Fitch Affirms DART (Texas) Sr Sales Tax Rev Bnds at 'AA'; Sub Notes at 'AA-'.

NEW YORK -- Fitch Ratings affirms the 'AA' rating on approximately $489.1 million of Dallas Area Rapid Transit (DART), TX, senior lien sales tax revenue bonds. Fitch also affirms the implied 'AA-' rating on DART's senior subordinate lien sales tax revenue commercial paper notes. The Rating Outlook is Stable.

The 'AA' rating on the senior lien bonds reflects the economic strength and diversity of the area served by DART, the gross pledge of sales tax revenues which make up over 80% of total revenue, DART's flexible capital program, and its proactive management. The rating also reflects strong bondholder protections in the form of a 2 times (x) additional bonds test on senior lien debt and DART's member unit withdrawal provisions, which require the continued collection of sales and use taxes until an amount equal to that unit's financial obligation to DART, present and future, has been collected and paid to DART. In addition, the rating incorporates the likelihood for rapid debt escalation as a result of DART's 20-year $5.2 billion capital plan, the vulnerability of sales tax revenue to economic cycles, and the cyclical nature of public sentiment for transit. The recent economic downturn and management's response to it have validated the strength of the gross pledge. It also confirms Fitch's opinion that the balance struck between operating and capital needs provides adequate insulation to manage through any unexpected volatility in sales tax collections and greater than expected operating expenses. Fitch's 'AA-' implied rating on the subordinate lien notes reflects the factors above and also the notes' subordinate position to the senior lien bonds.

DART has received an indication from the Federal Transit Administration that it will receive $700 million in grant funding for its $2.4 billion light rail extension. Rail expansion projects makes up roughly two-thirds of the $5.2 billion capital plan. While still subject to congressional approval, this is a significant step toward solidifying an important source of funding assumed in DART's capital plan. The scalability of DART's capital program to allow construction of light rail infrastructure in a segmented approach provides adequate flexibility for build-out plans to correspond with anticipated resources. The primary risk to delayed system expansion is expected to be in the public relations arena given the growing anticipation of residents for light rail service. To fund its $5.2 billion capital plan, DART expects to issue approximately $2.6 billion in additional debt. The plan estimates that gross debt service coverage of senior and subordinate debt will drop from an estimated 7.0 times (x) for fiscal 2006 to a low of about 2.5x by 2012, after which minimal amounts of debt will be issued. Coverage is then forecast to begin growing in fiscal 2013, hitting 3x in 2019 and 4x at the culmination of the 20-year financial plan. Coverage of total obligations, including operating and maintenance expenses, debt service, and pay-as-you-go capital expenses is expected to drop below 1x for a number of years, beginning in fiscal 2009. However, projected cash balances do not fall below $200 million.

As with many other areas of the country, DART's service area was negatively affected by the national economic downturn that began in 2001. By the end of fiscal 2003, sales tax revenue had dropped for three consecutive years for a cumulative reduction of nearly 17% relative to the fiscal 2000 base. Unemployment in the Dallas-Fort Worth metropolitan statistical area (MSA) hit an annual high of 6.6% in 2003. In 2004, the economy began to rebound, with fiscal 2004 sales tax revenue increasing by 6.6% over 2003, and the annual unemployment rate for the MSA dropping to 5.9%. Management responded proactively to these challenges by increasing fares by an average of 17% in fiscal 2003, and implementing service cutbacks and staff reductions in 2004. DART also delayed portions of its capital plan by a year. In addition, DART now expects to implement fare increases of about 17% every five years, beginning in fiscal 2008. DART has a large pay-as-you-go capital program, unlike many mature transit systems. As a result, while politically difficult, capital program spending can be adjusted to ease the pressure of reduced sales tax collections and operating expense growth during economic downturns.

Fiscal 2005 sales tax collections increased by 2.8% over 2004, and the December 2005 unemployment rate for the MSA dropped to 4.6%. As the economic picture continued to improve in fiscal 2005, DART reversed some of the previous service reductions. As a result of these factors, and higher gasoline prices, fixed-route ridership increased by 4.6% in fiscal 2005. DART has also moved up the portions of the capital plan that were delayed in fiscal 2004 and has forecast sales tax revenue growth of about 3% for fiscal 2006, with higher rates of growth in the future. The acceleration in the plan does come with some pressure, as reflected in recent management action to eliminate a restrictive internal policy that set limits for debt service coverage, including capital expenses. However, DART maintains the flexibility to delay portions of the capital plan should sales tax revenue grow more slowly than forecast, or operating expense growth exceed the roughly 3.6% average annual growth budgeted for, which assumes inflation of about 2.5% and reflects service additions.

DART is a subregional transportation authority with a mandate to provide public and general transportation services to 13 municipalities pursuant to the passage of a referendum on Aug. 13, 1983. A 1% sales tax is imposed on certain retail sales within the territories of the participating municipalities, which include Dallas, Irving, Plano, Carrollton, Garland, Richardson, University Park, Highland Park, Farmers Branch, Addison, Rowlett, Glenn Heights, and Cockrell Hill. DART's mass transit services include regular route buses, light rail, commuter rail, paratransit for the mobility impaired, HOV lanes, and rideshare matching. DART is governed by a 15-member board. Appointments to the board are made by municipalities based on the ratio of their population to that of the service area. Municipalities with fractions of an appointment may join together and make a full appointment. No municipality may appoint more than 65% of the board. Board members serve staggered two-year terms.

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