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Amend: Fitch Rates Cleveland RTA, Ohio's $35MM GOs 'A'
NEW YORK-(Business Wire)-January 31, 2008 - This is an amendment for a message issued on Jan. 30, 2008 . It replaces the previous version.
Fitch Ratings assigns an 'A' rating to the Greater Cleveland Regional Transit Authority, OH's (GCRTA, or the authority) approximately $35 million general obligation (GO) (limited tax) capital improvement and refunding bonds, series 2008. The bonds are expected to sell on or about Feb. 12, 2008.
Bond proceeds will finance capital improvements to the authority's transportation system and refund a portion of the authority's series 2006, 2004, and 1998R bonds. Fitch also affirms the 'A' rating on the authority's $147 million in outstanding GO (limited tax) capital improvement bonds. The Rating Outlook is Stable.
The 'A' rating reflects the strength and coverage of the 1% countywide sales and use tax and structural features protecting bondholders from the authority's financial pressures. The rating also reflects the authority's track record in adequately managing within its financial constraints. The authority has pledged its full faith and credit in securing the bonds, including the 10-mill limited tax pledge on all taxable property within Cuyahoga County.
While there is very limited property tax capacity available under the 10-mill limit, the authority anticipates using sales and use tax revenues to pay debt service. Pursuant to the sales and use tax collection agreement, the Ohio Dept. of Taxation directly deposits monthly sales and use tax revenues with the bond retirement fund held by the trustee for bondholders, with the remaining revenues transferred to the authority for its operating and capital needs.
Revenues from the dedicated 1% sales and use tax have grown by an annual average of 2% from 2002 through 2007, and provide an increasing share of the authority's total revenues. While sales and use tax revenues declined at a 2% average annual rate between 2000 and 2003, they recovered strongly in 2004 (6%) and have been flat through 2007. Although the tax rate has been unchanged, recent slowing of employment growth and reduced consumer spending have dampened recent retail sales in the area.
In this same period, passenger revenues declined to 18% of total operating expenses, significantly down from a high of 27% in 1993. In response to increasing fiscal pressure, the authority raised fares in 2006 and in the early part of 2008, which should increase passenger revenues to approximately 20% of the total in 2008. Accompanying the increased fares, the authority also implemented cost-containment strategies which reduced operating expenses by 1% in 2006, but rising fuel costs led to a 3% increase in operating expenses in 2007. The authority anticipates annual expense increases of 4% through 2010, similar to other transit agencies. GCRTA intends to manage its operations within a constrained fiscal environment and has demonstrated its willingness to compress spending should available financial resources diminish.
Although the property taxes under the 10-mill limit secure the bonds, the GCRTA relies on sales tax receipts as the primary method of bond repayment. On a gross basis, sales and use tax revenues provided GO debt service coverage of 11.2 times (x) in 2006, and with this issue are projected to cover debt service 11.3x in 2008. In the long term, debt service coverage is expected to remain strong. Coverage, including the issuance of the series 2008 bonds, remains at more than 10x against maximum annual debt service (MADS), which occurs in 2009. While the sales and use tax revenues strongly supports annual debt service payments, the high debt service coverage ratios do not reflect the importance of sales taxes in meeting the authority's large operating budget.
System ridership reached a low point in 2002 because of weaker economic growth and service reductions, but has since stabilized. The system recorded gains from 2003-2005 due to GCRTA increased focus on customer service. Ridership continued to grow in 2006, albeit at a slower pace, which corresponded to the authority's first fare increase in 13 years. Overall, ridership increased at a 1.7% average annual rate from 2002-2007.
The authority's financial plan anticipates a ridership decline of 2% in 2008, reflecting increased passenger fares and service reductions, partially offset by the opening of the Euclid Corridor project. The project is a bus rapid transit system operating in dedicated lanes serving to connect Cleveland's central business district to University Circle areas, Cleveland Clinic, and various other downtown areas, which might bolster ridership demand. In 2007, management took proactive measures to eliminate certain service routes and better align the system with available resources, resulting in a $5.3 million savings. Although RTA relies heavily on sales tax collections to pay its operating expenses, the authority has a record of curtailing operating expenses when necessary and managing its needs with available resources. Periodically, the authority also relies on its reserves to meet its service obligations.
Cuyahoga County, representing the largest county in Ohio in terms of population and economic activity, is an affluent area with employed earnings growing 3.5% annually in the past decade. Per capita income is 16% above the state average and 8% above the national average. Since 1992, when county unemployment peaked at 7.4%, the local economy has diversified with manufacturing now representing 15% of total earnings, in line with the national average of 12.7%, while financial services, professional and technical services, and health care have gained in importance. As a result, county unemployment rates have stabilized and equaled 5.7% as of November 2007, compared to the state's 5.3% and the nation's 4.5% averages.
GCRTA is an independent political subdivision of the State of Ohio, created in 1974. The authority provides all public transit services within Cuyahoga County, including rail rapid transit, light rail, fixed route, community circulator, and paratransit.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
