New York, December 22, 2015 -- Issue: Construction and Revitalization Program Revenue Bonds Series 2016A; Rating: Aa3; Sale Amount: $320,000,000; Expected Sale Date: 01/20/2016; Rating Description: Lease Rental: Appropriation
Summary Rating Rationale
Moody's Investors Service has assigned a Aa3 rating to Maryland Stadium Authority, Baltimore City Public Schools Construction and Revitalization Program Revenue Bonds Series 2016A. The rating reflects the State of Maryland's Aaa rating, the subject-to-appropriation nature of a substantial portion of the revenues funding the deposits that secure the bonds, the high essentiality of the funded projects, and ample coverage of the proportionate share of debt service by the Baltimore City (Aa2 stable) income tax backstop for the city's contribution. The rating also reflects the lack of strong bondholder protections that allow for potential impairment by legislative actions and the significant portion of revenue contributed by an allocation of state lottery proceeds, which, while offering very strong coverage, are volatile and risky over the 30-year horizon of the bonds
The outlook for the bonds is stable based on the stable outlook of the state.
Factors that Could Lead to an Upgrade
Statutory non-impairment covenant
State backstop to lottery revenues
Factors that Could Lead to a Downgrade
Significant reductions in state education aid to Baltimore City Board of School Commissioners (Aa1 stable)
Significant reductions in state lottery and/or Baltimore City income tax revenues
Additional prior claims on lottery proceeds
Legislative actions that impair bondholders, such as causing school aid that currently supports the bonds to be redirected to other purposes
The bonds are a limited obligation of the Maryland Stadium Authority (MSA) payable solely from deposits in a financing fund, described below. The bonds are not a debt, liability or pledge of the faith and credit or taxing power of the State of Maryland, the City of Baltimore, the MSA, the Lottery Agency or any other governmental unit.
The MSA, the Baltimore City Board of School Commissioners, the City of Baltimore and the Interagency Committee on School Construction have signed a memorandum of understanding (MOU) laying out the roles and responsibilities of each party. The bonds are issued by the Maryland Stadium Authority (MSA), which will have certain oversight and management responsibilities for the construction projects.
The bonds are secured by statutorily-required deposits of a minimum of $60 million per year into an MSA-controlled financing fund. Of this amount, $30 million is from funds appropriated by the General Assembly and deposited directly into a financing fund held by the Comptroller and controlled by the MSA. Principal and interest payments are due November 1 and May 1. The deposits are as follows:
Lottery proceeds ($20 million) - The Comptroller is required to deposit, or cause to be deposited, funds from the State Lottery Fund on a semi-annual basis in fiscal years in which bonds are outstanding. The lottery funds do not require appropriation and are subject to a prior claim of $20 million per year for the Maryland Stadium Facilities Fund.
Baltimore City school aid ($20 million) - A portion of state education aid due to the Baltimore City school board is transferred by the Comptroller to the financing fund. State education aid is subject to appropriation by the General Assembly. The Comptroller is required to deposit equal installments of school aid on a bi-monthly basis.
City of Baltimore education aid funds for retiree health costs for the BCSB ($10m). State education funds leveraged by payments by Baltimore to the BCSB and currently used by the BCSB for capital expenditures under a previous agreement between the state, Baltimore City and the BCSB. The funds are now required to be deposited by the Comptroller from state education aid into the financing fund, on a bi-monthly basis.
City of Baltimore bottle tax, table game proceeds and casino rent (minimum deposit of $10 million). Revenue from three sources to be deposited on a semi-annual basis on November 1 and May 1. The Act sets out a minimum deposit schedule of $8 million in fiscal 2014 and 2015, and then $10 million annually in two $5 million deposits until the bonds are no longer outstanding. These deposits are backed up by certain reserves held in a separate facilities fund described below, and a state intercept of undistributed Baltimore City income tax collections.
Deposits the financing fund are pledged to the trustee. The financing fund receives deposits from parties; pays debt service and reasonable bond-related and administrative charges. The balance of the financing fund, which has been receiving deposits since 2014, was approximately $19 million as of December 17 2015.
Sources of Deposits
School aid is appropriated by the General Assembly to the state's school aid fund and distributed to local governments based primarily on state school aid formulas. No further appropriation is required to enable the Comptroller to make the necessary transfers to the financing fund. The BCBSC received about $900 million in state school aid in fiscal 2015, net of teacher retirement costs. As of June 30, the school board had about $160 million in debt outstanding, with capacity to issue an additional $184 million based on its debt policy.
