Fitch Rates Greater Cleveland Regional Transit Auth, Ohio's $28MM Rfdg GOs 'A'.

CHICAGO -- Fitch assigns an 'A' rating to the Greater Cleveland Regional Transit Authority (GCRTA, or the authority), Ohio's approximately $28 million of general obligation (GO), limited tax capital improvement refunding bonds, series 2008B. The bonds are scheduled for negotiated sale on or about September 11, and are secured by the authority's full faith and credit pledge within the ten-mill limitation imposed by state statute. However, the authority intends to pay principal and interest from sources other than a property tax, primarily GCRTA's 1% sales and use tax. Proceeds will refinance outstanding GO bonds for debt service savings. The rating Outlook is Stable.

Fitch also affirms the 'A' rating on approximately $182 million of outstanding GO debt.

The 'A' rating reflects the broad sales tax base of Cuyahoga County, and the solid gains in ridership over the past five years. The rating is also based on a challenging operating environment, as a weakening service area, low levels of state financial support, and a heavy dependence on a potentially volatile sales and use tax with low farebox recovery continue to pressure fiscal stability. Reduced consumer spending may pose a risk to sales and use tax projections even given a small budgeted decline in 2008, but increased fares somewhat offset this risk. Fitch expects the authority to continue to manage the widening gap between operating revenue and expenses through increased consolidations, efficiencies, external funding sources, and fare adjustments, if necessary.

Although the bonds carry the authority's GO pledge, a property tax levy is not currently collected, as other revenues are sufficient to pay debt service. In addition, Fitch places limited weight on this pledge, as the overall property tax rate is limited to 10 mills, and a levy for GCRTA would necessitate a reduction to other taxing entities in the county. GCRTA's budgeting procedures and county oversight ensure timely collection of the levy if projected revenues are insufficient, but current revenues cover debt service over ten times on a gross basis. Pursuant to the sales and use tax collection agreement, the Ohio Department 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 1.3% since 2004, and provided 77% of total authority revenues in 2007, with passenger fares contributing 19%. In 2008 and 2009, the authority expects sales tax performance to decrease by approximately 2% and 1%, respectively, reflecting a continued trend of slow economic growth in the region. However, current data available illustrates sales and use tax collection from January through July 2008 is up approximately 4% from the same corresponding timeframe in 2007.

In 2006, the authority adopted a two-step rate adjustment which marked the first fare increase in 13 years. In 2006 fares were raised on local service and express and rail services, and as planned the second fare increase was implemented in the earlier part of 2008. In addition, pending board approval the authority plans to implement a 25-cent fuel surcharge on its bus services. Originally seeking a 50-cent increase, the authority received a one- time state grant contingent on maintaining service, which will enable a smaller rate increase. While recognizing it is not recurring, Fitch views this state contribution positively, as it indicates state support for the authority. In addition, the authority obtained Congestion Mitigation and Air Quality Program funding, which combined with the state grant and cost-containment strategies contributed an estimated $2.7 million increase to fund balances 2008.

System ridership grew at an average 1.7% annually from 2004 to 2006, spurred by reduced incomes and rising gas prices; however, ridership since then has been essentially flat, growing by .3% and .1% in 2007 and 2006, respectively. The authority forecasts 2008 ridership will increase 2%, with January through July 2008 up .7% from the same corresponding timeframe in 2007.

The authority's capital improvement plan (CIP) equals about $433 million over the next five years. The largest project in the plan is the Euclid Corridor bus line, connecting Cleveland's central business district to major health care institutions on the east side of the city. With the bulk of construction complete, about one-third of the remaining projects in the plan are related to rail expansion and rehabilitation, with the balance dedicated to vehicle replacement, improvements to transit shelters, fare collection system upgrades, and other projects. Fitch notes that while the authority has flexibility to delay investment if financial margins are overly stressed, delaying investment might result in greater deferred maintenance and increased equipment failure rates, albeit still manageable.

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. Cuyahoga County is the largest county in Ohio in terms of population and economic activity with the highest per capita incomes in the state, equal to 116% of the state average and 108% of the U.S. average. The area's economy has diversified as the health care industry has grown, but county unemployment rose substantially in the past year due to continued losses in durable manufacturing and exposure to the automotive industry's restructuring. The county's May 2008 unemployment rate increased to 8.1%, from 6.2% in May 2007, and remains well above national figures.

Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this underlying rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').

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