OREANDA-NEWS. Fitch Ratings assigns an 'A+' rating to the Turnpike Authority of Kentucky's (TAK) $220 million in economic development road revenue refunding bonds (revitalization projects) 2016 series A.

The bonds are expected to be offered through negotiated sale on or about the week of March 21.

The Rating Outlook is Stable.

SECURITY

The bonds are a special and limited obligation of TAK, payable solely from revenues derived under a financing/lease agreement between TAK, as lessor, and the commonwealth's transportation cabinet, as lessee. The bonds are paid from appropriations made to the transportation cabinet, from the Road Fund, which receives various transportation-related fees and taxes.

KEY RATING DRIVERS

APPROPRIATION RISK LIMITS RATING: Road fund revenues, which are the primary sources of revenues for debt service, are constitutionally dedicated to highway purposes, though not necessarily for debt service on road revenue bonds. Biennial legislative appropriation is required for the transportation cabinet to have sufficient resources to make lease payments, and therefore, for TAK to make debt service payments. Accordingly, the rating on TAK's road fund revenue bonds is equivalent to the commonwealth's general-fund supported appropriation debt.

MOST STATE DEBT IS APPROPRIATION BACKED: Kentucky's debt is primarily in the form of lease rental bonds requiring appropriation for debt service. The lease financing mechanism is well established, with automatically renewable leases and covenants to seek appropriation for debt service. Fitch rates appropriation-backed debt supported by the general fund and road fund one notch below the commonwealth's implied general obligation (GO) rating of 'AA-'.

LIMITED OPERATING FLEXIBILITY: The commonwealth's operating flexibility is constrained compared with that of most states. Recent budgetary performance reflects improvement as fiscal 2015 ended with a $165.4 million general fund budgetary surplus and current year revenues are ahead of the budgeted forecast.

COMPARATIVELY HIGH LONG-TERM LIABILITIES: The commonwealth's combined debt plus unfunded pension system liabilities are amongst the highest for U.S. states. Pension reform measures in 2013, including a commitment to full actuarial funding for one of Kentucky's systems, are a positive step, but significant challenges remain, including a consistently underfunded teachers' plan.

STEADY JOBS RECOVERY: Kentucky's economic recovery from the recession has been solid as the commonwealth returned to its pre-recession peak employment levels last summer. Other trends including labor force contraction, below-average population growth and low levels of educational attainment pose long-term demographic challenges.

RATING SENSITIVITIES
LINKED TO IMPLIED GO RATING: The rating on the commonwealth of Kentucky's appropriation-backed debt is linked to changes in the commonwealth's implied GO rating of 'AA-', on which the rating is based.

CREDIT PROFILE
TAK road revenue bonds are rated equivalent to general fund-supported appropriation debt of the commonwealth due to appropriation risk. While road fund revenues are constitutionally dedicated to transportation uses, there is no lien on road fund revenues in favor of bondholders. In the event of non-appropriation, statute dedicates a portion of motor fuel taxes and surtaxes to repayment of road fund revenue bonds. But these dedicated revenues are not anticipated to be sufficient to pay debt service on outstanding road revenue bonds. Further, neither the indenture nor the lease agreement includes non-impairment language requiring the commonwealth to maintain motor fuel tax rates at levels sufficient to pay debt service.

Road revenue bonds are paid with lease payments from the transportation cabinet to the authority, with revenues derived from biennial legislative appropriations. Resources of the road fund, principally motor fuel and vehicle usage taxes, are the main source of lease payments. Total available road fund revenues equaled $1.1 billion in fiscal 2015, after adjustments for various statutory deductions, down 1.5% from the prior year. The decline is due primarily to the sharp decline in the price of gasoline from the prior year. These revenues covered lease rentals for debt service on bonds supported by the transportation cabinet (including TAK road revenue bonds) by just over seven times.

The motor fuel tax (41% of FY 2015 available road fund revenues) includes a fixed component (5 cents) and a variable rate component equal to 9% of the average wholesale price, subject to a floor. The tax is levied on gasoline, liquefied petroleum gas and special fuels (e.g. diesel). The vehicle usage tax (37.9% of fiscal 2015 revenues) is a 6% tax levied on the sale or transfer of motor vehicles.

For the current fiscal year, total road fund receipts (inclusive of statutory allocations not available for these bonds) were down 6.7% year-over-year (yoy) through January; the official estimate calls for a 5.3% decline for the fiscal year. The decline primarily reflects the effect of lower gas prices on the variable component of Kentucky's motor fuel tax. In response, the legislature enacted HB299 (effective April 1, 2015) which raised the motor fuels tax floor and revised the overall process for calculating the motor fuel tax to limit future collection declines. While the change mitigated the effects of lower gas prices, the ongoing decline in Road Fund collections reflects continued vulnerability.

Kentucky's 'AA-' implied GO rating reflects the commonwealth's limited budgetary reserves following depletion amid recession-driven revenue shortfalls, continued reliance on one-time measures in the current biennial budget, and a high liability position, including unfunded liabilities for state-supported pension systems. Kentucky continues to face budget-balancing challenges despite economic recovery, indicating a structural problem that goes beyond the impact of economic cyclicality on its financial operations. Each of the past five biennial budgets relied on one-time solutions to achieve balance, including use of reserves, debt restructuring, or borrowing for operations.

For more information on the commonwealth's appropriation-backed ratings, please see Fitch's report titled 'Kentucky State Property and Building Commission', dated Feb. 26, 2016 and available at 'www.fitchratings.com'.