The Lottery Agency generates ticket sales of roughly $1.7 billion per year. Proceeds after prizes, administration, and certain claims are transferred to the state general fund. and equaled about $500 million in fiscal 2014. The $20 million required deposit to the financing fund by the lottery agency occurs prior to distribution to the state and after a $20 million transfer to the Maryland Stadium Facilities Fund to support debt service for sports stadiums and certain distributions to veteran's groups. Coverage of the transfer amount after prior claims is about 25x, based on a fiscal 2015 transfer to the state of about $500 million.
The sources of Baltimore City's required deposits are a beverage container tax, table game proceeds from the Horseshoe Casino, and participation rent payments from the same casino. The container tax was implemented in 2010 at a $0.02 levy on distributors per beverage container, and raised to $0.05 per container in 2013. Tax receipts from the tax were about $10.4 million in fiscal 2015. The table game proceeds are not available until the issuance of video lottery operating license for a new MGM Casino, which is under construction and expected to open in the second half of 2016. Baltimore City's allocation of these proceeds will be 5% of Horseshoe Casino proceeds, of which half will be deposited into the financing fund. The third source of revenues is a requirement that the city deposit 10% of participation rent it receives from the Horseshoe Casino. The city's payment is projected to total about $900,000 in fiscal year 2016, deposited semiannually. City beverage tax receipts and participation rent deposits are subject to appropriation by the Baltimore City Council.
Two Mechanisms Backstop Baltimore City Deposits
To mitigate risk from future volatility or unfavorable trends in Baltimore City payments, the Act establishes a facilities fund to receive excess deposits, if any, from Baltimore City and other amounts in the financing fund not needed for debt service and debt service reserves subject to the discretion of the MSA. If excess funds are transferred from the financing to the facilities fund, the MSA may retain up to $2.5 million per year, up to a cap of $20 million, as a reserve against any future shortfalls in deposits from the city. Excess deposits above the $2.5 million annual maximum may be used to pay design and construction costs, operations and maintenance and other expenses. The facilities fund, including any reserve, is not pledged to the bonds. However, MSA shall use the reserve in the facilities fund to cure deficiencies in deposits by Baltimore Cityand may use any amounts in the facilities fund to pay debt service on the bonds. An executive committee established by the MOU may increase the cap on reserves based on five-year forecasts of the beverage container taxes, table game proceeds and casino rental payments.
If there is a deficiency in Baltimore City payments that reserves are insufficient to cover, the MSA is required to direct the Comptroller within 10 business days of a missed deposit to withhold an equal amount of Baltimore income tax revenue, which the state collects, and credit it to the financing fund by the following June 15 or December 15, well in advance of debt service due dates. Baltimore's income tax receipts were $284 million in fiscal 2014. The city's income tax rate is 3.2%, the maximum allowed by law.
Lack of Rate Covenants or Nonimpairment Clause Mitigated by Project Essentiality
The security for the bonds consists of a pledge of financing fund deposits and not the revenue sources themselves. There are no rate covenants governing the Baltimore City revenues and state school aid is subject to legislative appropriation. The governing statute does not contain non-impairment language. The $20 million school aid deposit for fiscal 2016 was canceled by the legislature to cover other needs of the Baltimore City school board. However, there were no bonds outstanding when this action occurred. The risks are mitigated by the essentiality of the renovation of Baltimore's schools, demonstrated by the participation of multiple parties in creating the redevelopment program. Furthermore, the lack of rate covenant for Baltimore's contributions is mitigated by the interception of its income tax revenues which provide more than ample coverage of its required contributions.
Use of Proceeds
The proceeds of the bonds will be used to renovate and replace facilities of the Baltimore City Public School System.
The Maryland Stadium Authority was created by an act of the legislature in 1987 to finance and oversee construction of Camden Yards and has since been responsible for financing and oversight of construction of various sports and civic projects.
Maryland is the 19th largest state by population, at 5.98 million. Its state gross domestic product is 15th largest. The state has above-average wealth, with per capita personal income equal to 119.5% of the US level. The state has the 5th lowest poverty rate among states.
The principal methodology used in this rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. The additional methodologies used were US Public Finance Special Tax Methodology published in January 2014 and State Aid Intercept Programs and Financings: Pre and Post Default published in July 2013. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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Marcia Van Wagner
Moody's Investors Service, Inc.
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Moody's assigns Aa3 to Maryland's Baltimore City Schools Construction Bonds Series 2016A; outlook stable
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007