Fitch Ratings assigns a rating of 'AA' to the Massachusetts School Building Authority's $600 million dedicated sales tax bonds, consisting of 2009 series A tax-exempt bonds and 2009 series B federally taxable-direct pay to issuer-Build America Bonds. The bonds are scheduled to be sold the week of Dec. 7, 2009 through negotiation. Fitch also affirms the 'AA' rating on the authority's $3.8 billion outstanding dedicated sales tax bonds. The Rating Outlook is Stable.
The bonds are secured by an irrevocable dedication of one cent of Massachusetts's 6.25-cent sales tax, with some exclusions, to be phased-in through fiscal 2011. The 'AA' rating is based on the historical reliability of sales tax revenue, the adequacy of debt service coverage and the additional bonds test, and structural protections afforded, including the statutory dedication of the tax for school capital purposes. The commonwealth has imposed a sales tax since 1966, and although recent performance has been weak coverage of maximum annual debt service remains more than 2 times (x). Additional bond issuance under the $10 billion authorization requires 1.40x debt service coverage. Dedicated revenues are segregated from the commonwealth general fund, and the authority has no role in funding school operations. Strong legal covenants protect against diversion of revenues or lowering of the dedicated tax rate, although the base can be changed.
Dedicated sales tax revenues are credited to the School Modernization and Reconstruction Trust (SMART) fund, which is held by the commonwealth treasurer exclusively for the purposes of the authority, and disbursed to the bond trustee on a monthly basis. The revenues in the fund are not commingled with commonwealth funds and are not subject to appropriation. Bondholders have first claim on the dedicated sales tax. The dedicated one-cent sales tax would generate about $619 million in annual revenue at full phase-in, assuming no growth from fiscal 2010 estimates. Average annual sales tax growth has been 7% since the inception of the tax in 1966, with 7.1% in 1990 the largest one-year drop. However, revenues dropped 6.2% in fiscal 2009 and are projected to drop another 4.5% in fiscal 2010, not considering the increase in the commonwealth sales tax rate from 5% to 6.25% that became effective on Aug. 1, 2009.
The authority can choose to transfer excess dedicated sales tax revenues to the commonwealth, but the commonwealth has relinquished all claims to the revenue. The authority consists of seven members, the Commonwealth Treasurer (chair), four treasurer appointments, and two ex officio members. The authorizing legislation specifies that the treasurer shall act as trustee as it relates to the SMART fund and not on account of the commonwealth.
The authority was created in 2004 to address a substantial backlog of programs funded under the commonwealth's prior school building assistance program and create a sustainable system for school capital funding going forward. Prior contract assistance commitments to localities, a declining obligation through 2023, is paid annually from dedicated revenues on a subordinate basis. The authority is authorized to fund up to $500 million in new projects annually (adjusted upwards each year by the lesser of dedicated sales tax revenue growth or 4.5%), and has developed revised program regulations to this end. In a significant change from the commonwealth's prior practice, approval of new projects is contingent upon the availability of funds for this purpose. The authority does not have a waiting list.
Massachusetts has a fundamentally strong and wealthy economy, with the third highest personal income per capita in the nation (127% of the U.S.). The economy has always been diverse, with a large service industry component. Fitch rates general obligation debt of the commonwealth of Massachusetts 'AA' with a Stable Rating Outlook. For more information on the Commonwealth, see Fitch Research dated Nov. 9, 2009.
The 2009 bonds are being issued to fund grants to local governments for school construction and renovation. The federal subsidy on the 2009 series B Build America Bonds is pledged and will be paid directly to the trustee. Fitch treats the subsidy as a revenue rather than an offset to debt service for purposes of coverage calculations.
Additional information is available at www.fitchratings.com.
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