Fitch Rates San Francisco Bay Area Rapid Transit District, CA’s Sales Tax Revs ‘AA+’; Outlook Stable
--Approximately
In addition, Fitch assigns an Issuer Default Rating (IDR) of 'AA+' to the district. Fitch also affirms the following outstanding ratings at 'AA+':
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The Rating Outlook is Stable.
The 2016A sales tax revenue refunding bonds are scheduled to sell via competition on or about
SECURITY
The sales tax revenue bonds are payable from a first lien on 75% of the 1/2 cent BART sales and use tax (sales tax) levied in
The GO bonds are backed by an unlimited ad valorem tax levied on all taxable property within the BART counties.
KEY RATING DRIVERS
The 'AA+' IDR and GO ratings reflect BART's healthy financial performance, moderate but rising long-term liabilities, solid revenue growth prospects and manageable capital spending pressures in the context of an unusually vibrant economic base. The 'AA+' sales tax revenue bond rating reflects strong maximum annual debt service coverage, expectations for limited additional leveraging and solid growth prospects for sales tax revenues.
Economic Resource Base
BART provides essential public transportation services to a wealthy, diverse and growing
Revenue Framework: 'aaa' factor assessment
The district's sales tax and passenger fare dominated revenue structure provides strong revenue growth at above both the level of inflation and overall economic growth. The independent legal ability to raise revenues is satisfactory due to the system's high fare box recovery rate. The district may only raise sales taxes with a vote of the people.
Expenditure Framework: 'aa' factor assessment
The district faces significant capital spending pressures, but Fitch expects the increases to track revenues over time. Expenditure flexibility is solid with low fixed carrying costs and significant pay-go capital spending offsetting a somewhat restrictive labor environment.
Long-Term Liability Burden: 'aa' factor assessment
Combined debt and pension liabilities are low relative to personal incomes and moderate relative to funds available for debt service (FADS), but debt is expected to rise significantly as the district addresses a significant backlog of capital spending needs.
Operating Performance: 'aa' factor assessment
Operating performance is healthy. The district is very well positioned to withstand cyclical revenue variability due to very healthy reserves, consistently positive margins and the ability to offset revenue losses with either spending cuts or fare increases. Budget management in times of recovery is somewhat mixed with healthy funding of retirement liabilities and conservative, thorough financial planning offset by ongoing deferrals of needed capital spending.
RATING SENSITIVITIES
CAPITAL FUNDING RISKS: The ratings could come under downward pressure if the district fails to address its significant backlog of deferred capital needs in a sustainable manner or if the district's plan to address the capital backlog pushes leverage to a high level. Significant additional leveraging of the sales tax revenues could put downward pressure on the sales tax revenue bond ratings.
UNEXPECTED WEAKENING IN FINANCIAL PERFORMANCE: A sustained and unexpected weakening of financial performance could pressure the rating. A moderate weakening during a cyclical downturn is unlikely to pressure the rating so long as performance remains healthy and recovers in the subsequent expansion.
CREDIT PROFILE
Revenue Framework
The district benefits from a diverse mix of sales taxes, property taxes, fare revenues and intergovernmental aid. Revenue volatility is somewhat higher than the typical
The natural pace of revenue growth is quite strong with revenue gains consistently outpacing both inflation and economic growth. The 10-year compound annual growth rate of revenues (excluding capital grants and the GO bond levy) through 2015 was particularly strong at 6%. Growth in sales taxes (about a quarter of revenues available for operations) tracks inflation fairly well on average over time. Rapid increases in fare revenues (about half of revenues available for operations) push overall revenue gains above the rate of economic growth as ridership tracks the region's fast growing job market. Fitch does not expect the current revenue and economic boom to continue indefinitely but does expect revenues to continue to outpace the rate of economic growth on average overtime, reflecting solid long-term population and ridership trends. The district's board has also approved multi-year fare increases (2014 to 2020) that are tied to the consumer price index, but the bulk of recent growth has been driven by underlying increases in demand.
The district has satisfactory revenue raising flexibility due to strong fare box recoveries that offset a lack of independent legal ability to raise taxes. BART is unusual among urban public transit agencies in that fares cover a very high proportion of operating expenses (about three-quarters in recent years). The district's elected board has the authority to increase fares without outside approval and has regularly offset revenue losses through fare adjustments. For instance, a 10% increase in fares would fully offset the revenue loss generated by the Fitch Analytical Sensitivity Tool in a 1% decline in
While BART's revenue framework is generally judged to be a credit strength due to strong natural growth of revenues and satisfactory revenue raising flexibility, the district does have significant exposure to outside funding that is beyond the control of the district, including significant funding for capital from local transit funding agencies, the state of California and the federal government. This is not unusual for transit agencies, but Fitch's assessment of the revenue framework could be reduced if the district's access to intergovernmental aid declines on a sustained basis.
