Fitch Rates Massachusetts School Building Authority's $300MM 2015B Sales Tax Bonds 'AA+'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA+' rating to the following Massachusetts School Building Authority (MSBA) sales tax bonds:

--$300,000,000 senior dedicated sales tax bonds, 2015 series B.

The bonds are scheduled to be sold through competitive bid on or about May 6, 2015. Proceeds are intended to refund $300 million in subordinate dedicated sales tax bond anticipation notes, 2014 series A.

In addition, Fitch affirms the ratings on the following MSBA sales tax bonds:

--$5.07 billion in senior dedicated sales tax bonds at 'AA+';

--$76.3 million in senior dedicated sales tax bonds at 'F1+';

--$293.4 million in subordinate dedicated sales tax bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The authority's bonds are secured by an irrevocable dedication of one cent of Massachusetts's 6.25-cent sales tax, with some exclusions.

KEY RATING DRIVERS

BROAD DEDICATED REVENUE SOURCE: The bonds are secured by an irrevocable dedication of one cent of Massachusetts's 6.25-cent sales tax. Although performance in the recession was weak, the sales tax has been a relatively stable revenue source over time and recent growth has been in line with the commonwealth's economy.

STRONG STRUCTURAL PROTECTIONS: Bondholders benefit from the statutory dedication of the tax for school capital purposes. Dedicated revenues are segregated from the Commonwealth general fund, and the authority has no role in funding school operations. Strong legal covenants protect against diversion of revenues or lowering of the tax rate, although the base can be changed.

ADEQUATE COVERAGE: Both current debt service coverage and the additional bonds test are adequate.

STRONG AND WEALTHY ECONOMY: Massachusetts has a broad and diverse economy with the second-highest per capita personal income in the nation. Employment growth is solid, education levels are high, and population growth has approximated that of the U.S. this decade, a marked improvement from historical experience and the performance of other states in the region.

RATING SENSITIVITIES

PLEDGED TAX PERFORMANCE: The rating is sensitive to the performance of the pledged sales tax revenue and the maintenance of solid debt service coverage levels.

CREDIT PROFILE

The authority's strong bond ratings are based on the historical reliability of sales tax revenue, the adequacy of debt service coverage and the additional bonds test, and structural protections that include the statutory dedication of the tax for school capital purposes. The commonwealth has imposed a sales tax since 1966, and although performance in the recession was weak, coverage of maximum annual debt service (MADS) remains solid at 2.04x for senior bonds and 1.89x for aggregate debt service, based on fiscal 2015 revenues and without consideration of the federal interest subsidies associated with Build America Bonds and Qualified School Construction Bonds. Sales tax revenue results are much improved since the recession, with actual growth of 6.7% year-over-year in fiscal 2014, and estimated growth of 6.1% for fiscal 2015, which ends on June 30. Through March 2015, commonwealth sales tax revenues are slightly below the fiscal 2015 forecast, although remain 4.1% ahead of prior year figures; the commonwealth has noted the impact of unusually harsh winter weather on taxable consumption in recent months. The commonwealth's January 2015 consensus revenue forecast anticipates sales tax revenues growing 4.1% in fiscal 2016.

Additional bond issuance under a $10 billion authorization requires 1.4x maximum annual senior debt service coverage for senior bonds and 1.3x coverage of total MADS for subordinated bonds. Dedicated revenues are segregated from the commonwealth general fund, and the authority has no role in funding school operations. Strong legal covenants protect against diversion of revenues or lowering of the dedicated tax rate, although the base can be changed. Most of the authority's senior lien bonds issued to date have had a standard debt service reserve fund, but the current bonds will include a debt service reserve funded at 50% of MADS. This is not a rating factor given the strong coverage and structural features of the bonds.

Dedicated sales tax revenues are credited to the School Modernization and Reconstruction Trust (SMART) fund, which is held by the commonwealth treasurer exclusively for the purposes of the authority, and disbursed to the bond trustee on a monthly basis. The revenues in the fund are not commingled with commonwealth funds and are not subject to appropriation. Bondholders have first claim on the dedicated sales tax.

The dedication of the entire one-cent sales tax was fully phased in for fiscal 2011, resulting in receipts of $655 million for the year. Average annual sales tax growth has been about 6.4% since the inception of the tax in 1966, with the largest one-year drop of 7.1% occurring in 1990. However, in the recent recession sales tax revenues dropped 6.2% in fiscal 2009 and another 1.7% in fiscal 2010, not considering the increase in the commonwealth sales tax rate from 5% to 6.25% that became effective on Aug. 1, 2009 but did not benefit the bonds. After growth of 2.8% in fiscal 2011 and 2.4% in fiscal 2012, the year-over-year increase of 1.7% for fiscal year 2013 has been followed by the more robust growth discussed above.

The authority can choose to transfer excess dedicated sales tax revenues to the commonwealth, but the commonwealth has relinquished all claims to the revenue. The authority consists of seven members: the Commonwealth Treasurer (chair), four treasurer appointments, and two ex-officio members. The authorizing legislation specifies that the treasurer shall act as trustee as it relates to the SMART fund and not on account of the commonwealth.

The authority was created in 2004 to address a substantial backlog of programs funded under the commonwealth's prior school building assistance program and create a sustainable system for school capital funding going forward. Pre-existing contract assistance commitments to localities, a declining obligation through 2023, are paid annually from dedicated revenues after payment of debt service. The authority was authorized to fund up to $500 million in new projects annually starting in fiscal 2008 (with the limit adjusted up or down each year by the lesser of the dedicated sales tax revenue increase/decrease or 4.5%); approval of new projects is contingent upon the availability of funds for this purpose. The authority does not have a waiting list.

As pledged revenues are segregated from general operations of the commonwealth, bond security is driven by performance of the sales tax and therefore closely linked to economic performance in the state. Massachusetts has a fundamentally strong and wealthy economy. Institutions of higher education and health care are significant and lend stability, in addition to supporting development and innovation in other areas. At 128% of the U.S. average, per capita personal income is the second highest of the states.

The commonwealth's economic performance in the most recent recession was significantly better than the national experience, in contrast to 2002-2004 when Massachusetts experienced among the steepest employment drops in the country. Employment losses in 2009 were less severe than those of the U.S. (3.2% versus 4.3%), and commonwealth employment rose 0.4% in 2010 while U.S. employment fell 0.7%. Employment continued to grow in 2011 (1.1%), 2012 (1.6%) and 2013 (1.7%) at a pace generally in line with the national trend. More recently, job gains have continued at a slower pace than the nation, with 2014 growth of 1.6%, compared to 1.9% nationally, and March 2015 employment is up 1.6%, below the 2.3% national pace of growth. As of March 2015, the unemployment rate remains well below the U.S., at 4.8% in the commonwealth compared to 5.5% nationally.

For more information on the commonwealth, see Fitch Research 'Fitch Rates $550MM Massachusetts GO Bonds 'AA+'; Outlook Stable ' dated April 16, 2015, available at www.fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Statushttp://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983640

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Fitch Ratings
Primary Analyst
Douglas Offerman, +1-212-908-0889
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Laura Porter, +1-212-908-0575
Managing Director
or
Committee Chairperson
Marcy Block, +1-212-908-0239
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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