Fitch Rates MARTA, GA's Sales Tax Revenue Bonds 'AA-'; Outlook Stable
--$88.175 million sales tax revenue bonds (third indenture series) series 2015B;
--$97.05 million sales tax refunding revenue bonds (third indenture series) series 2015C.
The bonds are expected to price via competitive bid on Nov. 5. Proceeds of the series 2015B bonds will be used for various capital projects while proceeds of the series 2015C bonds will refund a portion of outstanding series 2007B bonds for debt service savings.
In addition, Fitch affirms the following ratings:
--Approximately $1.7 billion sales tax revenue bonds (third indenture series) at 'AA-'.
The Rating Outlook is Stable.
The bonds are secured by a third priority lien on sales tax receipts from the levy of a 1% sales tax within Fulton (GOs rated 'AA+' with a Negative Outlook by Fitch) and DeKalb ('AA-'/Stable Outlook) Counties and the city of Atlanta (GOs rated 'AA+'/Stable Outlook) (original sales tax) and a first priority lien on receipts of a 1% sales tax levied in Clayton County. The indentures governing the first two liens for the original sales tax are closed to additional new money bond issues. Also pledged are portions of certain title ad valorem taxes on motor vehicles (TAVT Receipts) that are deposited with the trustee. No reserve fund is provided for the series 2015B and 2015C bonds.
KEY RATING DRIVERS
STRONG DEBT SERVICE COVERAGE: Gross debt service coverage by fiscal 2015 pledged revenues remains ample at nearly 2.5x, buoyed by five straight years of sales tax growth, the addition of sales taxes from Clayton County and TAVT revenues.
EXPANDED PARTICIPATION: Last November, voters in Clayton County authorized the county's participation in MARTA's operations. The 1% sales tax was first imposed in March, roughly when MARTA commenced bus service to the county and is partially reflected in fiscal 2015 sales tax receipts.
BROAD-BASED UNDERLYING ECONOMY: The regional Atlanta economy is characterized by diverse employment opportunities, above average wealth indices and a growing population. Employment continues to recover from the most recent recession.
ESSENTIAL SERVICE: MARTA provides essential transportation services to Atlanta and immediately surrounding Fulton, DeKalb and Clayton counties with an average of over 433,000 passengers per day.
IMPROVED FINANCIAL OPERATIONS: System finances have shown marked improvement over the past three fiscal years but remain challenged by a weak operating revenue base that lacks state financial support and places heavy reliance upon sales taxes to fund operations.
RIDERSHIP TURNS AROUND: System ridership grew for the first time in six years as system enhancements and an improved economic climate boosted usage. Even without the addition of Clayton County riders, overall ridership expanded.
RELIANCE ON DEBT FOR CAPITAL NEEDS: MARTA's ten-year capital plan relies upon debt to finance the majority of capital projects through 2025, a dependence stemming from the paucity of dedicated capital funding sources available to the authority. Scheduled retirement of significant outstanding debt over this period partially mitigates the overall increase in authority debt.
SALES TAX DECLINES: Significant deterioration in sales tax collections which reduces coverage and further pressures operations could lead to a rating downgrade.
SHIFTS IN FINANCES: A downturn in financial performance would be viewed unfavorably. Conversely, measures which result in a lower cost structure or create new sources of revenues--and materially increase financial flexibility on a sustained basis--may result in positive rating action.
MARTA operates the ninth largest rapid transit system in the United States, which serves primarily the city of Atlanta and Fulton and DeKalb Counties (core service area). The main components are a fixed-rail transit system and a bus system. The fixed-rail passenger system commenced in 1979 and consists of 48 miles of rail lines and 38 stations. Bus service includes 550 buses and 211 mobility vans operating in MARTA's service area.
In addition, MARTA provides bus service to Clayton County, which voted to join MARTA levy the 1% MARTA sales tax last November. Bus service began last March coinciding with the first levy of the sales tax within Clayton's borders. Currently there are seven bus and van routes within the county. Eventually, MARTA will extend rail service into Clayton. MARTA officials state that operating and capital costs associated with Clayton County operations will be funded exclusively from county-derived sales taxes, fare revenues and dedicated federal grants.
