Fitch Rates Regional Transportation Authority, IL GOs 'AA'; Outlook Revised to Stable

Fitch Ratings has assigned an 'AA' rating to the following Regional Transportation Authority, IL bonds:

--Approximately $108 million general obligation (GO) bonds, series 2014A.

In addition, Fitch has affirmed the following bonds:

--$2 billion GO bonds at 'AA';

--$111.1 million GO variable-rate notes (extendable reset securities) series 2005B at 'F1+'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are general obligations of the Regional Transportation Authority (RTA), for which its full faith and credit is pledged. The RTA has pledged its allocation of sales tax and public transportation fund (PTF) revenue to repayment of the bonds.

KEY RATING DRIVERS

OUTLOOK REVISION: The Outlook revision to Stable from Negative reflects the improvement in the timeliness of distributions from the state and Fitch's expectation that the current rate of funding delay will not worsen.

IMPROVING TAX COLLECTION: Sales tax revenues, RTA's largest revenue source, continue to improve with year-to-date collections up 5.0% through September 2013.

ESSENTIAL SERVICE: RTA serves as a vital component of the regional economy and provides an essential service to roughly 2.0 million riders daily.

STRONG GROSS DEBT COVERAGE: Historical gross debt service coverage from pledged revenues is projected to remain ample at above 5x. Coverage from net revenues is engineered to produce slightly more than 1x coverage. The sales tax is assessed on a broad and diverse base, limiting the extent of cyclical sensitivity.

HIGH FAREBOX RECOVERY RATIO: The RTA is statutorily required to maintain a strong farebox recovery ratio among the three transportation systems of at least 50%, which is favorable relative to most peer transit systems. However, significant capital needs strain operations.

RATING SENSITIVITIES

INCREASED STATE PAYMENT DELAYS: A return to chronic delinquencies would adversely affect system maintenance, and present ongoing risk to the authority's financial health.

CREDIT PROFILE

RTA is the third largest transit system in the nation, serving a population of roughly 8.5 million located within the city of Chicago, suburban Cook County, and the counties of DuPage, Kane, Lake, McHenry, and Will (the collar counties). The authority is responsible for regional transit planning, and has financial and budget oversight of the three 'service boards': Chicago Transit Authority (CTA), Metra commuter rail, and Pace suburban bus. The system faces significant challenges; however, as operations rest with the service boards, the authority's exposure to operational risk is limited.

LARGE SYSTEM SERVES DIVERSE CHICAGO METRO AREA

The service area population has increased modestly over the past decade, primarily due to growth in the collar counties. While the area's economic fundamentals remain largely positive, improving but still somewhat elevated unemployment and a stagnant housing market, among other issues, continue to pressure the area's economic profile.

The authority generates revenues primarily from a sales tax levied within Cook and the five collar counties, as well as from PTF revenue, which is a statutorily required 30% state match of regional sales and real estate transfer tax for CTA generated within the city of Chicago.

Sales tax revenues accounted for 66% of total revenues in 2012 followed by various state payments that accounted for 33%. Of the sales tax revenues, 46% is generated within suburban Cook County, 31% in Chicago, 9% in DuPage County, and the remainder in the four other collar counties. After payment of debt service, excess moneys are used primarily to subsidize the operations of the authority's three service boards.

REDUCED STATE PAYMENT DELAYS

State remittance of PTF payments has been irregular since 2008. In 2011 and 2012, delays stabilized at around five to six months. The state is now running three-to-four months behind in remitting PTF payments. Fitch believes the reduced delay materially improves RTA's liquidity and its ability to meet the needs of its component service boards.

MAINTENANCE OF SYSTEM REMAINS A CHALLENGE

The RTA faces a serious challenge in the condition of its system assets. In particular, over 70% of rail cars are in worn or marginal condition. The level of investment required to bring the system to a state of good repair greatly exceeds the authority's resources and borrowing authority.

