OREANDA-NEWS. Fitch Ratings has affirmed the 'AA+' rating on the following Commonwealth of Massachusetts federal highway grant anticipation notes (GANs)(accelerated bridge program):

--$100,000,000 federal highway GANs series 2010A;
--$252,545,000 federal highway GANs series 2013A.

The Rating Outlook is Stable.

SECURITY

Massachusetts' federal highway GANs are secured by a lien on all federal highway reimbursements received by the Commonwealth. Additionally, the bonds have a secondary pledge of net Commonwealth transportation fund (CTF) revenues, after the payment of senior CTF bond obligations.

KEY RATING DRIVERS

SOLID DEBT SERVICE COVERAGE: Though the source of bond repayment is intended to come from federal highway receipts, the 'AA+' rating derives from a back-up pledge of CTF revenues, subordinate to payment of CTF bond debt service. The high 4x maximum annual debt service (MADS) additional bonds test (ABT) on senior CTF bonds mitigates overleveraging, strengthening the pledge of remaining receipts available to the federal highway GANs.

DEDICATED REVENUES OFFER LIMITED GROWTH POTENTIAL: Pledged back-up tax revenues have shown relative stability over time, although Fitch believes the revenue stream has limited growth potential absent Commonwealth action to raise rates. The Commonwealth's legislature, the General Assembly, has increased rates periodically, including raising motor fuels taxes in 2013 and raising certain fees in 2014.

BACKUP PLEDGE REQUIRES COMMONWEALTH APPROPRIATION: Use of CTF revenues for federal highway GANs debt service requires Commonwealth appropriation. However, should an appropriation not be provided, monies are frozen until debt service has been funded.

STRONG AND WEALTHY ECONOMY: Massachusetts has a broad and diverse economy with the second highest personal income per capita in the nation.

RATING SENSITIVITIES

DEBT SERVICE COVERAGE: The rating is sensitive to the performance of pledged back-up revenues and the resulting strength of debt service coverage.

LIMITED LEVERAGING OF CTF REVENUES: Additional leveraging of CTF revenues, beyond the current 4x ABT on senior CTF bonds, that weaken the back-up pledge likely would pressure the ratings.

CREDIT PROFILE

The 'AA+' rating on the Commonwealth's subordinate lien GANs reflects Fitch's view of the strong enhancement provided by net revenues from the CTF, after payment of senior gas tax bonds issued under a closed 1994 trust agreement and the CTF revenue bonds. Although bond repayment is intended to derive from pledged federal highway funds, the backup pledge of net CTF revenues mitigates the risk of a disruption of federal funding and is the basis for the 'AA+' rating.

Federal highway GANs have been issued under the current subordinate lien by the Commonwealth since 2010 to support transportation capital needs. Bonds outstanding under a previous, senior GAN lien matured in June 2015.

Coverage of subordinate lien GANs debt service by net CTF revenues would be ample in the event that pledged federal highway fund receipts were insufficient, despite the prior claims of bonds under two outstanding programs to pledged receipts.

Special obligation gas tax bonds outstanding under a 1994 trust agreement have a first claim on 6.86-cents of pledged gas taxes. The last series of 1994 trust agreement bonds was issued in 2005 and the lien was closed in 2010 with the reforms that created the Massachusetts Department of Transportation (MassDOT) and established the CTF. The remaining bonds mature in 2023. Fitch rates the outstanding bonds 'AA+'; Outlook Stable.

Excess gas tax receipts after payment of the remaining 1994 trust agreement bonds, along with other pledged CTF receipts, are available to support CTF revenue bonds, of which approximately $1.6 billion is outstanding. Leveraging of CTF revenue bonds is limited by a 4x ABT. The Commonwealth has the flexibility to create a subordinate lien in the future, but has no such plans at this time.

Net CTF receipts are collected in a holding account for subordinate lien GANs in the event that the Commonwealth Treasurer identifies at the start of the federal fiscal year that federal receipts will provide less than 1.2x coverage. Although transfer to the debt service account requires appropriation, net CTF receipts are not available for any other use until appropriation is made. Issuance of new subordinate lien GANs is limited by a 1.5x ABT by federal funds and a 2.5x ABT by net CTF revenues.

Historically, CTF revenues have exhibited resiliency, but limited growth beyond the impact from statutory rate changes. The majority of revenues derive from the Commonwealth's 24-cent per gallon motor fuel tax, raised from 21 cents in 2013. The rate increase was forecast at the time to generate an additional $95 million annually in pledged revenues. Additionally, several fees collected by the Registry of Motor Vehicles are deposited to the CTF. In 2014, the General Assembly raised registration fees to $60, from $50, which was forecast to generate an additional $25 million annually in pledged receipts. Fitch views the willingness of the Commonwealth to periodically adjust rates to expand CTF resources to be a credit positive.

Highway revenues are constitutionally pledged to transportation purposes, and debt service is a first claim on pledged revenues, with excess funds unable to be used for any transportation purpose until appropriation of sufficient debt service is made.

Massachusetts has a fundamentally strong and wealthy economy. Institutions of higher education and health care are significant and lend stability, in addition to supporting development and innovation in other areas. At 128% of the U.S. average, per capita personal income is the second highest of the states. Education levels are high and population growth has approximated that of the U.S. during this decade, a marked improvement from historical experience and the performance of other states in the region.