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Report Card

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GARVEE Transaction Structures Provide Smooth Rating Ride Despite Dips In Federal Funding
Primary Credit Analyst: Mary Ellen E Wriedt, San Francisco (1) 415-371-5027; maryellen.wriedt@standardandpoors.com Secondary Contacts: Peter V Murphy, New York (1) 212-438-2065; peter.murphy@standardandpoors.com Geoffrey E Buswick, Boston (1) 617-530-8311; geoffrey.buswick@standardandpoors.com

Table Of Contents
The Road To GARVEE Funding In MAP-21 Federal Approval For Transportation Funding Has Historically Been Bi-Partisan, But Funding Risks Remain The Reauthorization Risk For MAP-21

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Report Card:

GARVEE Transaction Structures Provide Smooth Rating Ride Despite Dips In Federal Funding
The nation's transportation sector continues to manage the risks associated with the federal government's attempts to curb the deficit, as well as the overall economic and political climate. Federal general fund transfers supporting the Highway Trust Fund (HTF) are subject to sequestration, and there is little support for raising the federal gas tax, the proceeds of which provide most of the program's funding. Moreover, Moving Ahead for Progress in the 21st Century Act (MAP-21), the legislation that governs federal funding for state transportation initiatives, will expire in September of this year. Standard & Poor's Ratings Services will monitor the MAP-21 reauthorization progress and its effect on the states' transportation initiatives. However, we expect that MAP-21 will be extended through short-term continuing resolutions or reauthorized due to the legislation's longevity and vital role in supporting the national highway system. Overview • MAP-21, which governs federal funding for states' transportation initiatives, will expire later this year. • We anticipate that MAP-21 will likely be extended through short-term continuing resolutions or reauthorized and would view positively Congress' approval of replacement funding for the gas tax. • Mitigating reauthorization risk or delay are the conservative financial structures inherent in all rated grant anticipation revenue notes or vehicles (GARVEE) transactions.

The Road To GARVEE Funding In MAP-21
Standard & Poor's maintains public ratings on 27 bond transactions (with 26 obligors) secured by federal aid transportation grants under Section 122 of Title 23 of the U.S. Code of Law. The source of the pledged funds is the longstanding Federal Aid Highway Program (FAHP), which has been the primary funding source for the national highway system for the past 50 years. The grants require annual appropriation by Congress and are distributed to each of the states and territories for reimbursement for various federal qualified highway and transit projects. Since 1995, certain projects have been financed by what are commonly referred to as GARVEEs. Currently, the FAHP is governed and authorized by specific federal legislation: MAP-21, which will expire on Sept. 30, 2014. A new multiyear authorizing statute has yet to be introduced in Congress although we anticipate that one or more bills will be proposed soon. In the past, new authorizing legislation has been slowed by the sheer size and complexity of the program, issues related to the federal deficit, tax increases and other funding sources, allocation of HTF resources among the states, and debate concerning its final price tag.

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Federal Approval For Transportation Funding Has Historically Been Bi-Partisan, But Funding Risks Remain
While Standard & Poor's views favorably all proposals that would extend the funding period of MAP-21 or introduce a new surface transportation funding bill, the delay and uncertainty regarding renewal authorizations highlight the key credit weakness of GARVEE ratings. Although we consider an interruption in future federal transportation funding to be remote, the risk to state programs that leverage these funds are not significant, including the timing of receipts and future erosion in dollars either due to lower authorized or appropriated levels or programmatic changes that negatively affect recipients. However, Standard & Poor's consider both the history of the program and its vital role in preserving and expanding the national highway system, as well as the significant funding needs facing surface transportation and the lack of resources to fund those needs, as considerations supporting continued reauthorization of the program for the foreseeable future. Standard & Poor's will closely monitor the sector both during and after reauthorization in order to evaluate and monitor how each individual state's debt plans may be adjusted or changed. We believe the transportation sector continues to face economic and financial risks associated with the consequences of Congress' recent efforts to reduce the federal deficit. The federal gas tax provides the bulk of the program's funding but is not indexed to inflation and has not increased since 1993. As such, the gas tax has not been able to fully fund the appropriation for the past few surface transportation bills. At $19 billion for federal fiscal 2014, general fund transfers supporting the HTF come from the general treasury and, thus, is subject to sequestration or other Congressional actions. We believe the requirement for a general treasury transfer to make the HTF whole introduces credit risk given that there is little support for raising the federal gas tax. In light of the plateau in national vehicle miles traveled (at about three trillion miles per year), growth in electric vehicles, and increased corporate average fuel economy standards, holding the gas tax as is will continue to erode the tax's purchasing power, especially as material and labor costs for road construction are increasing. It is with this funding question in mind that MAP-21 was approved with just a 27-month term (which states' department of transportation officials have said is too short to allow for meaningful planning for necessary large projects). Nevertheless, the sector's high credit quality and strong coverage provide a cushion against the need for frequent reauthorizations and any rating or outlook actions, in our opinion.

