Fitch Ratings has affirmed the following San Bernardino County Transportation Authority rating:
--$250 million sales tax revenue notes, 2009 series A at 'F1+'.
SECURITY
Then notes are secured by 0.5% Measure I sales and use tax revenues collected on or after April 1, 2010 through March 31, 2040, net of California State Board of Equalization administrative fees.
CREDIT SUMMARY
The highest quality, 'F1+' rating reflects Fitch's belief that the authority will be able to issue Measure I sales tax revenue funding bonds, sufficient to retire the rated notes. Strong market access is indicated by the authority's long history of managing debt and capital projects well, recent strengthening of the pledged sales tax, a diverse economic base and adequate legal protections afforded by the indenture.
KEY RATING DRIVERS
Long History Managing Debt and Capital: The authority has shown the ability to successfully operate its capital program, completing major projects on time and within budget. All long-term debt associated with the previous sales tax measure matured with the measure expiration in 2010; however, Fitch expects future sales tax debt will be similarly well-managed.
Recovering Sales Tax: Pledged sales tax receipts rebounded in 2009-10, after dropping steeply during the recession. Debt service coverage is projected to be strong when the new Measure I sales tax bonds are issued.
Adequate Legal Protections: The additional bonds test is a historical 1.3 times (x), which mirrors the authority's policy of maintaining a minimum of 1.3x annual debt service coverage. The take-out bonds are fully authorized and, as such, are not subject to the additional bonds test.
CREDIT PROFILE
Indenture Provides Adequate Noteholder Protections
The 'F1+' rating reflects the irrevocable gross sales and use tax pledge that secures the notes, coupled with the authority's covenant to issue sufficient take-out bonds to pay off the notes at maturity. Noteholders also benefit from the authority's covenant not to enter into senior or parity obligations, with the exception of a previously authorized $100 million of additional notes, until the notes are repaid. The additional notes have not been issued, and officials report they have no plans to do so.
Fitch expects pledged revenues alone will be insufficient to repay the notes in their entirety, but that the authority can easily accommodate long-term bonds sufficient to repay the notes in their entirety. The highest quality note rating underscores Fitch's expectation that the authority will have strong market access, due to its proven history of aptly managing its extensive capital program and previous sizeable bonded debt obligations.
Authority has History of Managing Complex Debt and Capital Program
The authority has a long history of successfully leveraging its 0.5% Measure I sales tax to fund its extensive, multi-year capital program. The county-wide 0.5% Measure I sales tax was first authorized in 1989 for a 20-year period ending March 2010. All bonds secured by that measure have since matured with the Measure's expiration.
The approximately $1.8 billion generated by the initial Measure, augmented by state and federal funds, enabled the authority to complete various traffic safety and congestion amelioration projects. Major initiatives included construction of the SR-71 and SR-210 Freeways, widening of I-10, SR-60 and I-215 Freeways, widening and maintenance of various arterial and local streets, as well as improvements to Metrolink rail service and equipment.
In 2004, the electorate of San Bernardino County (certificates of participation rated 'AA-' by Fitch) approved an extension of the Measure I sales tax by an 80% margin. The new measure extends collection through March of 2040. A portion of the note proceeds have been invested with the state in an obligation which is subject to mandatory tender prior to note maturity, but take-out provisions are not dependent upon the tender. Fitch does not factor the mandatory tender into the affirmation of the 'F1+' rating.
Note proceeds also provided interim funding for capital while the authority prepares its new 10-year capital plan. After the plan is completed, the authority intends to issue long-term bonds sufficient to retire the notes and provide permanent funding for identified capital needs. The sizing of the long-term issue, which is expected to occur in spring 2012, will not be known until the fall when the new 10-year capital plan is completed.
Sales Tax Shows Signs of Recovery Following Severe Recessionary Erosion
The San Bernardino County economy has suffered during the recent economic downturn. Unemployment rates remain elevated amid a contracting labor force. The May 2011 rate of 13.2% is well above that of the state (11.4%) and U.S. (8.7%). Housing market weakness persists, as evidenced by housing values which have fallen to below half of their peak, and widespread foreclosures. Similarly, sales tax performance eroded during the recession, declining more than 27% between fiscal year (FY) 2007 and FY 2010.
A rebound in sales taxes was recorded in FY 2011, when revenues increased 8% over the prior year's collections. Pledged revenues remain robust enough to support the necessary take-out bonds, even after experiencing the steep decline. Relatively conservative authority projections demonstrate coverage of pro forma take-out bond debt service in excess of 5.8x. Fitch's more severe stress test of three consecutive years of 10% declines with flat revenue through maturity produced over 4x coverage assuming level debt service. Fitch notes that the projections are based on estimated issuance, the levels of which will be more certain once the new capital plan is released.
The authority's responsibilities are limited to planning and construction. It retains no operational responsibility for the projects it constructs. Most are turned over to the state upon completion. With no toll or farebox revenue to support it, the authority is heavily dependent upon the excess sales tax revenues for funding of pay-go capital. The authority ended fiscal 2010 with a strong unreserved Measure I special revenue fund balance of $84.6 million, or 101.2% of spending.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.
Applciabe Criteria and Related Research:
'Rating U.S. Municipal Short-Term Debt', dated 23 Dec 2010.
'Tax-Supported Rating Criteria', dated 16 Aug 2010.
'U.S. Local Government Tax-Supported Rating Criteria', dated 08 Oct 2010.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
Rating U.S. Municipal Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=592885
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