October 11, 2010 Los Angeles County Metropolitan Transportation Authority, California; Sales Tax Primary Credit Analyst: David G Hitchcock, New York (1) 212-438-2022; david_hitchcock@standardandpoors.com Secondary Credit Analyst: Gabriel Petek, CFA, San Francisco (1) 415-371-5042; gabriel_petek@standardandpoors.com Table Of Contents Rationale Outlook Leading Employers in Los Angeles County The Los Angeles County Metropolitan Transportation Authority Related Criteria And Research www.standardandpoors.com/ratingsdirect 1
Los Angeles County Metropolitan Transportation Authority, California; Sales Tax Credit Profile US$604.6 mil sr sales tax rev bnds (taxable babs) (Measure R) ser 2010A due 04/01/2039 Long Term Rating AAA/Stable New US$133.86 mil sr sales tax rev bnds (Tax-exempt) (Measure R) ser 2010B due 04/01/2018 Long Term Rating AAA/Stable New Rationale Standard & Poor's Ratings Services has assigned its 'AAA' long-term rating, with a stable outlook, to Los Angeles County Metropolitan Transportation Authority (LACMTA), Calif.'s $738.46 million Measure R senior sales tax revenue bonds, series 2010A (taxable Build America bonds) and series 2010B (tax-exempt). A gross first-lien on Measure R sales and use tax revenues, less costs of collection and 15% of revenues allocated to local governments, secures the bonds. Collection of Measure R sales taxes, approved by county voters in 2008, began on July 1, 2009, and is scheduled to expire on June 30, 2039. Measure R sales taxes are collected at a rate of 0.5% on retail sales throughout Los Angeles County. The authority will issue the series 2010-A bonds as taxable Build America bonds eligible for a 35% federal interest subsidy. The federal interest subsidy is not pledged to the bonds, but the LACMTA intends to use actual receipts of the interest subsidy as an offset to the need to make future debt service fund deposits. The rating on Measure-R-supported sales tax debt reflects our opinion of: The deep and diverse Los Angeles County economy, with a growing population of 10.39 million residents; Very strong 10.6x maximum annual debt service (MADS) coverage based on the most recent 12 months' collection of historical pledged revenues; A strong 2.5x additional parity bonds test (ABT), which offsets significant future bonding plans; and Recent pro forma decreases in pledged revenue of 9.2% in fiscal 2009 and 9.9% in 2010, balanced against two recent quarters of increasing sales taxes. Separately, LACMTA collects an additional 0.5% sales tax pursuant to Proposition A, approved by voters in 1980, and issues bonds secured by Proposition A revenues (rated 'AAA') under a different indenture. Those bonds have a 2.46x ABT. In addition, LACMTA also collects another 0.5% sales tax pursuant to Proposition C, approved by the voters in 1990, which separately secures bonds issued under another indenture (rated 'AA+'). Proposition C bonds have a 1.3x ABT. Proposition A and C sales tax revenues are not pledged to the Measure R sales tax bonds. The state estimates the population of Los Angeles County (issuer credit rating 'AA-') at 10.39 million as of 2009, up 1.7% over the previous three years. In our view, county employment is diverse, with 15.4% of 2009 county employment in wholesale and retail trade, 15.7% in government, 10.2% in manufacturing, 10.0% in leisure and hospitality, 10.5% in health care and social assistance, and 6.5% in professional services (according to county figures). We believe the county is experiencing an economic downturn, as evidenced by an unadjusted county Standard & Poor s RatingsDirect on the Global Credit Portal October 11, 2010 2
Los Angeles County Metropolitan Transportation Authority, California; Sales Tax unemployment rate of 13.0% as of August 2010, above the August 2010 unadjusted state unemployment rate of 12.4% and the national rate of 9.5%, according to the federal Bureau of Labor Statistics. However, county median home prices, which had taken, in our view, a large 42.8% drop from 2007 to the first quarter of 2009, rose 9.1% in the second quarter of 2010 compared with same period the previous year. County median household effective buying income was good at 105.6% of the national level in 2009, while per capita effective buying income was 96.6%. County sales tax collections have been falling for the past three fiscal years. Although Measure R revenues have only been collected for one year, they are collected by the state on substantially the same basis and rates as the Proposition C sales tax, providing a pro forma historical record of county sales tax collections. In the fiscal year ended June 30, 2010, Proposition C revenue fell 9.9% on an accrual basis, after falling 9.2% in fiscal 2009 and 0.4% in fiscal 2008. Previously, Proposition C sales taxes rose 2.6% in 2007, 8.0% in 2006, and 7.4% in 2005. Measure R sales tax collections were reduced in the first quarter of fiscal 2009 by the start-up lag in collection of receipts, as the tax first began to be implemented. However, collections for the 12 months beginning the second quarter of fiscal 2009 through the second quarter of fiscal 2010, produced pledged cash basis