The Los Angeles County Metropolitan Transportation Authority (Metro) Board of Directors has authorized the release of an updated draft of its 2020 Long Range Transportation Plan (2020 LRTP), a $400 billion, 30-year transportation blueprint for the region. There is a 45-day public review period (through July 13, 2020) to gather comments.
The plan, Metro said “lays out a future vision and roadmap for bringing about a more mobile, sustainable and vibrant future for Los Angeles County. Through extensive public outreach during the past 18 months that included 77 community meetings, 28 public workshop meetings and 20,000 survey responses from the public, Metro has distilled the region’s desires into four goals: Better Transit, Less Congestion, Complete Streets and Access to Opportunity.”
The draft 2020 LRTP outlines what Metro “is doing currently and must do for Los Angeles County over the next 30 years. Current challenges, including the COVID-19 pandemic crisis, will present opportunities for Metro to take bold action and help achieve mobility improvements for the region.”
The 2020 LRTP details how Metro will add more than 100 miles over the next 30 years, “the most aggressive transit expansion plan in the nation.” Beyond transit, Metro will invest in arterial and highway projects to reduce congestion—such as the I-5 North enhancements project and adding more ExpressLanes—and bicycle and pedestrian projects, such as the L.A. River Path Project to close the eight-mile gap in the path between Elysian Valley and Maywood.
In addition, the draft 2020 LRTP includes more than $200 billion for operations and state of good repair, as well as $38 billion in funding for local agencies to maintain their transportation systems.
The plan also notes “the potential to deliver significant mobility benefits to the region through the major capital projects, programs and bold policies.” After implementation, those benefits include 21% of county residents and 36% of jobs within a 10-minute walk of rail or BRT (bus rapid transit) options, up from only 8% of residents and 16% of jobs currently. If implemented, the plan aims to result in an 81% increase in daily transit trips, a 31% decrease in traffic delays and a 19% decrease in greenhouse gas emissions.
The 2020 LRTP is available for viewing and public comment at www.metro.net. The 45-day public review period will run from May 29, 2020 through July 13, 2020. Those interested is providing comments can submit by mail to: Attn Long Range Planning, LA Metro, One Gateway Plaza, Los Angeles, CA 90012-2952 or by phone: 213.922.2833 or by email at [email protected]. Metro’s Board of Directors are expected to adopt the Final 2020 LRTP toward the end of summer 2020.
“Over the coming decades, Metro will be faced with numerous complex decisions about how to address our region’s transportation challenges,” said Metro Board Chair and Inglewood Mayor James T. Butts. “Significant investments will be needed to maintain the region’s aging roadway and transit systems, while managing and modernizing the system to prioritize safe and reliable transportation services.”
Since the plan was announced, Fitch Ratings analysts Andrew Ward, Senior Director, and Primary Rating Analyst; Karen Ribble, Senior Director and Secondary Rating Analyst; and Jose Acosta, Senior Director and Committee Chairperson, have noted that Metro’s “Rating Outlook is Stable.” Read the analysis in its entirety below:
Fitch Ratings has assigned an “AA+” rating to the following Metro bonds:
• $29 million Proposition C sales tax revenue refunding bonds, senior bonds, series 2020-A.
In addition, Fitch has affirmed the following:
• Metro’s Issuer Default Rating (IDR) is at AA+.
• Outstanding Proposition C sales tax revenue bonds at AA+.
The bonds are scheduled to sell via competitive sale on or about June 3, 2020. Bond proceeds will refund some or all of the authority’s outstanding 2010-A bonds for economic savings and pay costs of issuance.
The Proposition C senior sales tax revenue bonds are payable from a first lien on the Proposition C half-cent sales tax applied to all taxable sales within Los Angeles County, net of an administrative fee paid to the California Department of Tax and Fee Administration and net of the 20% allocated to local jurisdictions for local transit. The state remits the net Proposition C sales tax revenues directly to the trustee each month.
The AA+ IDR reflects Metro’s strong operating performance, low long-term liability burden, solid expenditure control, solid long-term revenue growth prospects and strong public support for transportation measures, balanced against the authority’s limited independent legal ability to raise revenues and very significant near-term revenue risks. The AA+ sales tax revenue bond rating reflects solid growth prospects for pledged sales tax revenues and a high degree of resilience to modeled revenue declines at assumed leverage levels. The rating is capped by Metro’s IDR.
Economic Resource Base
The economic resource base is exceptionally large and diverse, and historically grew at a solid pace. Los Angeles County is the largest in the U.S., with a population of over 10 million people. The county accounts for more than one-quarter of California’s population and a slightly higher percentage of economic output.