In fiscal 2015, MARTA transported approximately 136 million passengers, representing the first increase in year-over-year passenger counts in six years. Officials cite an expanding economy, changing demographic trends and improved service as factors in the boost in ridership. Clayton County's utilization of MARTA in fiscal 2015 had a negligible impact on overall ridership.
SALES TAX DEDICATED FOR RAPID TRANSIT
Pursuant to an amended contract between the authority and its members, Fulton, DeKalb and Clayton Counties and the city of Atlanta are obligated to levy a sales and use tax (sales tax) for rapid transit purposes. The sales tax is levied at the rate of 1% until expiration, currently 2057. All outstanding bonds including this bond issue mature by 2045.
The sales tax is collected by the state and then assigned by the participating counties to be paid directly to the bond trustee. The authorizing legislation limited the use of sales tax receipts for operations to 50% (the 50/50 rule). However, last year, the state legislature permanently waived the 50/50 rule. Despite the waiver, authority policy limits debt service to a maximum of 45% of sales tax collections. Fitch's coverage calculations continue to treat the entire amount as pledged.
SUSTAINED SALES TAX GROWTH
Fiscal 2015 sales tax collections totaled $372.4 million, for a sizable 7.7% increase over fiscal 2014 collections. Excluding Clayton County partial year collections, sales tax receipts would still have grown by a healthy 4.3%. This represents the fifth consecutive year of sales tax growth, aggregating to 13.5% over this period. Fiscal 2016 three month sales tax collections are up over 16% year over year, but only 1.4% without Clayton County.
In March 2013, the state replaced the sales tax on vehicle purchases with a title ad valorem tax (TAVT) on vehicle purchases. A 2015 amendment to the TAVT Act requires Fulton and DeKalb Counties to pay the authority an amount equal to sales taxes attributable to motor vehicles collected by those counties in 2012, or about $23 million annually. With this transaction, MARTA has pledged the TAVT revenues to bond repayment.
STRONG DEBT SERVICE COVERAGE
Fiscal 2015 sales tax coverage of MARTA's revenue bonds, including the current offering, remains strong at 2.4x MADS. Sales tax revenues from Clayton County have recently been incorporated into the security structure, pledged to bond debt service. Fiscal 2016 full year Clayton County sales tax receipts are budgeted at $48 million, or about 11% of total budgeted sales taxes.
MARTA debt consists of sales tax revenue bonds issued under multiple liens. Bonds outstanding under the closed first and second lien indentures total about $251.4 million (not rated by Fitch). Since 2004, MARTA has been issuing bonds under the third lien. Outstanding third lien debt totals $1.7 billion. The third lien bonds will ascend in lien status upon final maturity of first and second lien bonds in 2021 and 2025, respectively.
Additional issuance is restricted by an adequate two-pronged additional bonds test requiring debt service coverage of 2.0x from historical (recently changed from 1.5x) and 2.0x from projected sales tax revenue. However, MARTA's need of sales tax revenues to fund operations serves as a practical brake against over-issuance of debt.
CAPITAL NEEDS FUNDED MOSTLY WITH DEBT
The authority has identified in its 10-year capital improvement plan approximately $2.6 billion of capital needs. The system is relatively mature so capital needs focus mainly on safety improvements, equipment replacement and rehabilitation. Proposed funding sources include about $1.4 billion of debt payable from sales taxes. Narrow operating margins result in limited resources for pay-go capital spending.
Management is hoping that a proposed additional half-cent sales tax to be levied in MARTA's current service area will receive approval at the state's next legislative session. Proceeds from the additional sales tax, if approved, would enable the authority to execute its long-planned expansion.
System utilization turned upwards in fiscal 2015 after five consecutive years of decline. The increase in ridership totaled 5.3% from the prior year due to a combination of service upgrades, a stable fare structure, significant conference activity and fewer weather-related down days. The first three and one half months of Clayton County ridership had only a negligible effect upon system usage.
