Fitch Rates Massachusetts School Building Auth's $1B 2015C & D Sales Tax Rfdg Bonds 'AA+'
--$713,875,000 senior dedicated sales tax refunding bonds 2015 series C;
--$289,765,000 senior dedicated sales tax refunding bonds 2015 series D.
The par amounts are approximate and subject to change prior to final sale.
The series C bonds are scheduled to be sold through negotiated sale on or about Nov. 16, 2015. The series D bonds are expected to be directly purchased on or about Dec. 1, 2015, following a tender on the bonds to be refunded.
In addition, Fitch affirms the ratings on the following MSBA sales tax bonds:
--$5.3 billion in senior dedicated sales tax bonds at 'AA+';
--$76.3 million in senior dedicated sales tax bonds at 'F1+';
--$293.4 million in subordinate dedicated sales tax bonds at 'AA';
--$450 million in bank notes associated with subordinate dedicated sales tax bond anticipation notes at 'AA'.
The Rating Outlook is Stable.
The Authority's bonds are secured by an irrevocable dedication of one cent of Massachusetts's 6.25-cent sales tax, with some exclusions.
KEY RATING DRIVERS
BROAD DEDICATED REVENUE SOURCE: The bonds are secured by an irrevocable dedication of one cent of Massachusetts's 6.25-cent sales tax. Although performance in the last recession was weak, the sales tax has been a relatively stable revenue source over time and recent growth has been in line with the commonwealth's economy.
STRONG STRUCTURAL PROTECTIONS: Bondholders benefit from the statutory dedication of the tax for school capital purposes. Dedicated revenues are segregated from the Commonwealth general fund, and the Authority has no role in funding school operations. Strong legal covenants protect against diversion of revenues or lowering of the tax rate, although the base can be changed.
ADEQUATE COVERAGE: Both current debt service coverage and the additional bonds test are adequate.
STRONG AND WEALTHY ECONOMY: Massachusetts has a broad and diverse economy with the second-highest per capita personal income in the nation. Employment growth is solid, education levels are high, and population growth has approximated that of the U.S. this decade, a marked improvement from historical experience and the performance of other states in the region.
SUBORDINATED BOND RATING LOWER: The lower rating on the subordinated bonds reflects the junior pledge to the senior bonds and the difference in the additional bonds test protections on the two liens. Additional issuance requires 1.4x maximum annual debt service (MADS) coverage for the senior bonds compared to 1.3x aggregate coverage for the subordinated bonds.
PLEDGED TAX PERFORMANCE: The rating is sensitive to the performance of the pledged sales tax revenue and the maintenance of solid debt service coverage levels.
The Authority's strong bond ratings are based on the historical reliability of sales tax revenue, the adequacy of debt service coverage and the additional bonds test, and structural protections that include the statutory dedication of the tax for school capital purposes. The Commonwealth has imposed a sales tax since 1966, and although performance in the last recession was weak, coverage of MADS remains solid at 2.04x for senior bonds and 1.89x for aggregate debt service, based on fiscal 2016 estimated pledged revenues and without consideration of the federal interest subsidies associated with Build America Bonds and Qualified School Construction Bonds.
Sales tax revenue results are much improved since the last recession, with actual growth year-over-year of 6.7% in fiscal 2014 and 5% for fiscal 2015, which ended on June 30. Through Sept. 2015, fiscal 2016 Commonwealth sales tax revenues are slightly ahead of the fiscal 2016 forecast and 6.2% ahead of prior year figures. The commonwealth's January 2015 consensus revenue forecast anticipates sales tax revenues growing 4.1% in fiscal 2016.
Additional bond issuance under a $10 billion authorization requires 1.4x maximum annual senior debt service coverage for senior bonds and 1.3x coverage of total MADS for subordinated bonds. Dedicated revenues are segregated from the Commonwealth general fund, and the Authority has no role in funding school operations. Strong legal covenants protect against diversion of revenues or lowering of the dedicated tax rate, although the base can be changed. Most, but not all, of the Authority's senior lien bonds issued to date have had a standard debt service reserve fund, as will the current bonds. The debt service reserve level is not a rating factor given the strong coverage and structural features of the bonds.
Dedicated sales tax revenues are credited to the School Modernization and Reconstruction Trust (SMART) fund, which is held by the Commonwealth treasurer exclusively for the purposes of the authority, and disbursed to the bond trustee on a monthly basis. The revenues in the fund are not commingled with Commonwealth funds and are not subject to appropriation. Bondholders have first claim on the dedicated sales tax.
The dedication of the entire one-cent sales tax was fully phased in for fiscal 2011, resulting in receipts of $655 million for the year. Average annual sales tax growth has been about 6.4% since the inception of the tax in 1966, with the largest one-year drop of 7.1% occurring in 1990. However, in the recent recession sales tax revenues dropped 6.2% in fiscal 2009 and another 1.7% in fiscal 2010, not considering the increase in the Commonwealth sales tax rate from 5% to 6.25% that became effective on Aug. 1, 2009 but did not benefit the bonds. After growth of 2.8% in fiscal 2011 and 2.4% in fiscal 2012, the year-over-year increase of 1.7% for fiscal year 2013 has been followed by the more robust growth discussed above.
The Authority can choose to transfer excess dedicated sales tax revenues to the Commonwealth, but the Commonwealth has relinquished all claims to the revenue. The Authority consists of seven members: the Commonwealth Treasurer (chair), four treasurer appointments, and two ex-officio members. The authorizing legislation specifies that the treasurer shall act as trustee as it relates to the SMART fund and not on account of the Commonwealth.
The Authority was created in 2004 to address a substantial backlog of programs funded under the Commonwealth's prior school building assistance program and create a sustainable system for school capital funding going forward. Pre-existing contract assistance commitments to localities, a declining obligation through 2023, are paid annually from dedicated revenues after payment of debt service. The Authority was authorized to fund up to $500 million in new projects annually starting in fiscal 2008 (with the limit adjusted up or down each year by the lesser of the dedicated sales tax revenue increase/decrease or 4.5%); approval of new projects is contingent upon the availability of funds for this purpose. The Authority does not have a waiting list.
As pledged revenues are segregated from general operations of the Commonwealth, bond security is driven by performance of the sales tax and therefore closely linked to economic performance in the state. 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.
The commonwealth's economic performance in the most recent recession was significantly better than the national experience, in contrast to 2002-2004 when Massachusetts experienced among the steepest employment drops in the country. Employment losses in 2009 were less severe than those of the U.S. (3.2% versus 4.3%), and commonwealth employment rose 0.4% in 2010 while U.S. employment fell 0.7%. For much of the expansion, employment gains in Massachusetts have approximated the national trend, although 2014 employment rose 1.6%, below the 1.9% growth rate reported nationally. More recently job gains appear to have accelerated, with Sept. 2015 employment rising 2% annually in the Commonwealth, vs. a 1.9% rate reported for the nation as a whole. As of Sept. 2015, the unemployment rate remains well below the U.S., at 4.6% in the Commonwealth compared to 5.1% nationally.
For more information on the commonwealth, see Fitch Research 'Fitch Affirms Massachusetts GO Rating at 'AA+'; Outlook Stable ' dated Sept. 10, 2015, available at www.fitchratings.com.