CHICAGO — With an improved rating outlook in hand, the Regional Transportation Authority of Illinois will take bids on $106 million of general obligation bonds next week.
Ahead of the RTA's first new-money sale since 2010, Fitch Ratings revised its outlook on the RTA's AA rating to stable from negative.
RTA officials also hope to benefit from an improving market for Illinois paper when the authority takes competitive bids Jan. 28 on the 30-year bonds.
"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," Fitch wrote.
Moody's Investors Service affirmed its Aa3 rating and stable outlook and Standard & Poor's affirmed its AA rating and stable outlook. The authority has $2 billion of long-term debt outstanding.
Backstrom McCarley Berry & Co. LLC is advising the RTA on the sale and Katten Muchin Rosenman LLP is bond counsel. The RTA pledges its full faith and credit to the bonds and its allocation of regional sales tax collections and public transportation funds which come from a 30% state match of regional sales and pledged real estate transfer tax in Chicago.
Proceeds will fund prioritized projects aimed at keeping the Chicago area transit system in a state of good repair. Funding will support improvements and maintenance for rolling stock, track and structures, electric signals, and stations and passenger facilities.
About $50 million goes to the Chicago Transit Authority which runs bus and rail transit in the city, $45 million to Metra suburban commuter rail, and $5 million to Pace suburban bus service. The RTA provides financial oversight of the three. Proceeds will also fund a debt service reserve.
"Clearly there is a large need to keep our infrastructure in a state of good repair," RTA chief financial officer Bea Reyna-Hickey said; the system reports a long-term $32 billion tab of needed work.
The RTA will release an updated asset management report next month. The RTA's five-year capital program calls for $4.6 billion in spending.
The sale marks the RTA's first long-term, new money issuance since 2010 as it has exhausted most of its state approved bonding capacity. About $50 million of authority will remain after the sale. While the state has not moved to increase the RTA's bonding capacity, it did include $2.7 billion in transit funding in its $31 billion capital program.
Most Illinois credits have paid a penalty to borrow due to the state's pension and liquidity woes but credits with some exposure to the state's fiscal position have been penalized the most. The RTA relies on state aid which has chronically been late.
A boost in income tax collections in the last fiscal year helped bring down the size of those late payments and passage of legislation overhauling the state's pension funds has improved the secondary market trading on Illinois paper as investors see the state's credit stabilizing.
The state currently is about $200 million behind on RTA payments which amounts to about four months' worth of aid. That's worse than a low of $123 million last year but much better than a previous high of $380 million.
The RTA has authority to issue up to $400 million of working cash flow notes to manage through the delays. Its use of the borrowing mechanism this year will "depend on how the state continues to pay us," said Reyna-Hickey.
There's some uncertainty in the next fiscal year as the state could be hit with a cash crunch as its temporary 2011 income tax hike begins to expire midway through fiscal 2015.
While the agency does face cash flow struggles due to late state payments, Reyna-Hickey said the agency has stressed in meetings with rating agency analysts and in its investor outreach its insulation from state pressures on its own revenue sources and its senior lien on sales taxes. It also stresses its successful navigation of the payment delays through short-term borrowing.
The RTA's sales taxes go to repay the bonds and those revenues "are never late," she said. Collections have also been on the rise, reflecting the improving economy, with year-to-date collections through September up by 5%. Sales taxes account for 66% of total revenues following by various state payments that make up 33%.
The RTA's pledged revenues provide a strong 5% debt service coverage ratio. The credit also benefits from the essential service provided by the RTA's service boards with about 2 million riders daily. The RTA is the third largest transit system in the nation.
"Fitch believes the reduced delay materially improves RTA's liquidity and its ability to meet the needs of its component service boards. A return to chronic delinquencies would adversely affect system maintenance, and present ongoing risk to the authority's financial health," the agency wrote.
"The stable rating outlook encompasses improved debt-service coverage because of favorable economic conditions, as well as RTA's demonstrated ability to manage persistent delays in state aid payments," Moody's wrote.
The RTA pension plan is also better funded at 70.4% then state plans which are below 50%, and its combined pension and other post-employment benefits contributions represented less than 1% of 2012 operating expenses. The bond structure benefits from limits on additional issuance based on sales tax collections for the last two years.
The RTA board late last year adopted a $4.5 billion budget for 2014 that includes $2.8 billion for operations and $1.7 billion for capital. The agency noted that it will not tap capital funds to help cover operations, a practice shed about three years ago.
Infrastructure needs and the lack of adequate funding remains not just a central operating but a key credit challenge for the agency, with more than 70% of its rail cars in worn or marginal condition, Fitch said.
RTA board chairman John Gates has proposed centralizing bonding authority for the region under the RTA and expanding its capacity to $5 billion arguing it offers the lowest cost of borrowing.
The CTA has butted heads with the RTA over its ongoing push to manage its own borrowing needs and opposes the proposed change.
The future of the agency is also potentially in flux. A state-appointed task force is examining regional transit oversight and may recommend changes to Gov. Pat Quinn and lawmakers on management and oversight issues in a report due in March.
Oversight came into question after a scandal at Metra in which the agency's former chief accused the Metra board of forcing him out over patronage allegations and attempting to keep him quiet with a lucrative severance package.
RTA chief Joseph Costello will retire at the end of February from the agency where he has worked for the last two decades first as fiscal chief and then as executive director. RTA senior planner Leanne Redden will serve an interim director beginning March 1.