Expenditure Framework
The primary drivers of BART's spending are capital expenditures and labor costs. Fitch expects spending to keep pace with above-average revenue growth due significant capital spending pressures. Other components of spending, particularly labor, are likely to track inflation more closely, though rising benefit costs could add further to cost pressures.
Expenditure flexibility appears solid. The fixed carrying costs of debt service and retiree liabilities are very manageable at 12.5% of spending in fiscal 2015. Fitch expects carrying costs to rise as additional debt is issued but to remain moderate (below 20%) as a percentage of expenditures. The district also benefits from significant spending flexibility due to the ability to temporarily defer pay-go capital spending during downturns or to shift funding strategies from pay-go to debt financing during periods of stress. The district has some (but not complete) control of labor costs. It must negotiate pay and benefits levels with its unionized workforce, but management ultimately controls headcount and may ultimately impose terms after an impasse. District employees retain the ability to strike and have in recent years, forcing management to ultimately offer more favorable terms.
Long-Term Liability Burden
The district's long-term liability burden is low relative to its large economic base and composed primarily of GO bonds, sales tax revenue bonds and a moderate unfunded pension liability. The direct debt burden (including estimated unfunded pension liabilities of about
A variation from the referenced criteria was applied in this analysis. The committee assessed the long-term liability burden via a modification to the debt metrics supporting the long-term liability assessment. The district is a local, tax supported government enterprise. Fitch's credit opinion is that the district debt burden is best analyzed by combining measurement methods typically used in self-supporting enterprises and the approach usually applied to local governments.
Debt is likely to increase significantly over the next decade as the district addresses a backlog of deferred capital needs - including rail car replacement, a major overhaul and expansion of the district's maintenance facilities and upgrades to train control systems. The district has identified about
The district's board has approved a
Operating Performance
The district is well positioned to withstand typical cyclical revenue variability. Fitch believes BART's very strong all-in debt service coverage would decline from the very robust levels of recent years (3.9x coverage in 2015) in a downturn, providing less pay-go funding for capital spending but remaining quite healthy even in a moderate downturn. The district also maintains a strong reserve safety margin to offset short-term cyclical revenue shortfalls. Unrestricted cash and investments equaled of 70% of operating and non-operating expenses (equivalent to 256 days cash). This reserve safety margin equaled about 14x the 5% decrease in revenues that the Fitch analytical sensitivity tool suggests the district may experience in a moderate recession. The FAST estimate is based on an analysis of the districts long-term revenue performance across economic cycles. Fitch expects the district to adjust service levels, fares and capital spending to maintain healthy cash balances through a downturn. The district may also increase debt funding of capital for a period in downturns, which is typical for capital intensive enterprises. The ability to shift between capital funding sources (locally generated pay-go, grants from higher levels of government and use of debt) is a key source of financial flexibility.
The district's budget management at times of economic recovery is mixed with strengths somewhat offset by a track record of deferral of needed capital spending. The district engages in through and conservative budgeting with long-term forecasting that keeps management and policymakers focused on long-term budget balance. It also consistently makes full actuarially determined contributions to pensions and has begun to make meaningful progress in prefunding other post-employment benefit liabilities. It also quickly rebuilds financial flexibility and the reserve safety margin after periods of stress. However, the failure to fully maintain the transit system's capital infrastructure in a state of good repair limits Fitch's assessment of operating performance.
Sales Tax Revenue Bonds
The sales tax revenue bonds are supported by a broad and diverse base of taxpayers across the three BART counties. Sales tax revenues are expected to grow above the level of inflation, but below the level of
Pledged sales tax revenue bonds provide strong coverage of estimated maximum annual debt service at about 4.5x. The excess coverage margin provides a buffer that equals 7.8x the level of the 10% revenue decline that the Fitch analytical sensitivity tool suggests the district's sales taxes may experience in a moderate economic decline. The excess coverage margin equals 4.4x the largest consecutive decrease experienced since 1999 (17.8% over two years in the aftermath of the Great Recession in 2009 and 2010).
The additional bonds test (ABT) for the sales tax revenue bonds provides a much narrower coverage cushion equal to about 3.3x the decline the district may experience in a moderate downturn and 1.9x the decline experienced in 2009-2010.
The sales tax revenue bond ratings reflect Fitch's expectation that the district is unlikely to leverage down to the ABT because it needs the excess revenues to pay for operations and to fund planned pay-go capital spending. The district has no current plans to issue additional sales tax revenue bonds. The sales tax revenue bond ratings could come under downward pressure if the district decided to significantly further leverage the sales tax revenue stream.
The sales tax revenue bond ratings are capped at the Issuer Default Rating because they are exposed to the general operating risks affecting the district as a whole. The bonds are not likely to be treated as special revenues under Chapter 9 of the
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and
Applicable Criteria
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
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Endorsement Policy
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Source: Fitch Ratings
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