Fitch Rates $325MM Maryland Consolidated Transportation Bonds 'AA+'

The following is from Fitch Ratings on November 17:

Fitch Ratings has assigned an 'AA+' rating to the following Maryland Department of Transportation (MDOT) consolidated transportation bonds:

--$325 million consolidated transportation bonds series 2015 (third issue).

The bonds are expected to sell via competitive sale on Dec. 2.

In addition, Fitch has affirmed the ratings on other MDOT bonds rated by Fitch, as detailed at the end of this release.

The Rating Outlook is Stable.

SECURITY

Consolidated transportation bonds are payable by specific pledged tax revenues after certain allocations, and prior to being available for other uses by MDOT. If the pledged taxes become insufficient to meet debt service requirements, other receipts of the department are available for that purpose.

KEY RATING DRIVERS

SOLID DEBT SERVICE COVERAGE: Consolidated transportation bonds benefit from strong debt service coverage by pledged taxes and net revenues. A solid additional bonds test requires 2x coverage by pledged taxes as well as departmental net revenues. MDOT practice requires a stronger 2.5x coverage level by both measures, and current coverage is comfortably above these levels.

BROAD REVENUE PLEDGE: Revenues pledged to debt service include transportation-related and certain general fund taxes. Pledged taxes and other available revenues are affected by statutory changes and economic cyclicality. However, bond coverage has remained consistently strong.

STRONG MDOT CONTROL: MDOT has broad authority over state transportation, including the ability to adjust capital projects as necessary based on projected available resources.

RATING SENSITIVITIES

CONTINUED SOLID COVERAGE AND CAREFUL MANAGEMENT: The rating is sensitive to ongoing maintenance of solid coverage by pledged revenues and the state's continued careful management of debt.

CREDIT PROFILE

Security for MDOT's consolidated transportation bonds is broad-based, consisting of a pledge of portions of motor fuel, motor vehicle titling, corporate income, and sales taxes on vehicle rentals, after statutory allocations to other state funds and local governments. The legislature periodically changes tax rates and the distribution of tax receipts among state funds and local governments, including extensive changes enacted in early 2013 that materially expanded pledged revenues available to bondholders as new rates are phased in through 2016.

Pledged taxes have consistently provided ample coverage despite their vulnerability to economic cycles and the impact of statutory changes. Other MDOT revenues, primarily transportation-related fees and operating receipts, are available if pledged taxes are insufficient.

Debt service coverage on consolidated bonds remains solidly above the two parity bond issuance tests, which require 2x coverage of maximum annual debt service (MADS) by prior-year pledged taxes and 2x coverage of MADS by prior-year department net receipts. MDOT's internal practice requires more stringent 2.5x coverage by both tests. Including the new bonds, coverage of MADS (in fiscal 2018) is 5.7x by fiscal 2015 pledged taxes, and is 3.4x by fiscal 2015 net revenues, well over the policy threshold for both measures.

RECENT RATE CHANGES EXPAND PLEDGED RESOURCES

The state has made periodic rate and distribution changes affecting pledged taxes and other departmental revenues, both to expand resources available to transportation and conversely to relieve state general fund stress in the past. The extensive 2013 legislative changes were intended to augment transportation resources and allow the state to address unmet capital needs. Rate changes included the addition of an incremental fuel excise tax that adjusts annually based on inflation and a separate sales tax equivalent fuel rate based on average gasoline prices that is pledged to the bonds; the rate was phased in to 3 percent as of July 1, and is expected to fully phase in at 5 percent as of July 1, 2016.

The state recently made it more difficult to divert transportation monies for general fund relief. A constitutional amendment passed by voters in November 2014 makes any such transfer subject to an emergency declaration by the governor and a three-fifths vote of both legislative houses. By statute, any such reallocation must be repaid in five years.

MDOT updates its revenue forecast twice annually, most recently in July 2015. Through fiscal 2021, the end of MDOT's current capital planning period, pledged taxes are projected to rise an average of 2.4 percent annually, and net revenues are projected to rise 5 percent annually, reflecting the impact of the 2013 legislative changes and underlying collection trends. Taxes from fuel consumption are expected to grow given the inflation adjustment, although baseline consumption is expected to gradually decrease given changing energy consumption patterns.

Maryland's transportation revenues are sensitive to economic cyclicality. Motor fuel tax collections, which equal about 47 percent of 2015 pledged taxes, declined modestly in fiscal years 2009 and 2010 with recessionary weakness. Titling tax collections, which equal 43 percent of total pledged taxes, declined sharply during the downturn and then rose quickly reflecting consumer pent-up demand. The pace of growth is expected to remain elevated through fiscal 2016 and then drop to more modest growth for the duration of the forecast.

Including projected future issuances during the capital plan period, debt service is forecast to reach $485 million in fiscal 2021. At this level, prior-year pledged tax coverage of MADS would be 4x in fiscal 2021, while coverage by prior-year net departmental revenue would be 2.7x.

CAREFUL MANAGEMENT OF DEBT AND CAPITAL NEEDS

State oversight of consolidated bonds, as with other state tax-supported debt, is strong. The legislature's ceiling on consolidated transportation bonds that may be outstanding is $4.5 billion, raised from $2.6 billion as part of the tax rate changes noted earlier. A separate annual cap on outstanding bonds as of June 30, the state's fiscal year end, is set at nearly $2.9 billion for fiscal 2016. Prior to the new bonds there are almost $2 billion in consolidated transportation bonds outstanding, with new issuance requiring Board of Public Works approval. The state constitution mandates that consolidated bonds mature within 15 years. Fitch rates the state of Maryland's GO bonds 'AAA' with a Stable Rating Outlook.

MDOT has the discretion to delay capital plan spending to reflect available resources. The fiscal 2016-2021 capital plan totals $15.5 billion; recent capital plans have expanded, reflecting the additional resources made available by the 2013 legislative changes. MDOT continues to have the discretion to reduce capital outlays in light of revenue underperformance, one of the means by which it responded to revenue weakness during the last downturn.

MDOT's capital plan focuses primarily on system preservation, with the largest shares of funding directed to highways and mass transit. Over the 2016 -2 021 plan period, available federal aid is expected to provide about 31 percent of capital program needs and consolidated bonds about 23 percent. Remaining capital program needs are met from departmental net revenues.

RATING AFFIRMATIONS

In addition to assigning the 'AA+' rating to the new bonds, Fitch affirms the ratings on outstanding MDOT bonds as follows:

--$1.987 billion in outstanding MDOT consolidated transportation bonds at 'AA+';

--$49.6 million in outstanding county transportation bonds at 'AA+'; and

--$44 million in outstanding MDOT certificates of participation at 'AA'.

Additional information is available at 'fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10,). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10 percent of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, and IHS.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=994249

Solicitation Status

https://fitchratings.com/gws/en/disclosure/solicitation?pr_id=994249

Endorsement Policy

https://fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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