The Reauthorization Risk For MAP-21
U.S. Transportation Secretary Anthony Foxx has stated that a priority will be "working on bipartisan solutions to surface transportation that put us on a long-term sustainable path." Congressman Blumenauer and Chairman Camp, as well as senators Boxer, Baucus, and Mikulski are working on proposals to fund transportation. Ray LaHood, the former transportation secretary, has stated that he wants Congress to pass a six-year surface transportation bill with at least $500 million in funding for transportation infrastructure. Standard & Poor's believes that it is more likely that Congress will continue to fund the future surface transportation bill using primarily the gas tax, but as MAP-21's expiration quickly approaches, Standard & Poor's will be watching to see whether Congress will approve any replacement funding for the gas tax. Should the gas tax remain the funding source, and should Congress continue to focus on austerity and debt reduction, we believe that general-fund transfers to support transportation funding could be less likely to gain bipartisan support, potentially limiting the size of the next surface bill to just what the gas tax can

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support. While reauthorization risk cannot be completely eliminated, it has been minimized through conservative financial structures inherent in all rated GARVEE transactions, which have resulted in the relatively high ratings on these transactions. This includes the use of back-up credit support, debt service reserves, robust debt service coverage (DSC) levels, shorter final maturities, and restrictive additional debt provisions (see table 1). However, in addition to these, many nonquantitative credit issues, such as funding mechanics and timing; evaluation of state processes for managing and administering the program; history of federal receipts and volatility; each individual state's donor status, underlying economy, and transportation needs; and each state's respective political representation and influence in Congress also influence the ratings. Many of Standard & Poor's higher GARVEE credit ratings ('AA' category) have the benefit of either a secondary pledged revenue stream or access to transportation-related resources at the state level or very high DSC levels, which would provide credit support during a protracted lag between reauthorization periods.
Table 1

Issuer Review
Transportation Grant-Secured Obligations Rating and Outlook (as of Jan. 24, 2014) A+/Stable

State AK

Issuer Alaska Railroad Corporation Alabama Federal Highway Finance Authority Arizona Transportation Board

Analyst Wriedt

Comment DSRF funded at 50% of MADS; Final maturity 2021; MADS coverage at 2.1x based on actual receipts; ABT 1.5x MADS; $110 million in debt outstanding. No DSRF; Final maturity 2026; MADS coverage at 16.5x based on obligation authority; ABT 3x; $391 million outstanding. No DSRF; Final maturity 2026; MADS coverage at 12.6x based on actual receipts; ABT 3x; Access to cash balances in state highway funds if federal highway funds are insufficient; ABT 3x on maturities extending beyond current authorization period; $335 million outstanding. No DSRF; Final maturity 2020; MADS coverage 43x based on actual receipts; ABT 4x (6.6x based on board policy); $202 million outstanding. No DSRF; Final maturity 2017; MADS coverage at 5.6x based on actual receipts; ABT 2x; Access to cash balances in state highway funds; $670 million outstanding. DSRF only on series 2011 bonds; Final maturity 2027; MADS coverage at 12x based on obligation authority; ABT 3x; $126 million outstanding. Trustee-held supplemental debt service account funded monthly to pay debt; Final maturity 2025; MADS coverage 1.8x based on actual receipts; ABT 3x; $115 million outstanding. No DSRF; Final maturity 2018; MADS coverage 5.9x based on obligation authority; ABT 3x; $1.3 billion outstanding. Section 5307 Bonds: No DSRF; Final maturity 2029; MADS coverage at 2.2x based on 5307 apportionments; ABT 1.5x; $510 million outstanding. Section 5309/5337 bonds: No DSRF; Final maturity 2028; MADS coverage at 3.1x based on 5309 apportionments; ABT 1.5x; $312 million outstanding. No DSRF; 6.39x MADS coverage at 6.4x based on actual receipts; ABT 4x; $557.6 million outstanding.

