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Fitch Dwngrs $226MM Santa Clara Valley Trans Auth, CA Bnds to 'A+'.

Business Editors


Fitch Ratings downgrades the Santa Clara Valley Transportation Authority, CA's (VTA, or the authority) $225.7 million in outstanding sales tax revenue bonds 2001 series A and 1997 series A to 'A+' from 'AA'. The Rating Outlook is Stable. The sales tax revenue bonds are secured by the authority's permanent 1/2 cent sales and use tax levied in Santa Clara County, CA.

The downgrade reflects a sizable decline in sales tax revenue as well as the authority's continual operating pressures and limited outlook for near-term recovery. The drop in sales tax collections adversely constrains financial operations and, consequently, the level of transit services provided. Nonetheless, debt service coverage by pledged revenue remains very high. Fares have been increased recently and service reductions made, with the authority also considering leveraging revenue from a new sales tax to minimize future cuts.

Debt service has a first lien on the pledged 1/2 cent sales tax, and the high debt service coverage level is necessitated by the VTA's dependence on surplus tax revenues to fund the bulk of operations. Fitch's analysis for tax-supported debt issued by transit agencies relies primarily on the tax pledge and debt service coverage provided, while also considering the sufficiency of surplus revenues to meet operating costs and other financial obligations.

As a result of severe economic dislocation in the Silicon Valley area, the authority's sales tax revenues fell by 21% in fiscal 2002 to $144.2 million and are estimated to have declined by about another 9% in fiscal 2003. In contrast and reflecting the expansion of the region's economy during the 1990's, sales tax revenues posted strong gains for much of that decade and increased at an average annual rate of over 9% between fiscals 1997 and 2001. Sales tax revenues are expected to post a modest recovery beginning fiscal 2004. However, further revenue deterioration remains a possibility.

Debt service coverage of sales tax revenue bonds and parity equipment trust certificates (not rated by Fitch) remains very strong at around 7 times (x), but below the 9-10x coverage projected at the last bond sale. Coverage including variable-rate junior lien bonds, which were sold through a pool and do not carry a stand alone rating, is more than 4x. Although debt service coverage would slip if sales tax collections were to continue to decline, bondholders continue to have good margins of protection consistent with the 'A+' rating. Rather, the impact of further decline or stagnation in sales tax revenues will be borne by VTA's service levels and operations.

The authority has undertaken actions that begin to align its operations with the now lower revenue base. However, further actions are needed to assure ongoing financial balance. Measures implemented to date include a 22% increase in fares and 9% reduction in service levels since fiscal 2002 as well as the deferral of over $120 million in capital projects. A 21% additional service reduction is pending for fiscal 2004, which would bring VTA's operations down to levels last provided in the early 1980's.

The combination of the economic downturn, service reductions and the fare increase are expected to continue to have an obvious adverse impact on ridership, which declined by 7% in fiscal 2002 after growing 3% annually between fiscal 1995 and 2001. System revenue covers a very low 12% of operating costs, relying instead on substantial subsidies from sales tax revenue remaining after debt service is paid.

At present, VTA is pursuing a financing strategy to defer the proposed fiscal 2004 service reduction while a permanent funding solution is sought. The authority plans to issue up to $550 million in auction rate bonds secured by a new and separate 1/2 cent sales tax (known as Measure A) which is authorized for implementation in 2006 and is not pledged to current bondholders. The issue may include $80 million to defer the pending service reductions through fiscal 2005. The balance would be used for retiring a grant and bond anticipation note, reimbursing the authority for light rail vehicle purchases, development of new services, capitalized interest, a potential debt service reserve fund and issuance costs.

The new Measure A sales tax, which essentially replaces the county's 1996 Measure B 1/2 cent sales tax set to expire in 2006 and also not pledged to current bondholders, was authorized by voters in 2000 to fund new projects and increased services. The authority has filed a validation action with the Santa Clara Superior Court regarding the use of the proposed Measure A bond proceeds to support existing operations.

Although the use of bond proceeds for existing operations, assuming a validation action in favor of the authority, provides temporary relief, the authority continues to have a structural financial imbalance. The authority is evaluating options for additional ongoing revenue sources, likely something that requires voter authorization. Fitch expects that VTA would initiate its near term service reduction strategies if it is unable to use new Measure A funds for existing operations and/or additional revenue sources are not available. VTA may face additional financial constraints and need to further realign its services once light rail system expansion projects currently under construction become operational over the next three years. Given the lower sales tax base, additional reductions and realignment of capital improvements and system expansion initiatives are likely.

VTA is an independent public agency responsible for transit services, congestion management, certain highway improvement projects and transportation planning in Santa Clara County, CA. As a member of several joint powers authorities, the authority provides funding support for regional commuter rail, inter-county express bus and rail feeder operations.
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Publication:Business Wire
Date:Sep 3, 2003
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