OREANDA-NEWS. Fitch Ratings has assigned a 'AA' rating to the following Utah Transit Authority (UTA), UT sales tax revenue bonds:

--$129 million subordinate sales tax refunding bonds series 2016.

The new bonds are scheduled to sell via negotiation on or about Aug. 11, 2016. Proceeds will refund the district's outstanding series 2013, 2014A and 2014B sales tax revenue bonds.

In addition, Fitch has assigned an Issuer Default Rating (IDR) of 'AA' to the authority and taken the following rating actions on outstanding sales tax revenue bonds:

--$943.5 million outstanding subordinate lien sales tax revenue bonds upgraded to 'AA' from A+;

--$1.1 billion outstanding senior lien sales tax revenue bonds affirmed at 'AA'.

The Rating Outlook is Stable.

SECURITY

The senior and subordinate bonds are payable from a first and second lien, respectively, on certain gross sales and use taxes generated within the service area. The revenues are pledged through interlocal agreements with Salt Lake and Utah counties through at least 2045, which is beyond the final maturity date of the bonds. Pledged revenues also include interest subsidy payments received by UTA from the U. S. pursuant to the issuance of Build America Bonds (BABs). Some bonds are additionally payable from debt service reserve funds (DSRFs) met through a combination of sureties and cash. The 2016 bonds do not include such DSRFs.

KEY RATING DRIVERS

The 'AA' IDR reflects the authority's exceptionally strong gap closing capacity in economic downturns, an unusually strong economic base, solid expenditure flexibility and strong revenue growth prospects. These credit strengths are balanced against a very limited legal ability to raise revenues and the elevated debt burden of a relatively young mass transit system.

The sales tax revenue bond ratings reflect strong growth prospects for revenues and sound debt service coverage. The upgrade of the subordinate lien sales tax revenue bond rating reflects implementation of Fitch's revised U. S. Tax-Supported Rating Criteria, which was released on April 18, 2016. The revised criteria introduced scenario analysis into the rating process and specifically focuses on the growth prospects for revenues and expected minimum coverage levels. The sales tax revenue bond ratings are capped at the authority's IDR because they are exposed to the general operating risks affecting the authority as a whole. In Fitch's opinion, the bonds are not likely to be treated as special revenues under Chapter 9 of the U. S. bankruptcy code. As such, the ratings on the senior and subordinate lien bonds are the same despite the substantially higher coverage for the senior lien bonds.

Economic Resource Base

The Utah Transit Authority provides rail and bus services to about 80% of the population of the state of Utah (IDR of 'AAA' /Stable Outlook) across a broad service area that covers 1,400 square miles in six counties. The service area covers Utah's Wasatch Front, linking the city and county of Salt Lake (IDR of 'AAA'/Stable Outlook) with fast-growing suburban areas including in Box Elder, Davis, Tooele, Utah and Weber counties. The authority's economic resource base is broad and diversified with positive long-term growth prospects. The region and the authority benefit from solid incomes, low unemployment rates and strong population growth.

Revenue Framework: 'a' factor assessment

UTA's revenue framework is dominated by sales taxes. Revenue growth has been consistently strong at above the level of both inflation and U. S. economic growth with brief downturns followed by rapid recovery. However, the authority has very limited revenue raising flexibility with no independent taxing authority and limited practical ability to adjust fares.

Expenditure Framework: 'aa' factor assessment

Expenditure growth is expected to remain at or below the authority's strong revenue growth. Expenditure flexibility is adequate to maintain balanced operations across business cycles. While fixed costs of debt and pensions are elevated, the authority benefits from a flexible labor framework that allows strong control of labor costs and the ability to adjust service levels as needed.

Long-Term Liability Burden: 'a' factor assessment

Debt is high relative to cash flows, but low relative to the large economic base.

Operating Performance: 'aaa' factor assessment

The authority is very well positioned to withstand typical cyclical stresses with a strong unrestricted cash position offsetting moderate revenue volatility in the context of the authority's midrange inherent budget flexibility. Budget management in times of recovery is strong with conservative long-term financial and capital planning.

RATING SENSITIVITIES

Operating Performance Drives IDR: The Issuer Default Rating could come under downward pressure if the district's financial performance weakens significantly and on a sustained basis. A temporary, moderate decline in revenues would be expected in recessionary periods and would not pressure the rating so long as the authority took appropriate action to stabilize revenues at a healthy level. Significant and unexpected increases in leverage could also put downward pressure on the rating. The IDR is unlikely to rise due to debt levels and limited revenue raising flexibility.

