NEW YORK--(BUSINESS WIRE)--
Fitch Ratings downgrades to 'AA-' from 'AA' the rating on the Maine Municipal Bond Bank's (the bond bank) $208.9 million transportation infrastructure revenue bonds (TransCap Program).
The Rating Outlook is Stable.
The bonds are limited obligations of the bond bank, payable from various motor vehicle fees and excise taxes, including portions of excise taxes on gasoline, motor vehicle registration fees, and amounts appropriated to the highway fund.
KEY RATING DRIVERS
MORE VULNERABLE REVENUE STREAM: The downgrade reflects the state's sluggish economic performance in the recovery, weak demographic trends, and a statutory change in the fuel taxes that makes collections more sensitive to shifts in fuel consumption.
SATISFACTORY DEBT SERVICE COVERAGE: Pledged revenues provide satisfactory debt service coverage on both an annual and maximum annual (MADS) basis, though below the additional bonds test (ABT) standard. No additional bonds are currently statutorily authorized.
CONSTITUTIONALLY DEDICATED REVENUES: Portions of various highway revenues, including motor vehicle fees and fuel taxes, are pledged to the bonds. Highway revenues are constitutionally dedicated for highway purposes, and statutorily allocated to the TransCap fund from the highway fund.
DEBT SERVICE COVERAGE: The rating is sensitive to ongoing maintenance of satisfactory coverage by pledged revenues.
The downgrade to 'AA-' from 'AA' reflects reduced expectations for the state's economic performance and the loss of indexing in the fuel taxes, resulting in increased economic vulnerability of pledged revenues. Fuel taxes, including taxes on gasoline and other motor fuels, constituted 46% of fiscal 2012 pledged revenues. The fuel taxes had been indexed since fiscal 2003 and the rates increased six times before the legislature ended indexing effective Jan. 1, 2012. Between fiscal 2008 and fiscal 2011 (the last full fiscal year with indexing), total fuel tax revenues declined at an average annual rate of 1.2%, reflecting the impact of the recession. In May 2013, several years after the recession, the state's Revenue Forecasting Commission (RFC) forecast a 1.6% decline in 2013 (the first full year without indexing) based on available data through the first 10 months of the fiscal year. Going forward, the RFC projects per-gallon fuel tax revenues will decline at an average annual rate of 0.7% between fiscal 2013 and 2017 as the economy continues a sluggish recovery.
Maine's relatively stable economy has expanded into new sectors, particularly education and health services, but growth prospects remain modest. In 2012, Maine recorded just 0.3% non-farm employment growth, while national employment continued a more robust post-recession recovery with 1.7% growth. Similarly, state gross domestic product (GDP) increased 2.2% versus the national gain of 4.1% in 2012. More recent data echoes these trends with the Maine's May employment remaining flat year-over-year while national employment grew 1.6%. Maine's median age is the oldest among the states, 43.5 years compared to 37.4 years for the U.S., and population growth trends have been well below the U.S. average.
PLEDGED REVENUES PERFORMANCE
Debt service coverage has been adequate, but below the ABT, and is now more susceptible to shifts in fuel consumption because of the loss of fuel tax indexing. Fiscal 2012 pledged revenues covered MADS by 1.9 times (x), while the ABT sets a 2x test (described further under Rated Security). The TransCap program has no remaining statutory debt authorization. In a base case scenario derived primarily from the RFC's forecast for fuel taxes and motor vehicle registrations and fees through fiscal 2017, MADS coverage remains at 1.9x from fiscal 2014 through 2017. Fiscal 2013 revenues are skewed because of a one-time jump in title fees attributed to a single company. Under a Fitch stress scenario (6.7% decline in fiscal 2015 to match the worst recessionary decline, followed by annual 2% declines), MADS coverage declines to 1.7x in fiscal 2017 and 1.5x in fiscal 2023 when MADS occurs. Annual debt service coverage weakens to 1.4x by final maturity in fiscal 2027.
TRANSCAP PROGRAM OVERVIEW
The bond bank serves as the financing agency of the State of Maine for transportation revenue bond projects. Separately secured from the bank's GARVEE bonds and from state general obligation highway bonds, the TransCap program is part of the state's bonding program supporting bridge and highway projects. The 2011 bonds completed issuance under an initial $210 million authorization that was subsequently increased to $240 million authorization in 2009.
The bonds are paid from revenues in a separate TransCap fund statutorily created for the program and held by the bond bank. To provide monies for debt service, the legislature allocated 7.5% of fuel excise tax revenues along with revenues generated by $10 increases in motor vehicle registration, title and license plate fees to the fund. In addition, the highway fund's responsibility for public safety expenses was reduced from 60% to 49%, with the general fund assuming the added expenses. The difference between the old and new highway fund obligation (11% of public safety expenses) is pledged to the TransCap fund, providing 14.6% of fiscal 2012 pledged revenues.
The resolution provides for an ABT of 2x of MADS, excluding the original authorization, based on 12 consecutive months out of the previous 24, a longer than average look-back period. The debt service reserve fund, equal to 50% of MADS, is funded from bond proceeds. Debt service increased to $20.3 million in fiscal 2013 and remains fairly level through final maturity in 2027.
While pledged revenues are subject to legislative allocation, any revenues generated from motor vehicle fuels or fees (including the pledged revenues) are constitutionally dedicated to highway and bridge purposes. A memorandum of agreement (MOA) provides for the state's department of transportation to include a budget request for debt service in the biennial budget. The MOA also requires the state treasurer to transfer allocated revenues monthly to the bond bank to support debt service expenses along with capital construction. The broader highway fund, which provides for debt service on the state's general obligation highway bonds, is not pledged.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's U.S. Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Fitch Downgrades Maine's GOs to 'AA' from 'AA+'; Outlook Revised to Stable' (Jan. 22, 2013);
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
- Security Upgrades & Downgrades
- Fitch Ratings
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