Fitch Ratings assigns an 'AA+' rating to the following Maryland Department of Transportation (MDOT) consolidated transportation bonds:
--$150 million consolidated transportation bonds, series 2012.
The bonds are expected to sell via competitive sale on May 23, 2012.
In addition, Fitch affirms the following ratings:
--$1.44 billion in outstanding MDOT consolidated transportation bonds at
--$85.4 million in outstanding county transportation bonds at 'AA+';
--$58.6 million in outstanding MDOT certificates of participation at 'AA';
--$194.8 million in outstanding Maryland Economic Development Corporation lease revenue bonds (Maryland Aviation Administration Facilities) series 2003, at 'AA'.
The Rating Outlook is Stable.
Consolidated transportation bonds are payable from specific tax revenues, primarily motor fuel and motor vehicle titling taxes prior to being available for other uses by the Department. If the tax proceeds pledged to the payment of principal of and interest on the bonds become insufficient to meet debt service requirements, other receipts of the Department are available for that purpose.
KEY RATING DRIVERS
SOLID DEBT SERVICE COVERAGE: Consolidated transportation bonds benefit from strong debt service coverage by pledged taxes and net revenue. A solid additional bonds test requires 2x coverage by pledged taxes as well as departmental net revenues. Departmental policy requires a stronger 2.5x coverage level by both measures.
DIVERSE REVENUE PLEDGE: Revenues pledged to debt service are diverse, including transportation-related and certain general fund taxes, as well as net revenue from facility operations. Pledged revenues are affected by statutory changes and economic cyclicality, and the state general fund has used transportation funds for general budget relief during periods of fiscal stress. However, coverage has remained consistently strong.
STRONG MDOT CONTROL: MDOT has broad authority over state transportation, including the ability to plan and adjust capital projects as necessary based on projected available resources.
Security for MDOT's consolidated transportation bonds is broad-based, consisting of certain pledged taxes, including motor fuel, motor vehicle titling, and corporate income taxes, except for portions of collections that are shared with other state funds and local agencies. The legislature periodically changes tax rates and the distribution of tax receipts among state funds and local agencies, most recently in the 2011 legislative session. Pledged taxes have consistently provided ample coverage despite their vulnerability to economic cycles and the impact of statutory changes. Other MDOT revenues are available if pledged taxes are insufficient.
Debt service coverage is above the two parity bond issuance tests, which require 2x coverage of maximum annual debt service (MADS) by prior-year department net receipts, and 2x coverage of MADS by prior-year pledged taxes. MDOT policy requires a more stringent 2.5x coverage by both tests. Including the new bonds, coverage of MADS by fiscal 2012 estimated net revenues is 3.2x, and by fiscal 2012 estimated pledged taxes is 5.6x, well over the policy threshold.
The state has made periodic changes affecting pledged taxes, both to expand resources available to transportation and conversely to relieve state general fund stress. Rates for statewide corporate taxes and general sales taxes were raised in fiscal year (FY) 2008, and the state shifted a 5.3% portion of the general sales tax to the transportation trust fund (TTF). However, state general fund revenues weakened during the 2008-2010 recession and the state reallocated certain TTF receipts intended for local agencies to the state general fund. The state had similarly shifted MDOT's allocation of receipts to the state general fund in the previous downturn.
The state general assembly made extensive statutory changes in its 2011 session, the net effect of which modestly increases annual revenues available to MDOT but changes their composition. The deposit of 5.3% of state general sales taxes to the TTF was ended as of July 1, 2011, although these moneys remain pledged if necessary to consolidated transportation bonds issued prior to that date. (Sales taxes on motor vehicle rentals continue to be deposited to the TTF.) Scheduled allocations of TTF resources back to the state general fund are ending, although $40 million in TTF funds were shifted to the state's rainy day fund in FY 2012. The allocation of receipts among MDOT and local agencies was shifted, with MDOT receiving a higher share, and various fees were increased. Future allocations of TTF revenues to the state general fund will be subject to repayment in five years. The general assembly made no further changes to transportation revenues in its 2012 regular session.
Trends in pledged taxes and net revenues are subject to economic cyclicality as well as the impact of statutory changes. Average growth between fiscal 2003 and fiscal 2011 was 2.4% per year for pledged taxes and 6% for net revenues, reflecting broad economic growth through 2007, tax rate increases enacted in 2008, and the negative effects of fuel price volatility and recessionary conditions late in the period.
MDOT updates its revenue forecast twice annually, most recently in January 2012. Through FY 2017, the end of MDOT's capital plan period, pledged taxes are projected to rise an average of 4.6% annually, and net revenues are projected to rise 3% annually, reflecting a slow economic recovery and the impact of corporate tax allocation changes. MADS is forecast to reach $311 million in FY 2017, including projected bond issuance through the end of the plan period. At this level, prior-year pledged tax coverage of projected MADS would be 5.4x in FY 2017, well above the 2.5x policy coverage measure by pledged taxes. Coverage of projected MADS by prior-year net departmental revenue in that year would be 2.9x.
Bonds issued by MDOT are conservatively managed. The legislature's ceiling on consolidated transportation bonds that may be outstanding is $2.6 billion; a separate annual cap on outstanding bonds as of June 30, the state's fiscal year end, is set at $1.9 billion for fiscal 2012. Prior to the new bonds there is $1.4 billion in consolidated transportation bonds outstanding. The state constitution mandates that consolidated bonds mature within 15 years.
MDOT's capital plan was reduced repeatedly during the recession as revenue weakness eroded coverage, although federal stimulus funds blunted the impact of recessionary declines. The FY 2012-2017 capital plan represents a return to growth, with a total of $9.9 billion, compared to $9.1 billion for the fiscal 2010-2015 plan. MDOT's capital plan focuses primarily on system preservation, with the largest shares of funding directed to highways and mass transit. Federal sources fund about 34% of capital program needs and consolidated bonds fund 17%. Remaining capital program needs are met from departmental net revenues.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', 15 Aug. 2011.
'U.S. State Government Tax-Supported Rating Criteria', 15 Aug. 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
Douglas Offerman, +1-212-908-0889
Fitch Inc., 1 State St. Plaza, New York, NY 10004
Ken Weinstein, +1-212-908-0571
Laura Porter, +1-212-908-0575
Sandro Scenga, +1-212-908-0278