CHICAGO – Michigan's recent adoption of a $1.2 billion road funding package was labeled a positive credit factor for the state's transportation revenue bonds by Moody's Investors Service.
The road funding package that Gov. Rick Snyder is signing Nov. 10 will fuel stronger coverage ratios for the Michigan Department of Transportation's state trunk line fund bonds and comprehensive transportation bonds, which carry Aa2 ratings, Moody's said in its weekly outlook published Nov. 9. The ratings are one notch below the state's Aa1 general obligation rating.
The plan relies on $600 million from the state general fund and $600 million from higher registration fees and gasoline taxes. The general funds are expected to enhance coverage of trunk line fund bonds.
The higher taxes and fees that will generate the other $600 million in new annual revenue will bolster debt service coverage ratios for both forms of state transportation borrowing.
The bonds are secured by money deposited in the state's transportation funds and since fuel taxes and registration fees are constitutionally dedicated for transportation, the incremental revenues would likely enter the flow of funds for the bonds and be pledged to bondholders, Moody's wrote.
"The additional revenues are meaningful," Moody's wrote. "Constitutionally dedicated transportation revenues currently total a little less than $2 billion, with the motor fuels tax and the vehicle registration fee each about half of dedicated revenues." A $600 million addition to these tax revenues would mark a 30% increase, and affect coverage on transportation bonds by roughly that amount.
Coverage on MDOT's $1 billion of trunk line bonds, which fund highways and other big roads, is roughly 4.7 times. A 30% increase to revenues implies that coverage could increase to roughly 6 times. Some of the general fund contributions to transportation projects would also flow through the trunk line fund, implying even higher coverage.
Coverage on MDOT's $150 million of comprehensive bonds, which fund other types of projects such as local bus service and rail freight, is roughly 11 times. A 30% increase to revenues implies that coverage could increase to roughly 15 times. The statute does not direct the general fund contributions to the comprehensive fund, and so would not further enhance coverage.
Under Michigan's state constitution, motor fuel taxes and vehicle registration fees must be used exclusively for transportation uses. "The trend for these bonds has already been positive. Revenues are growing and the mix of motor fuel taxes and registration fees has proven to be a dependable revenue stream with low volatility," said the report authored by analyst Dan Seymour.
The higher taxes and fees take effect Jan. 1, 2017. Under the plan, $150 million would be diverted from the general fund in fiscal 2018 and 2019 with that figure rising to $325 million for 2019 and 2020 before settling at $600 million in additional funding earmarked in fiscal 2020 and beyond.
