OREANDA-NEWS. Fitch Ratings assigns a 'AA' rating to the following grant anticipation notes (GANs) issued by the Arizona State Board of Transportation (ATB):

--$77,545,000 grant anticipation refunding notes, series 2016.

The par amount is subject to change upon final sale.

The notes are scheduled to be offered by negotiated sale on or about Sept. 7, 2016.

In addition, Fitch has affirmed the 'AA' rating on approximately $142,000,000 in outstanding GANs.

The Rating Outlook is Stable.


The GANs are backed by pledged future federal aid under grant agreements between the Arizona Department of Transportation (ADOT) and the Federal Highway Administration (FHWA). Available funds deposited in the State Highway Fund (SHF) provide additional security.


RATING DRIVEN BY STATE TRANSPORTATION REVENUE BACK-UP: The GANs are backed by a first lien on Arizona's federal highway funds with additional security provided by a back-up pledge of SHF balances, subordinate to the payment of debt service on state highway revenue bonds. Pursuant to Fitch's criteria for rating GARVEE bonds, the agency generally assigns a rating consistent with the higher of the federal grant or the backup pledge. Currently, 'A+' is the highest rating assigned to standalone grant anticipation revenue vehicle (GARVEE) bonds for which federal Highway Trust Fund (HTF) revenues are the only pledged revenue source, reflecting Fitch's view of the strength of the federal program. Therefore, the 'AA' rating on Arizona's GANs reflects Fitch's view of the strong enhancement provided by the availability of SHF balances for debt service.

SOLID TRANSPORTATION REVENUE GROWTH PROSPECTS: The SHF receives a statutory distribution of motor vehicle fuel taxes and other transportation-related taxes and fees deposited to the highway user revenue fund (HURF). Source taxes and fees are economically sensitive in general, and the largest source, motor vehicle fuel tax, is expected to be a steady but slowly growing revenue source over time.

FREQUENT STATE HIGHWAY FUND DIVERSIONS Distributions to the SHF are supported by constitutional requirements that most state highway user revenues only be used for transportation-related purposes, but this still allows for transfers or diversions to transportation spending outside the SHF. Though one-time and multi-year distributions to support transportation activities outside the SHF have reduced SHF balances available for the backup pledge, balances remain ample.

LIMITS ON LEVERAGING: Additional GANs leverage is limited by a strong additional bonds test (ABT) of 3.0x maximum annual debt service (MADS) based on federal aid revenues. Additional leverage of highway revenue bonds that have a senior claim on the SHF is limited by 4x and 3x MADS ABTs for senior and subordinate highway revenue bonds, respectively.


REDUCTION IN AVAILABLE BACK-UP REVENUES: A significant decline in Fitch's expectations for available SHF balances could put pressure on the rating.


ADOT operates and administers the state highway system under the policy directives and debt issuing authority of the board. The department is responsible for 6,800 miles of highways and 4,787 bridges across the state of Arizona. In addition to the GANS, state transportation debt includes highway revenue bonds backed on a senior basis by SHF revenues (which include motor vehicle fuel taxes, registration and license taxes and fees) and excise tax revenue bonds backed by Maricopa County transportation-dedicated excise tax revenues.


ADOT has entered into grant agreements with the FHWA relating to the outstanding GANs, by which the FHWA has agreed to make payments to ADOT for eligible project costs to the extent federal funds are available, in amounts equal to GAN debt service. ADOT bills the FHWA for the amount of debt service in advance of the debt service payment date. All grant revenues under any grant agreement relating to the outstanding GANs are deposited with the State Treasurer, who is required to deposit such grant revenues directly into the GAN Fund.

Debt service on the GANs is payable from federal aid revenues related to each GANs series. Since the grant agreements establish only a sum sufficient payment stream, the board has broadened the definition of pledged revenues to include all federal aid revenues received by ADOT and, to the extent necessary for currently outstanding and the refunding GANs, available SHF resources.

Previously, other GANs were outstanding for certain projects that additionally benefited from the backup pledge of available Maricopa County transportation-dedicated excise tax revenues to the extent that GANs proceeds were used for eligible projects, although these series have now matured; future issuance supporting Maricopa County projects would rely on the additional backup.

The GANs resolution requires that prior to the debt service due date, to the extent necessary to pay debt service after accessing available federal aid and any remaining notes proceeds, the state treasurer transfers available moneys from the SHF to the GAN Fund. Available SHF balances are exclusive of any funds pledged to outstanding highway revenue bonds.


The SHF is funded chiefly by statewide fuel taxes and other transportation-related user fees via a statutory distribution from the HURF. Distributions to the SHF are intended to equal 50.5% of HURF revenues, although the ultimate distribution is affected by state legislative transfers and diversions for certain other purposes; as of fiscal 2016, SHF distributions equaled 43.4% of HURF deposits. The SHF had a balance of about $547 million as of fiscal 2016 year-end.

ADOT projects continued near-term annual growth for HURF revenues (averaging about 3% annually) through fiscal 2020, which appears reasonable given state economic growth trends, and assuming no additional changes in legislative distributions. Excluding federal funds, available fiscal 2016 SHF balance provided 3.6x coverage of MADS for GANs and the senior outstanding highway user revenue bonds, on a combined basis. Fitch expects coverage to remain ample throughout the economic cycle.