AL AZ

AA/Stable AA/Stable

Rovirosa Wriedt

CA

California

AA/Stable

Wriedt

CO

Colorado Department of Transportation District of Columbia

AA/Stable

Wriedt

DC

AA/Stable

Wriedt

DE

Delaware Transportation Authority Georgia State Road & Tollway Authority Chicago Transit Authority

AA/Stable

Pancholy

GA IL

AA-/Stable A/Stable

Pancholy Hannay

IL

Chicago Transit Authority

A/Stable

Hannay

KY

Kentucky Asset Liability Commission

AA/Stable

Pancholy

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Table 1

Issuer Review (cont.)
MA Massachusetts AAA/Stable Torres No DSRF; Final maturity 2027; MADS coverage of 8.5x including gas tax revenues; ABT 4x; Access to excess state gas tax revenues; $388 million outstanding. No DRSF; Final maturity 2027; MADS coverage of 7.3x based on actual receipts; ABT 3x; $733 million outstanding. No DSRF; Final maturity 2033; MADS coverage at 11.5x based on actual receipts; ABT 5.0x; $830 million outstanding. No DSRF; Final maturity 2023; MADS coverage at 25x based on actual receipts; ABT 3x; $170 million outstanding. No DSRF; Final maturity 2026; MADS coverage of 12.7x based on actual receipts; ABT 3x; $600 million outstanding. No DSRF; Final maturity 2025; MADS coverage at 11.9x based on actual receipts; ABT 3x; $180 million outstanding. DSRF funded at IRS maximum; Final maturity 2021; MADS coverage at 2.2x (senior) and 1.9x (senior and sub) based on actual receipts; ABT 1.15x (senior and sub); $178 million (senior) and $313 million (sub) outstanding. No DSRF; Final maturity 2018; MADS coverage of 54.3x based on actual receipts; ABT 1x; $75.4 million outstanding. No DSRF; Final maturity 2029; MADS coverage of 8.7x based on actual receipts; ABT 5x; Access to additional lawfully available funds; $906 million outstanding. No DSRF; Final maturity in 2028; MADS coverage at 3x based on actual receipts; ABT 1.5x; Access to additional cash in the regional flexible funds; $174 million outstanding. DSRF funded at 50% MADS; Final maturity 2029; MADS coverage of 5.6x based on obligation authority; ABT 1.5x; $191 outstanding. No DSRF; Final maturity 2021; MADS coverage 5.0x based on actual receipts; ABT 3x; $312 million outstanding. No DSRF; Final maturity 2029; MADS coverage at 9.9x based on actual receipts; ABT 3x (4x based on board policy); Access to state transportation trust fund monies if necessary; $525 million outstanding. No DSRF; Final maturity in 2024; MADS coverage at 6x based on obligation authority; ABT at 3.5x (3.75x based on state policy); $786 million outstanding. No DSRF; Final maturity at 2015; MADS coverage at 15x based on actual receipts; ABT 3.0x; $99 million outstanding.

MI MO

Michigan Missouri Highway and Transportation Commission Montana Department of Transportation North Carolina New Hampshire New Jersey Transit Corporation

AA/Stable AA+/Stable

Murphy Pancholy

MT NC NH NJ

AA/Stable AA/Stable AA/Stable A/Stable (senior); A-/Stable (subordinate) A-/Stable AA/Stable

Wriedt Rovirosa Wriedt Rovirosa

NJ OH

New Jersey Transportation Trust Fund Authority Ohio

Rovirosa Rovirosa

OR

Tri-county Metropolitan Transportation Authority Southeastern Pennsylvania Transit Authority (SEPTA) Rhode Island Department of Transportation Commonwealth Transportation Board

A/Stable

Wriedt

PA

A+/Stable

Rovirosa

RI VA

AA-/Stable AA/Stable

Torres Pancholy

WA

Washington

AA/Stable

Wriedt

WV

West Virginia Commissioner of Highways

AA/Stable

Pancholy

ABT: Additional bonds test. DSRF: Debt service reserve fund. MADS: Maximum annual debt service.

Table 2

Contact Information
Analyst Robert Hannay Peter Murphy Anita Pancholy Georgina Rovirosa Adam Torres Mary Ellen Wriedt Location Phone E-mail

San Francisco 415-371-5038 robert.hannay@standardandpoors.com New York Dallas New York New York 212-438-2065 peter.murphy@standardandpoors.com 214-871-1402 anita.pancholy@standardandpoors.com 212-438-7983 georgina.rovirosa@standardandpoors.com 212-438-2481 adam.torres@standardandpoors.com

San Francisco 415-371-5027 maryellen.wriedt@standardandpoors.com

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