Fitch Ratings assigns an 'AA' rating on approximately $425 million Maryland Transportation Authority (MdTA) Grant and Revenue Anticipation (GARVEE) bonds, series 2008. The Rating Outlook is Stable. In addition, Fitch has affirmed the 'AA' rating on MdTA's approximately $301 million in outstanding GARVEE bonds series 2007. The bonds are expected to be sold competitively on Sept. 10th. Bond proceeds will be used to finance a portion of the proposed 18 mile east-west Intercounty Connector project in Montgomery County and Prince George's County, Maryland and pay the costs of issuance.
The bonds are secured by a pledge of the trust estate, consisting of annual allocations of federal aid and a subordinate pledge of certain Maryland State Transportation Trust Fund (TTF) tax sources. Pledged Federal Aid is not subject to appropriation. Pursuant to a memorandum of agreement with the Federal Highway Administration (FHWA), Maryland State Highway Administration (SHA) and MdTA, FHWA has agreed that the project will be treated as an advance construction project and that FHWA will make payments of the applicable portion of the debt service on the bonds to the trustee not less than three business days prior to each payment date. TTF tax sources include a portion of motor fuel taxes, titling excise tax on vehicles, sales and use tax on vehicle rentals and corporate income tax. Similar to some other state transportation grant anticipation programs leveraging federal transportation funds, advance segregation for debt service payments is not on a cash basis but through a set aside of obligation authority for federal transportation funds.
Fitch's 'AA' rating reflects the dual pledge of federal aid and state TTF tax sources, the long established track record of federal transportation funding, a strong additional bonds test of 3.0 times (x) maximum annual debt service and a 12 year debt maturity profile for the proposed bonds and subsequent issuance that helps limit future federal surface transportation program reauthorization risk. Additionally, the rating reflects strong covenants and timing mechanisms in the unlikely event of deficiency in Federal Aid by starting the process to deobligate Federal Aid for other projects no less than 60 days before a debt service payment date and, if required, deobligate Federal Aid and / or seek TTF tax sources through a budget amendment at least 45 days prior to a debt service payment date.
A risk for the bonds is the potential for significant changes in federal transportation funding policy with each new authorization period. Interruption in the flow of federal transportation funding is highly unlikely given the broad-based political support for the program. However, the most recent multi-year reauthorization of the federal surface transportation program was significantly delayed. The Transportation Equity Act for the 21st Century (TEA-21) expired on Sept. 30, 2003 without a successor multi-year authorization, although 12 short-term extensions were passed. The Safe, Accountable, Flexible, and Efficient Transportation Equity Act - A Legacy for Users (SAFETEA-LU) took nearly two years to enact.
Given the recent decline in motor fuel consumption the highway trust fund (HTF) is projected to have an $8 to $9 billion shortfall for Federal fiscal 2009 which begins Oct. 1, 2008. Pending appropriation legislation could provide some relief. However, continuing federal budget deficits, opposition to fuel tax increases and national security concerns coupled with the possibility of changing federal priorities do not guarantee that such federal transportation funding growth will continue during subsequent reauthorization cycles. Assuming the continuation of six-year reauthorization cycles, the bonds are dependent upon two authorization cycles. In Fitch's opinion, the pledge of subordinate TTF funds provides an important offset to this reauthorization risk at the current rating level. While litigation involving the project may delay its implementation or increase its costs, the likelihood for an interruption in a flow of Federal Aid for debt service is low. The pledge of all legally available Federal Aid and the subordinate pledge of TTF funds significantly mitigates this risk. In addition, with this issuance the authority will have reached the statutory cap on GARVEE issuance. While future leveraging can not be ruled out, the risk of over-leveraging is mitigated by strong projected debt service levels and strong additional bonds test of 3.0x.
MdTA is responsible for coordinating, planning and implementation of the GARVEE program in consultation with SHA. SHA is the recipient of all Maryland Federal Highway Funds; GARVEE debt service paid directly to the trustee. SHA is also responsible for letting contracts and management and delivery of the ICC project.
Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this underlying rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').
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