revenue of $537.1 million, after the deduction of the 15% local allocation, providing, in our view, very strong 10.6x coverage of MADS on the Measure R bonds to be outstanding after this sale, and even higher if the federal interest subsidy were included as a pledged revenue. LACMTA reports that fiscal 2011 Proposition C cash basis sales tax collections in the quarters ending March 31, June 30, and Sept. 30 decreased 5.6%, increased 1.9%, and increased 4.2%, respectively compared with the same period a year earlier, indicating, in our opinion, that fiscal 2011 could see a small increase in pledged sales taxes. Currently, Measure R sales taxes are projected by LACMTA to generate $35 billion cumulatively through 2040. LACMTA plans to use 60% of this for capital purposes, 25% for operations, and 15% for local transportation. LACMTA expects to issue about $2.7 billion of Measure-R-secured debt in the first decade of the program, but it does not plan to issue additional new money Measure R sales tax debt for the next three to four years. In our opinion, the large size of the potential capital program is offset by what we view as a restrictive ABT, which requires historical revenues for 12 of the most recent 18 months immediately preceding the issuance debt to cover MADS 2.5x. For purposes of calculating the ABT, the indenture allows the deduction of the federal interest subsidy from the calculation of debt service; however, the federal interest subsidy is not pledged to debt service. Also, for purposes of the ABT, the definition of MADS excludes principal payments and related interest payments that LACMTA designates it plans to refund with a future issue of bonds or to retire from nonpledged revenues, such as a federal grant or other sources that, in the authority's opinion, it may rely on. The definition of MADS for purposes of the additional bonds test also assumes that interest rates on variable-rate debt are either the average of the previous five years or adjusted for interest rate swap agreements and excludes the principal amount of "put" tender options for additional parity debt. However, the current issue of debt consists of all fixed rate debt with a level amortization. The lack of a debt service reserve is offset, in our opinion, by the high debt service coverage and restrictive ABT. The indenture allows the LACMTA the opportunity to add a debt service reserve for future series of debt, if it so chooses. After scheduled monthly payments of pledged revenue to a fund to pay debt service and related expenses, excess pledged revenues may be used by LACMTA for any lawful purpose. www.standardandpoors.com/ratingsdirect 3
Los Angeles County Metropolitan Transportation Authority, California; Sales Tax Outlook The stable outlook reflects Standard & Poor's expectation that the breadth of economic activity within Los Angeles County should continue to support what we view as strong coverage levels, even if there are moderate further decreases in pledged revenue. In addition, we anticipate that the strong additional bonds test will help maintain a minimum level of strong coverage despite the LACMTA's substantial future bonding plans. The rating also reflects our expectation that debt service coverage will not be diluted below 2.5x by LACMTA issuance of parity debt outside the definition of MADS because LACMTA expects to retire such debt from future grants or other nonpledged revenue sources. Leading Employers in Los Angeles County The deep and diverse Los Angeles County economy includes significant health care, international trade, defense, education, tourism, entertainment, and financial service activity. The 10 largest private sector employers include Kaiser Permanente (34,179 employees in Los Angeles County), Northrup Grumman Corp. (19.137), Boeing (14,400), Kroger Co. (14,000), University of Southern California (13,044), Target Corp. (13,000), the Home Depot (10,000), Providence Health & Services (9,715), Vons (9,688), and Cedars-Sinai Medical Center (9,300), according to the county. Other notable employers include Wells Fargo (9,100), AT&T Inc. (8,950), California Institute of Technology (8,504), Amgen (6,500), and JP Morgan Chase (4,700). The Los Angeles County Metropolitan Transportation Authority The LACMTA was established in 1993 as the successor to the Southern California Rapid Transit District and the Los Angeles County Transportation Commission. It serves as the transportation planner, designer, builder, and operator for the county for bus, rail, highway, and commuter rail activities in the county. Its governing board consists of 13 voting members, including the five Los Angeles County board of supervisors, the mayor of the city of Los Angeles and one city councilman, two public members, and four members from cities other than Los Angeles. It operates more than 2,400 buses, five light rail lines, and commuter rail to surrounding counties and finances highway improvements. Related Criteria And Research USPF Criteria: Special Tax Bonds, June 13, 2007 Standard & Poor s RatingsDirect on the Global Credit Portal October 11, 2010 4
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