The RTA had proposed a plan to address the system's state of good repair by seeking $2.5 billion in sales tax bond authorization. Implementation of the plan is increasingly uncertain, given the lack of support from the service boards and the need for state legislative approval. Absent state action, the RTA will remain challenged to address the maintenance backlog within its existing debt capacity. After the issuance of these bonds, the authority will have approximately $55 million of authorization remaining.

The individual service boards are facing a backlog of $18.7 billion and a continued 10-year capital program totalling $12.4 billion to bring the system back to a state of good repair. RTA's 2014-2018 capital plan totals $4 billion, funded primarily by federal/state grants and additional bonding. The backlog is thus expected to increase at current funding levels.

The RTA participates in the RTA Pension Plan, a cost-sharing multi-employer pension plan for RTA, Metra and Pace. The plan was 70.4% funded in 2012. Limited OPEB liability consists of full premium coverage for disabled pensioners and an implicit rate subsidy for all other retirees. Combined pension and OPEB costs are negligible at less than 1% of 2012 operating expenses.

STRONG DEBT SERVICE COVERAGE BY PLEDGED REVENUES

Gross debt service coverage levels are expected to remain strong given the significant demand on pledged revenues to fund the operating needs of the transit system after payment of debt service. Debt service coverage is expected to be 4.8x in 2013 from sales tax revenues, and the addition of pledged state PTF revenue raises coverage to 6.3x.

STEADY SALES TAX GROWTH

Economically sensitive sales tax revenues have rebounded from the 2009 low and show steady year-over-year growth. Sales taxes grew 4.7% in 2011 and 2012, and year-to-date collections are up 5.0% through September 2013. Beginning 2014, collections are expected to benefit from a recent favorable Illinois Supreme Court ruling that effectively prohibits the diversion of sales taxes to a municipality with a lower rate.

Increased sales tax collections have allowed the authority to increase disbursements to its service boards; projections show disbursements growing at a CAGR of 3.5% through 2016. Should economic conditions change, Fitch believes management will continue to demonstrate a willingness to revise its budget.

HIGH FAREBOX RECOVERY

RTA continues to meet its statutory requirement of covering at least 50% of expenses from system-generated revenues. Farebox revenue has grown 2.5% on average annually since 1997 and the recovery ratio is estimated at a high 54.1% for 2013.

CTA accounted for approximately 60.8% of operating revenues (exclusive of public funding), with Metra at 32.8% and the remainder made up of the Pace suburban bus system and ADA paratransit, which is largely unchanged since 1997. Total ridership in 2013 is estimated to have decreased by 2.2% to 651.5 million. The CTA, which represents over 80% of the region's rides, is expected to record a 2.9% decrease due to a fare increase and five-month construction on the red line. Metra's ridership is expected to have increased 0.4% and Pace's ridership is expected to have increased 1.7%. Overall ridership for 2014 is budgeted to increase 1.1%.

REDUCED SHORT-TERM BORROWING

Each year, RTA is required to adopt an annual budget and a two-year financial plan. The budget includes RTA's direct expenditures and funding of each service board's operating deficit. Beginning with the 2012 budget, RTA ended its practice of transferring capital funds to cover operating expenses. The three service boards helped RTA achieve this with labor savings, the fare increase, and various other adjustments. Importantly, service reductions were not included in any of the 2013 budgets. However, RTA will continue to use cash flow financing, although the amount outstanding has declined from $400 million to $300 million due to improved state remittance of PTF revenues.

STRONG LEGAL PROVISIONS

Legal covenants are good. Additional bonds are allowed, assuming debt service reserve requirements are fully funded and an additional bonds test whereby one-half of the sales tax revenues for the past 24 months must at least equal 2.5x pro forma maximum annual debt service (MADS), including short-term obligations is met. The current issue will feature a cash-funded debt service reserve at the lesser of 10% of par or MADS. There is no debt service reserve for the notes.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'Rating Criteria for Infrastructure and Project Finance' (Jul. 12, 2012).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813558

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Arlene Bohner, [phone]
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Raymond Wu, [phone]
Analyst
or
Committee Chairperson
Amy Laskey, [phone]
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, [phone]
[e-mail]