Economy Drives Sale Tax Bonds: The sales tax revenue bond ratings are sensitive to declines in economic activity and sales tax revenues. A sustained and unexpectedly large decline in sales tax revenues or further leveraging of sales tax revenues could put downward pressure on the ratings. Typical cyclical fluctuations should not pressure the rating.

CREDIT PROFILE

The Wasatch Front's economy is dynamic and diverse. The authority's service area is the cultural and economic heart of the state and is home to major governmental, defense, healthcare, retail, and educational employers. Overall employment statistics suggest a diverse economy driven by service-industry employment, including professional and business services, technology companies and retailers. Population gains are driven by very high birth and family formation rates, which have proven a stable source of population gains and economic expansion.

The region's growth has prompted increasing investments in public transit infrastructure with the UTA completing major investments in light rail and suburban commuter rail systems over the past decade. The authority's ridership has expanded by 65% since 2000 to 46.7 million passenger trips in 2015. The system is increasingly important to the region's economy with average daily ridership equaling about 11% of employment. Rail developments have also spurred transit-oriented development projects in cities and towns across the region with higher density mixed-use projects being built or planned near many rail stops, including some with active involvement from the authority.

Revenue Framework

Overlapping local governments provide the bulk of UTA's funding via sales taxes levied on behalf of the authority. Like most U. S. transit agencies, passenger fares provide a fairly limited proportion of overall transit funding with fares covering just 22% of operating expenses in 2015. Sales taxes provide about 80% of revenues excluding capital grants. Reliance on sales taxes is not uncommon for a U. S. transit agency, particularly agencies in the earlier years of their development. Public funding allows policymakers to incentivize transit use and maintain affordability while spreading the cost of broader public policy benefits, such as reductions in road congestion and air pollution, across the entire population.

UTA's revenue growth is very strong with total revenues outpacing both inflation and U. S. GDP growth with a compound annual growth rate of 6.9% over the past decade. The rapid pace of revenue growth reflects increases in tax rates and fares as well as underlying growth in ridership and taxable sales. Fare revenues have outpaced sales tax revenue gains over the period, reflecting both fare increases and service expansions. Even absent policy adjustments, Fitch expects revenue growth to outpace economic growth over the coming years, reflecting increases in ridership and continued gains in taxable sales.

The authority's independent legal ability to raise revenues is very limited, and the lack of revenue flexibility is among the main factors constraining the IDR. UTA cannot raise taxes without outside approval by overlapping local governments and/or the state of Utah. The authority can raise fares without outside approval, but Fitch does not believe it would be practical for the authority to offset the typical cyclical swings in sales taxes with fare increases. The Fitch Analytical Sensitivity Tool (FAST) suggests the authority may see a sales tax revenue decline of about 3.7% in a moderate U. S. recession with a 1% decline in U. S. GDP. A 10% increase in fares would only cover about a 40% of the resulting budget gap. Fare-raising flexibility is constrained by affordability concerns. Management also reports that it is constrained in making fare adjustment because many UTA riders can opt to drive instead of taking transit when the economics favor driving.

Expenditure Framework

UTA's expenditure profile is dominated by energy to power trains and busses, labor costs, debt service and capital spending. The natural pace of spending growth is likely to remain in line with revenue growth. Pension contributions have been rising at a rapid pace in recent years, but appear to have reached a level that reflects full actuarial funding. Debt service costs are rising, but are unlikely to rise faster than revenues, given current borrowing plans. Labor costs tend to track inflation well. Energy costs are more unpredictable. They have been falling with oil prices in recent years, but are inherently volatile. Fitch expects the authority to face periods of spending pressure due to rising energy costs, but believes the authority's strong revenue growth positions it well to withstand periods of energy price increases.

Expenditure flexibility is solid. The authority has solid ability to adjust service, staffing and compensation levels, even though its fixed cost burden is elevated as a leveraged, capital-intensive enterprise. The carrying cost of inflexible pension and debt service costs is elevated at almost 30% of expenditures (operating expenses plus debt service).

Fitch believes that the authority has a significant degree of control over operating expenses and capital spending. The authority's collective bargaining framework is flexible. About two-thirds of the authority's workforce is unionized. Management retains full control over staffing and compensation levels of the non-union workforce. Management retains adequate control over staffing levels and compensation levels of unionized workers because it may impose economic terms in the rare instances where it cannot reach agreement with labor.

UTA also maintains solid control over service levels. In downturns, it can reduce hours and/or frequency of service on bus and train lines, reducing both labor and fuel costs. The authority has a strong track record of making cuts in a disciplined manner, having managed the revenue losses of the Great Recession largely through spending adjustments. The authority cut bus service by 6% during the downturn and laid off administrative staff to maintain solid financial performance across the period. In addition, the authority's significant, ongoing pay-go capital investments can be scaled back somewhat during downturns.