Key Rating Drivers
Revenue Framework: a
Fitch expects Metro to experience significant sales tax revenue declines in calendar 2020, but long-term growth prospects for revenues remain solid due to the sound economic fundamentals of Metro’s broad, diverse and resilient service area. The authority has limited independent legal ability to raise revenues due to tax limitations. While Metro’s board can adjust fares, they are a relatively small revenue stream, and it would be impractical to adjust fares to a degree that would offset the cyclicality of the authority’s much larger sales tax revenue stream.
Expenditure Framework: aa
Fitch expects expenditure growth to align well with revenue gains on average over time. The authority has solid flexibility to adjust spending in response to changing economic conditions with low to moderate fixed costs, strong control over service levels and employee headcount, and a significant proportion of spending devoted to formulaic local transportation funding programs that automatically adjust to changes in revenues. Capital spending equaled about one-third of total expenditures in recent years and can be adjusted somewhat more readily than other forms of spending.
Long-Term Liability Burden: aaa
The long-term liability burden is low relative to the large economic resource base and low to moderate relative to cash flows. Fitch expects both of these metrics to remain unchanged despite Metro’s large debt plans for system expansion.
Operating Performance: aaa
The authority has the highest level of gap-closing capacity, reflecting a sizable reserve cushion relative to expected revenue volatility and midrange inherent budget flexibility. The county built very large cash balances in recent years due to voter approval of new taxes to fund increased transportation investments in the county.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
• Upward rating movement unlikely due to limits on the authority’s revenue raising flexibility and high dependence on economically sensitive revenues.
Dedicated Tax Bonds
• An increase in the IDR, which is unlikely.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
• A decline in liquidity in which unrestricted cash and investments fall below approximately 30% of operating expenses (110 days’ cash) on a sustained basis, reducing Fitch’s assessment of financial resilience.
• A weak and protracted recovery from the current economic downturn, leading to diminished revenue growth below the rate of inflation.
Dedicated Tax Bonds
• An increase in leverage beyond current expectations, which are driven by the authority’s policy of maintaining coverage in excess of about 2.3x.
• An extended period of weakness in sales tax revenue growth below the rate of inflation.
• A reduction in the authority’s IDR, which serves as a cap on the rating.
Best/Worst Case Rating Scenario
International scale credit ratings of Public Finance issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Sectorwide Coronavirus Implications
The recent outbreak of the coronavirus and related government containment measures worldwide create an uncertain global environment for U.S. state and local governments and related entities in the near term. As severe limitations on economic activity only began recently, most local governments’ fiscal and economic data do not fully reflect credit impairment. Material changes in revenues and expenditures are occurring across the country and likely to worsen in the coming weeks and months as economic activity suffers and public health spending increases. Fitch’s ratings are forward looking, and Fitch will monitor developments in state and local governments related to the severity and duration of the virus outbreak, and incorporate revised expectations for future performance and assessment of key risks.
In its baseline scenario, Fitch assumes sharp economic contractions hit major economies in 1H20 at a speed and depth that is unprecedented since World War II. Recovery begins from 3Q20 onward as the health crisis subsides after a short but severe global recession. GDP remains below its 4Q19 level until mid-2022. A severe but plausible downside scenario includes a prolonged health crisis and negative economic shock. Additional details, including key assumptions and implications of the baseline scenario and a downside scenario, are described in the April 2020 report ‘Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases — Update’ available on www.fitchratings.com.
Los Angeles County is beginning to slowly re-open its vast economy, but remains in the early stages of the process. The Department of Public Health issued an order requiring closure of shopping centers and non-essential retail business on March 19, followed by an order for residents of the city of Los Angeles to remain at home except for certain essential activities. With deaths and new cases declining in recent weeks, the county is beginning stage two of a five-stage reopening process. The county opened lower risk non-essential businesses, such as car dealerships and curbside delivery for indoor shopping malls; and it plans to reopen other low-risk businesses, such as manufacturing, and office and retail establishments, as it progresses through stage two of its recovery plan. The county appears to be on track to allow a significant amount of economic activity to resume, including businesses that generate the bulk of Metro’s sales tax revenues, if the region continues to meet health benchmarks over the coming weeks.
Significant economic risks remain, including renewed closures due to new infections. Fitch believes consumers may limit consumption due to individual consumers’ efforts to maintain social distance and due to reductions in personal income caused by the economic downturn. Los Angeles County’s unemployment rate jumped to 20.3% in April, according to the California Employment Development Department. Fitch expects a portion of the job losses to be permanent, with unemployment remaining above pre-crisis levels even after the economy reopens fully. Stages three and four of the reopening plan would allow activities that involve larger crowds, such as nightclubs, movie theaters, schools, entertainment, conventions and sporting events, and county public health officials have not yet provided a timetable for such a broad reopening.