The authority originally planned to raise fares in fiscal 2014 but has delayed the fare hike until fiscal 2018. The extent of the fare rise will be based on consumer price index growth in fiscals 2016 and 2017. Fitch's concern about the long length of time between fare increases is tempered by the authority's plan following fiscal 2018 for modest fare increases every two years. More incremental fare hikes should maintain ridership while providing modest but frequent growth in fare revenues.
FINANCES IMPROVE BUT REMAIN PRESSURED
MARTA is projecting an operating surplus for fiscal 2015 of approximately $34.8 million (less depreciation), representing the third consecutive year of surplus operations following years of deficits. The positive results were driven by higher sales tax collections and fare revenues due to ridership gains combined with strict cost controls. Cost containment measures include negotiated lower power costs, improved internal controls, streamlined and automated contracts and procurement process. Consequently, operating expenses remained flat in fiscal 2015. A new labor agreement signed late last year grants workers a 3% wage increase in each of the next two years in exchange for higher worker contributions for healthcare and concessions on workplace rules.
Management is projecting another small operating surplus of approximately $15 million for fiscal 2016, buoyed by sizable sales tax growth given a full year of Clayton County receipts and below budget spending (including an increase in personnel).
Recent state actions have served to add some flexibility to the authority's limited and restrictive revenue structure. Last year, the state legislature eliminated the 50/50 rule which hindered management discretion. MARTA has historically received no state support, the only major mass transit system in the nation not receiving dedicated state funding. This year, however, the state is providing some monies for capital which, together with the other measures, signals a more favorable state disposition towards MARTA.
Nevertheless, MARTA is still hampered by an elastic demand structure that renders it difficult to raise fares sufficiently to offset funding gaps elsewhere. Moreover, MARTA's dependence on debt for its capital program creates significant fixed costs that further limit flexibility.
Positively, officials have stepped up efforts to promote transit-oriented development opportunities on MARTA-owned land near rail stations, which is expected to provide additional diversification to the authority's revenue base. Moreover, the authority does have limited ability to delay capital projects should revenues fail to meet expectations.
DIVERSE AND BROAD-BASED SERVICE AREA ECONONMY
Fulton, DeKalb and Clayton Counties have a diverse economic base benefiting from Atlanta's role as the state capital and center of a broad regional economy. The area serves as a corporate headquarters for large employers including Coca-Cola, Bell South, Home Depot, and Delta Air Lines. Also located within the service area is the U.S. Centers for Disease Control and Prevention and Emory University. Hartsfield-Jackson International Airport (Hartsfield), the world's busiest airport, is located in Fulton and Clayton Counties. In addition, Mercedes Benz will be moving its U.S. headquarters to the Atlanta area and State Farm is developing one of its national headquarters attached to the Dunwoody MARTA station.
Estimated 2014 population within the service area is about 2 million. The City of Atlanta, with a population of approximately 448,000, accounts for about 22% of the total. Service area population growth over the past decade has been modest, increasing at an average annual rate of slightly more than 1%. Atlanta experienced a negligible population rise over this period.
MARTA's service area was hit hard by the last recession, with a cumulative job loss of more than 14% between 2007 and 2010. In 2010, unemployment rates in Fulton, DeKalb and Clayton Counties soared to 10.5%, 10.8% and 13.5%, respectively. Atlanta's unemployment rate that year was over 11%. Since 2010, the area has experienced a significant gain in jobs but employment, with the exception of Fulton County, remains below 2007 levels. A healthy 1.7% increase in employment in July 2015 from the prior year has lowered unemployment rates in Fulton, DeKalb and Clayton Counties to 6.3%, 6.3% and 7.9% respectively - all above the national unemployment rate of 5.6%.
Wealth indices in Fulton County are significantly above the state and national averages, with 2013 per capita income at 146% and 131% of the state and national averages, respectively. Income levels in DeKalb County are below those of Fulton County but above those of the state and on par with the national averages. Clayton County is not as affluent as the other two counties with per capita income at 71.3% and 63.8% of the state and national benchmarks, respectively. Clayton County's individual poverty rate of 24% is well above average. Since 2011, income metrics within MARTA's service area have dropped relative to those of the nation.