OREANDA-NEWS. Fitch Ratings has affirmed the following obligations of the Riverside County Transportation Commission, California (RCTC) at 'AA':

--\$462.2 million sales tax revenue bonds (limited tax bonds) 2013 series A;
--\$185.4 million outstanding limited sales tax revenue bonds, series 2009A, B, and C and series 2010A;
--\$112.4 million outstanding limited sales tax revenue bonds, series 2010B (taxable build America bonds);
--Limited sales tax revenue bank bonds.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are secured by an irrevocable first lien pledge of the countywide 2009 Measure A 1/2 cent sales tax revenues, net of state collection expenses, and swap revenues.

KEY RATING DRIVERS

GROWTH IN REVENUES AND COVERAGE: The Positive Outlook reflects continued growth in sales tax revenues, maximum annual debt service (MADS) coverage, and expectation of additional leveraging within the Measure A voted debt limit. MADS coverage reached 2.8x based on projected fiscal 2015 pledged sales tax revenues.

ADEQUATE SECURITY STRUCTURE: The bonds' legal provisions are adequate, with a satisfactory 1.5x MADS additional bonds test (ABT) and a first lien on gross revenues, which represent a large and diverse revenue stream that nonetheless has historically been volatile. There is no debt service reserve fund; though a notching distinction is not applied at the 'AA' rating level.

DIVERSE ECONOMY IN RECOVERY: The county's economy is large, diverse, and well-situated for growth given its proximity to the Los Angeles and Orange County metro areas with competitive home prices and ample developable land. The housing-led recession severely affected the region, but recent data concerning housing, employment, and sales tax revenues suggest the economy is continuing to recover at a moderate pace.

MINIMAL OPERATIONAL RISKS: The commission acts predominantly as a capital funding and coordination vehicle and does not operate any transit systems. As such, Fitch views the commission as exposed to minimal operating risks.

SOLID COMMUNITY SUPPORT, ESSENTIALITY: The system enjoys a track record of voter support in approving and extending sales tax measures and the commission's debt ceiling. Fitch views the commission's community essentiality as moderate to strong given the region's dependence on highways for economic activity.

SOUND MANAGEMENT PRACTICES: The commission's management team is well tenured and has implemented prudent policies, including a cap on administrative expenditures, full funding of the commission's small other post-employment benefits (OPEB) annually required contribution (ARC), and a sound 2x MADS minimum internal coverage requirement on the sales tax revenue bonds.

RATING SENSITIVITIES

CONTINUED POSITIVE REVENUE TREND: Continued growth in sales tax revenues would likely lead to an upgrade given the limitation on additional borrowing under the voted debt limit.

CREDIT PROFILE

The commission oversees funding and coordination of all public transportation services within Riverside County, including Metrolink and various local agencies. With a small administrative staff and a narrow funding and coordination role, RCTC has limited exposure to operational risks from related transit agencies or the commission itself.

ECONOMIC STRENTHENING CONTINUES

Measure A sales tax revenues derive from a large and diverse base and are in their fifth year of improvement. The recession caused a severe cumulative decline of 27% from 2006-2010, but revenues have increased in each year since hitting bottom and are projected to reach an all-time high in fiscal 2015. Revenues increased by 7.8%, 9.4%, 10.7%, and 4.6% in fiscals 2011-2014, respectively, and projections show a 6.8% increase in fiscal 2015. The commission has budgeted for a more modest 1.8% increase in fiscal 2016. The recovering economy and recently positive trends in the housing market, if sustained, would bode well for sales tax revenues moving forward.

GOOD DEBT SERVICE COVERAGE

Estimated fiscal 2015 net Measure A sales tax revenues of \$167 million cover MADS a solid 2.76x (the BABs subsidy on outstanding bonds is treated conservatively as a revenue and not an offset to debt service in all calculations herein). The debt service schedule is level through fiscal 2017 at \$22 million then jumps to \$57.5 million in fiscal 2018 and remains around this level through fiscal 2039. Annual debt service (ADS) coverage stands up well under severe scenarios that Fitch does not expect to transpire. ADS coverage could withstand, for example, an annual 4.6% sales tax revenue decline through bond maturity in fiscal 2039 with coverage remaining at or above 1.0x in each year assuming no BAB subsidy. Further, Fitch estimates that sales taxes would need to decline by an extreme 65% for MADS coverage to fall to 1.0x again assuming no BAB subsidy. By comparison, the cumulative four-year sales tax contraction during fiscal years 2006-2010 amounted to 27.1%.

The Build America Bond series receives a \$3 million annual federal interest rate subsidy. Exclusion of this revenue source lowers MADS coverage to a still solid 2.7x from 2.8x. Federal sequestration resulted in an immaterial loss of federal interest subsidies equal to \$129,700 in fiscal 2013 and \$214,700 in both fiscals 2014 and 2015.

LIMITED FURTHER LEVERAGING EXPECTED

Fitch expects the commission's large capital plan will result in some leveraging over the near-term, with approximately \$100 million sales tax revenue bond issuance expected in 2017, the majority of which will take out an expected \$60 million commercial paper issuance. Additional issuance up to the remaining \$70 million under the Measure A voted debt limit is anticipated over the intermediate to long-term. The commission has a 2x internal MADS coverage policy which Fitch expects it to comply with based on its current debt plans.

The rating would likely be upgraded to 'AA+' after an additional year or two of moderate sales tax growth. The upgrade would assume the issuance of the full amount of additional debt allowed under the voted limit and a reasonable stress to pledged revenues and still result in Fitch estimated MADS coverage of over 2x.

MODERATE VARIABLE RATE DEBT EXPOSURE

The commission's variable rate exposure equals a moderate 16% of its debt portfolio. The series 2009 variable rate bonds carry a short-term rating of 'F1' based on liquidity provided through a standby bond purchase agreement with Bank of Tokyo, which expires in March 2019. The commission is party to synthetic fixed rate swap agreements with Deutsche Bank and Bank of America for this issue. As of June 2, 2015, the termination value of the swaps was a negative \$22.2 million.

MIXED ECONOMIC CONDITIONS; LONG-TERM GROWTH POTENTIAL

The populous western portion of the county is within commuting distance to the large economic centers of Los Angeles and Orange counties. Prior to the housing-led recession, population growth was very high, growing from 1.5 million in 2000 to 2.1 million in 2007 and slowing considerably thereafter.

The county's economy is large, diversified, and well-situated for long-term growth. These strengths are offset, however, by below-average income levels, and a volatile housing market and tax base which, nonetheless, have shown significant improvement over the past two years. County per capita income levels lag the state and nation at 80% and 84% of their averages, respectively. Household income levels are higher, reflective of larger household sizes, and poverty rates are moderate. The county-wide unemployment rate is down to 6.6% as of March 2015 on strong year-over-year employment growth.

The county's housing market was one of the hardest hit in the nation, with average home values falling 55% from their 2006 peak, according to Zillow. Prices have since rebounded somewhat, but remain about 29% below the peak. These severe price declines caused a cumulative multi-year property tax base contraction of 15.7% from fiscal years 2009-2013, followed by a cumulative 12% increase through fiscal 2015.

Pre-recession growth was spurred by the area's housing affordability, ample developable land, proximity to other employment centers, and location along a major distribution route. As the economy and housing market continue to recover, Fitch believes these attributes will continue to drive population growth going forward, though not to the extent of pre-recession years.