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Houston Metro Deal Rolls Along

DALLAS — With its federal funding restored amid efforts to regain public trust, the Harris County Metropolitan Transit Authority in Houston is preparing a $511 million deal to get its belated light-rail expansion back on track.

The $463 million of sales-tax bonds and $48 million of contractual obligations are expected to price next week in a negotiated deal with senior manager Goldman Sachs & Co. and six co-managers.

The sale comes as a significant milestone in Texas’ largest city after controversies over procurement and management.

“This is a very important step for us,” Metro board chairman Gilbert Garcia said in approving the bond issue last month.

“It’s been like turning an aircraft carrier around,” board member Dwight Jefferson said in recommending the bond deal after two years of disputes over expanding the city’s single light-rail line.

This week’s bonds are part of a November 2003 voter authorization of $640 million, backed by 75% of the 1% sales and use tax revenue collected by the authority.

The bonds will finance a portion of two light-rail lines known as the North and Southeast corridors and will refund about $75 million of commercial paper notes.

“I would hope we would issue the full amount [$463 million], given the current interest rates,” Jefferson said at the July board meeting.

“I’ve never seen interest rates this low, and I’m not sure we’ll ever see them that low again,” board vice chairman Allen Watson said before joining in unanimous approval of the deal. “This looks like a good time to do this.”

Metro chief financial officer Susan Bailey said she expects long-term interest rates “well below 4%,” even though financial projections for the two new lines were based on rates of 5.5%.

“At times, we had a rate as high as 6%,” she said. “So, current times are to our benefit.”

Standard & Poor’s assigned its AA long-term rating to the upcoming bonds, just one notch below its rating of Treasuries.

So far, the agency’s Aug. 5 downgrade of United States debt to AA-plus from AAA has not affected Harris County Metro’s ratings.

The authority is highly dependent on congressional appropriations that have been stymied amid Washington’s long-running political standoff, though much of its bond debt is backed by the local sales tax.

Standard & Poor’s also affirmed its AA rating on the authority’s outstanding sales tax bonds and contractual obligations and its AA-minus long-term rating and underlying rating on the certificates of participation. The outlook is stable.

“The ratings reflect our view of the county’s very deep and diverse service area economy, a stable sales tax base, and the authority’s very high coverage levels and strong liquidity,” said credit analyst Russell Bryce.

Moody’s Investors Service assigned its Aa2 rating with a stable outlook. Fitch Ratings does not rate the debt.

“Pledged revenues are growing strongly and future debt issuance plans have moderated,” Moody’s analyst Nicholas Samuels wrote. “We expect that at the current rating level Metro will continue to maintain healthy coverage of its sales tax bonds similar to the ratios currently forecast.”

What Moody’s considers strong bondholder protections include direct funding with the trustee, a debt-service reserve fund, and pledged revenues running two times higher than maximum debt service.

The sales tax backing the debt was authorized by voters in 1978, and in 2003 voters authorized bonding against the tax to finance a light-rail system.

Sales tax revenues distributed by Texas Comptroller Susan Combs to the Harris County Metro this month rose 10.8% compared to the same month last year, growing at a faster pace than the 9.4% for transit authorities statewide.

Sales tax revenue statewide has risen for 16 straight months, Combs reported this month.

A critical piece of good news for the authority came in February when the authority learned that proposed federal funding for its New Starts grant had grown by $50 million.

Shortly after that, Metro found that its procurement violations under the Buy America Act had been repaired and that it could acquire U.S.-built rail cars that had previously been under contract to the Utah Transit Authority but were no longer needed in Salt Lake City.

The transit authority plans to complete the two new lines by 2014 with $900 million of federal grants that have been promised but still have to navigate the treacherous congressional appropriations process.

The so-called full-funding grants would arrive over five years as part of the Federal Transit Administration’s New Starts program. Washington has reserved about a third of the total grant for the Metro rail project, according to the Houston-based authority’s chief executive, George Greanias.

Threatening the funding in the wake of the recent federal debt-limit cliffhanger is the potential cut of $1.2 trillion in spending to be proposed by the 12-member congressional “super committee” made up of appointees from the House and Senate with a mandate to reduce federal spending.

The dozen appointees must produce a list of recommendations by Thanksgiving that can be approved by Congress.

Metro’s plans for the two new lines hit a roadblock in September when the FTA ruled that Metro’s process for procuring rail cars was improper and ordered the agency to cancel its contract with Spanish supplier CAF (Construcciones y Auxiliar de Ferrocarriles SA).

In December, CAF agreed to refund Metro’s $14 million payment for the order, and the authority pledged to qualify for its $900 million full-funding agreement from the FTA.

After working out its deal with CAF, Metro learned that the Utah Transit Authority would not be exercising its option for 19 Siemens rail cars mostly built in California. The first car could be delivered as early as October of 2012, a full year earlier than expected.

Metro’s recovery from a spate of bad news over funding, lawsuits, a district attorney’s investigation of alleged illegal document shredding and a variety of other mishaps in 2010 has been led by Greanias, who replaced Frank Wilson.

Wilson left under a cloud but was later cleared of spending irregularities in an internal investigation.

Following that, Greanias was also tarnished in July by a one-week suspension for using Metro’s wireless network to view adult websites.

Despite the setbacks, Garcia said that Metro will continue its efforts to restore trust.

“Our goal is very simple,” the board chairman said. “We want to provide first-class transportation for the community. We want to earn the public trust. We want to work with the community. We want to improve the internal morale of Metro because we have good people here at Metro.”

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