Fitch Rates Santa Clara Valley Transp Auth, California 2007 Revs 'AA-'; Upgrs Outstanding to 'AA-'.

SAN FRANCISCO -- Fitch rates Santa Clara Valley Transportation Authority, California's (VTA) $27,405,000 sales tax revenue refunding bonds, 2007 series A 'AA-'. The new bonds will be sold through negotiation by Goldman, Sachs & Co. on or about April 24. Fitch has also upgraded VTA's $167.8 million in outstanding parity bonds to 'AA-' from 'A+'. The Rating Outlook is Stable.

The rating upgrade reflects VTA's very high debt service coverage by pledged sales tax revenue, the sales tax sustained growth following severe declines, good reserve levels and strong legal features. The upgrade also acknowledges VTA's efforts to date to prioritize and reduce its total capital plan, although pressures to provide broad service continue. Offsetting these factors are the system's very low fare-box recovery ratio and several years of declining ridership. Fitch also acknowledges the criticism contained in a management and financial analysis recently produced by an outside consultant at VTA's request. Implementation of many of the report's recommendations as well as continued efforts to match the overall transportation system with the VTA's ongoing financial resources and other resources it can procure will be necessary for Fitch to maintain this rating.

The bonds are secured by a first lien on VTA's permanent one-half cent sales tax. Debt service coverage for all senior lien obligations is very high at 9.0 times (x) in fiscal 2006. Including junior lien obligations (not rated by Fitch), coverage remains strong at 7.0x. These high coverage levels are facilitated by the transit system's low fare-box recovery ratio, 11-12% since fiscal 2003, as the excess sales tax revenue is needed to subsidize operations. Nonetheless, debt service coverage is protected by a 2.0x additional bonds test, above average for transit sales tax-secured debt. Also, the authority's expected issuance of parity debt is limited, relying more on a second one-half cent sales tax approved by voters in 2000 (Measure A) for most future capital needs

VTA's sales tax collections have shown gains in the last three fiscal years, averaging 5.3% per year. This follows a cumulative 27.7% loss in fiscal 2002 and 2003. The drop resulted from severe economic dislocation, including substantial losses in business to business sales, which represents about 30% of total sales tax collections. Fitch believes the existing sales tax base now is more stable since it is based on moderate gain. Nonetheless, volatility is inherent to this revenue source, particularly with a sizable business to business component. Economic indicators for Santa Clara County are positive, including moderate population gain, good job growth, and a return of the unemployment rate to average levels.

VTA's transit system consists largely of buses and light rail, including light rail lines opening between 2003 and 2005. The area's economic losses also caused ridership to decline by 7% annually since 2002. The ridership loss also resulted from a 4% annual reduction in service miles made to adapt operations to reduced transportation needs and financial resources. Fitch expects the system's low fare-box recovery ratio to remain at around 11% at least through the near term. The low share of operating costs provided by fares results somewhat from the nature of the system with higher cost rail operations, new rail lines, and a non-centralized transit needs network inhibiting high transit vehicle occupancy. Future financial operations will be aided by an 18.5% share of the Measure A sales tax that is available for operations. Fitch notes VTA's prudent policy of maintaining reserves equal to 15% of the following year's operation expenses. Reserves have dropped below this policy level in the recent past, but returned to at or above 15% in fiscals 2005 and 2006. Fitch expects that VTA will continue to adhere to its reserve policy.

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