S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Transportationrevenues and intergovernmental subsidies; salestaxes and other nontransit-related revenues actuallysecure most bonds issued for transit purposes.DemandEvaluation of demand for a start-up facility is difficultand centers largely on determining the plausibilityof traffic and engineering studies. Generally,Standard & Poor’s would have difficulty rating astart-up mass transit facility bond or other transitlikerail project in the investment-grade categories ifthe system had no operating history and was backedsolely by farebox revenues. Localities that have onlylimited public transportation service need a majormarketing effort to persuade commuters to foregodriving. Many people who vote positively for transitprojects have no intention of using them regularly;they are seen as a method of getting other people offthe highways. New transit systems rarely achievetheir projected ridership. Nevertheless, if a systemcan reduce travel time significantly at reasonable costin a safe environment, it will attract some motorists.Ridership can be enhanced by establishing linkagewith suburban transit systems; around thecountry “Park and Ride” programs, wheremotorists can park at the exterior terminuses of asystem and complete their commute by rail or bus,have been highly successful.For established systems, the historical demandand the relative competitiveness of alternative travelmodes are reviewed. Virtually every metropolitanarea with an established network also has a regionaltransportation commission responsible for coordinatingthe planning and development of all methodsof transit. Since members of the commission areappointed by governors or other elected officials,their past policies and practices provide a valuablemeasure of how public policy has been used toattract commuters to a transit system. With anestablished system, there is an evaluation of historicalridership patterns and departures from these patternsfollowing fare increases and during economicdownturns. These trends are a rough measure of thevalue of transit for users and their willingness to payincreasing amounts for the service.OperationsBecause mass transit systems are capital intensiveand generally have deficit operations, these systemsrely heavily on governmental support. This is compoundedby the fact that fare increases generallyevoke strong negative reactions from users, thereforerevenue flexibility is often limited. As a result,most transit systems rely on government subsidiesor the pledge of tax revenues in addition to fareboxrevenues. Standard & Poor’s reviews the history ofthese additional revenue sources and the stability ofthis revenue stream. In particular, Standard &Poor’s looks to the ability of management to closeany projected operating deficits through its abilityto raise revenues either through fare increases orincreased other revenues or through operationalcutbacks. The ability of management to containcosts and increase labor productivity is especiallycritical because wages and benefits account for wellover half of total operating costs in this labor-intensiveindustry.For older more established systems, operatingdeficits can also mean that maintenance programshave been neglected or there is significant deferredmaintenance. As a result, Standard & Poor’s examinesthe mean distance between failures in each yearso as to determine the overall state of repair for thesystem. Standard & Poor’s is especially attentive tomaintenance procedures, since no system canattract new ridership or retain existing users if theequipment is subject to frequent breakdowns.In examining capital improvements and extensions,the feasibility of the project, usually as determinedby an independent engineering firm, and thelogic of the assumptions supporting the conclusionsare studied. The project also is evaluated within thecontext of the regional transportation commission’soverall planning and the adequacy of pledged revenuesto cover debt service on the debt to be issued,as well as any parity debt that is outstanding.Legal ProvisionsGiven the weak financial condition of transit systems,legal provisions are important to an investment-graderating. Where the pledged security is agross lien on farebox revenues, Standard & Poor’slooks to both historical coverage of debt serviceobligations and covenants related to additionalindebtedness in order to provide bondholder protectionfrom revenue declines that could not be mitigatedby reducing operating expenses. In practice,most operators view farebox revenues as a supplementalsource to provide leverage and do not lookto maximize this type of debt. Rate covenants maynot provide credit strength to the extent most operatorsexhibit a general lack of revenue flexibility.Standard & Poor’s evaluates the practical aspectsof such a rate covenant against what is frequently ahighly charged political atmosphere and litigationthat delay or change proposed fare increases. Someissuers of transit revenue bonds try to compensatefor what is seen as a weakness in the rate covenantby supplying an exceptionally high multiple in theadditional bonds test. Those tests that include onlyhistorical revenues are significantly stronger thanany test allowing projected revenues. A fully fundeddebt service reserve helps provide liquidity in timesof cash flow stress. ■150 Standard & Poor’s Public Finance Criteria 2007