectation of receipts in fiscal 2016. Fitch projects the revenue stream could sustain an almost 2% decline per annum and still fully fund debt service requirements in the final year of maturity.

The pledged revenues are subject to annual state appropriation. Once appropriated, pledged revenues are remitted to the trustee on a monthly basis. A non-impairment pledge to bondholders was included in the authorizing statute although the state retains the ability to adjust motor fuel tax rates and the allocation of revenue to the RITBA. Proceeds of the current offering will redeem an outstanding bond anticipation note issued by the RITBA and provide funding for additional capital projects.

Bonding authorization for the RITBA under the current motor fuel tax indenture will be essentially exhausted after this issuance although the legislature has the ability to grant additional authorization. The RITBA is currently reviewing its capital improvement program and expects future capital needs to be largely funded through pay-go spending and its toll revenue security (rated 'A' with a Negative Outlook). RITBA is responsible for maintenance and operation of four bridges in addition to a portion of Route 138 in the southern portion of the state.

RESIDUALS PROVIDE LIMITED CUSHION
There is a debt service reserve fund equal to MADS that will be funded from cash on hand and the indenture establishes two additional subordinate operating reserve funds, currently expected to total \\$2.7 million at bond closing, that are pledged and available to bondholders. Operating reserve fund balances may fluctuate over time and thus the potential added bondholder protection provided by the pledged operating reserves is limited, in Fitch's view.