Metro is well positioned to withstand the current crisis due to very strong reserves, solid expenditure flexibility, a resilient economic resource base and significant federal support for U.S. public transit agencies. The authority is primarily affected by the pandemic via reduced sales tax revenue collections, which equaled about $4 billion, or 80% of total revenues excluding capital grants, in the fiscal year ended June 2019. The authority expects sales tax revenues to decline by between $435 million (about 11% of 2019 sales tax revenues) and $750 million (about 19%) with declines spread across fiscals 2020 and 2021. The wide range of estimates reflects a lack of actual data on sales tax revenue collections during the pandemic, as well as considerable uncertainty about the timing and durability of efforts at re-opening the county’s economy. The Fitch Analytical Stress Test (FAST) model, suggests revenue losses at the high end of the authority’s estimated range, based on Fitch’s baseline economic downturn scenario. Metro is also experiencing significant reductions in fare revenues due to sharp declines in ridership, but fares are not a major revenue source for the authority, having provided just 8% of 2019 revenues, excluding capital grants.
Metro expects to receive a $770 million allocation under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), which would cover most of the authority’s revenue losses under Fitch’s baseline economic downturn scenario. The funding could prove inadequate in the downside stress scenario, which would put downward pressure on the rating if the authority failed to receive additional federal support or to make adjustments to its capital spending plans that would protect the authority’s healthy reserve position and balance long-term revenue and spending plans. Fitch believes the authority would face difficult spending decisions in a downside scenario, forcing it to rethink major investments in the region’s growing rail transit system. However, Fitch believes the capital plan could be adjusted to restore fiscal balance, even in the downside scenario, if policymakers maintained their historical fiscal discipline.
The authority’s reserves are very strong. Metro had about $2 billion of unrestricted cash and investments, or 191 days’ cash, on hand at the end of fiscal 2019. Reserves included about $1.1 billion of unrestricted cash. The authority projects it will maintain cash balances near this level at the end of fiscal 2020, with a very slight decline projected in fiscal 2021. The authority’s forecast appears reasonable despite considerable near-term revenue uncertainty. Fitch’s scenario analysis shows the authority maintaining sufficient unrestricted reserves to support the highest financial resilience assessment throughout the current downturn, even without consideration of extraordinary CARES Act funding.
The Proposition C sales tax revenue bonds are backed by a first lien on sales taxes collected on a broad and diverse revenue base. The authority pledged 80% of the half-cent tax on all taxable sales in Los Angeles County. The revenue resource base is massive and diverse in terms of payers. The 10-year CAGR of pledged revenues was 3.1% in 2019. Across a typical business cycle, Fitch expects growth between the rate of inflation and nominal GDP growth.
To evaluate the sensitivity of the dedicated tax revenues to cyclical decline, Fitch analyzes the degree of coverage cushion that current revenues provide at maximum annual debt service (MADS) at assumed leverage levels. Fitch assumes the authority will comply with its internal financial policies and Proposition C spending allocations, which limit leverage to about 2.3x (well above the 1.3x additional bonds test). At expected leverage levels, pledged revenues could fall 57% before reaching 1.0x debt service coverage. The largest consecutive decline in the revenue history was 17.6% during the Great Recession. The 57% coverage cushion is 3.2x the largest consecutive decline in the analyzed revenue history, consistent with an ‘aaa’ level of financial resilience. Annual debt service coverage was much stronger at 4.0x in 2019. The pledged revenues also show a high degree of resilience to expected revenue losses due to the current coronavirus outbreak, with MADS coverage remaining above 2.0x, even in an extreme stress scenario, with a 34% decline in revenues (reflecting a 40% to 50% decline in U.S. retail discretionary spending in 1H20).
In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from Lumesis.
References For Substantially Material Source Cited As Key Driver Of Rating
The principal sources of information used in the analysis are described in the Applicable Criteria.
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.
“For this plan to succeed, we must and will continue to build strong partnerships with local, state and federal agencies, as well as our many local stakeholders,” said Metro Chief Executive Officer Phillip A. Washington. “These partnerships are crucial for funding and delivering projects and for coordinated planning on issues of regional significance. Metro will increase this collaboration with local jurisdictions to support transit priority on local roadways, to improve first/last mile access to transit, and to improve local mobility.”