Long-Term Liability Burden

The long-term liability burden is quite elevated in terms of system cash flows, but moderate relative to the large economic base. Debt and unfunded pension liabilities (adjusted for Fitch's 7% rate of return assumption) are high at about 21.6x 2015 funds available for debt service and 74% of net plant assets. The liability burden is moderate relative to the large economic base at just 2.5% of personal income.

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.

Fitch expects the debt burden to moderate relative to cash flows and personal incomes over the next five years with no near-term new money debt issuance planned and gradual amortization. Economic growth should improve debt ratios significantly over time as the authority grows into the debt burden created by the recent completion of major capital projects, but Fitch's assessment of the debt burden as elevated, but still moderate is unlikely to change until the authority reaches a period of rapid debt amortization in the next decade. Amortization in slow with just 16% of debt repaid over the next decade. Principal repayment escalates thereafter.

The authority plans to repay debt more rapidly as its capital spending slows with the completion of major projects and as the savings from a large refunding in 2015 accrue. The authority has set aside about $10.5 million for debt prepayments and plans to continue to set aside savings from the refunding to reduce the debt burden. Management expects the debt prepayment fund balance to grow to $100 million by 2021 and to begin calling bonds in 2022. Given the current debt burden, any significant additional borrowing could put downward pressure on the IDR, and meaningful reductions in the debt burden would be positive for credit quality.

Management believes it has largely completed the backbone infrastructure of the regional mass transit system and is shifting its attention from growth and expansion projects to system maintenance and renewal. Management has prudently chosen to limit new expansions to projects that local cities and counties are willing to provide funding to support. Fitch expects the authority to carefully manage continued pressures for service expansions to limit impact on leverage metrics and to maintain adequate funding both to maintain the system in a state of good repair and to support operations.

Operating Performance

The authority is well positioned to withstand typical cyclical revenue declines due to high reserve levels that offset UTA's sales tax revenue volatility. Unrestricted cash and investments equaled a solid 193 days cash, or 52.8% of operating expenses, at the end of fiscal 2015. That's very strong relative to the 3.7% revenue decline that the Fitch Analytical Sensitivity Tool suggests the authority may experience in a moderate U. S. recession with a 1% decline in national GDP. The 3.7% decline scenario is based on Fitch's analysis of taxable sales levels in the authority's service area, a proxy for underlying revenue performance. Fitch does not believe the system's actual revenue history (which suggests no cyclical declines) provides a meaningful stress scenario because tax rate adjustments overwhelm underlying performance. Fitch expects cash balances to decline somewhat in downturns as the authority adjusts capital spending, fares and service levels to close budget gaps. Higher than typical reserves are necessary to maintain the rating at its current level given the authority's limited revenue raising flexibility.

Budget management in times of recovery is very strong with no meaningful deferrals of necessary spending. The authority pays its full actuarially determined pension payment. It is proactively planning to meet the relatively young system's maintenance needs over time, and it conducts thorough long-term financial and capital planning.

Sales Tax Revenue Bonds

The sales tax revenue bonds are supported by a broad and diverse economic base. Sales tax growth prospects are very strong, reflecting taxable sales trends and expansion in the overall economy.

Senior lien debt service coverage was very robust relative to maximum annual debt service ( MADS, which occurs in 2036) at 2.5x in 2015, providing an excess coverage cushion that could withstand the 3.7% stress scenario 16x and the largest historical consecutive decline of 14.5% 4x.

Subordinate lien coverage is tighter at 1.3x MADS (which occurs in 2031), but MADS is based on a debt service schedule that the district expects to adjust by prepaying debt over the next decade or so. UTA has actively begun to set aside funds to prepay debt and has identified ongoing sources of funding to level out the debt service schedule. Assuming prepayments (or restructuring) eliminates a four-year jump in debt service, MADS coverage would rise to about 1.5x, providing a coverage cushion that would withstand the 3.7% stress scenario about 8.7x and the 14.5% largest aggregate decline twice. Given the distance to MADS, expectations for solid growth in sales tax revenues and plans to reshape the debt service schedule, Fitch expects subordinate lien coverage to improve significantly before the expected peak in debt service and to remain healthy across the repayment period.

The subordinate lien additional bonds test remains fairly weak at 1.2x. The rating assumes that the district will not significantly further leverage the revenue stream, based on district debt issuance plans and the district's need for excess sales tax revenues to support operations. The sales tax revenue bond ratings are capped at the IDR because the pledged revenues do not appear to be legally insulated from the overall credit risks affecting the issuer and could be subject to an automatic stay in the unlikely event that the district declared bankruptcy.