Standard & Poor's Ratings Services assigned its 'A' rating to Los Angeles County Metropolitan Transportation Authority (LACMTA), Calif.'s $200 million general revenue refunding bonds, series 2004 A-D, reflecting:

• A dual revenue pledge, consisting of gross operating revenues and a subordinate lien on voter-approved sales taxes;
• A broad and diverse service area economy spanning the Los Angeles metropolitan region; and
• Favorable ridership and revenue collections trends that have substantially recovered from a 2003 operator strike.

The above strengths mitigate concerns about the LACMTA's reliance on intergovernmental subsidies that are beyond its control, and the authority's recurring operating deficits that necessitate large transfers of both Proposition A and Proposition C sales tax revenues into the LACMTA's enterprise and general funds. Additionally, the area's ridership trends, historic intergovernmental support for the LACMTA's services, and positive sales tax revenue trends temper concerns about a large capital plan, which could result in sizable additional bonding needs estimated at $500 million over the next eight years.

The bonds are secured by a gross lien on LACMTA's operating revenues, mainly farebox revenues and other fees, and by a subordinate pledge of Prop. A and Prop. C sales tax revenues and other sales tax revenues. The 2004 bonds are on parity with $76.1 million in outstanding series 2003 bonds, and will refund a previous issuance from 1996. LACMTA's outstanding Prop. A and Prop. C debt, which is senior to these 2004 bonds, totals $3.2 billion. Farebox revenue from all LACMTA buses and trains grew to $247.4 million in 2003 from $233.4 million in fiscal 2000, an overall increase of 6% despite a 32-day strike in fiscal 2001. A 35-day strike that occurred in fiscal 2004 is expected to have only a temporarily negative affect on revenues, with estimates for the fiscal year showing a 6.8% decline for the year to $230.5 million.

LACMTA provides transportation planning and design and also operates a system of buses, trains, and HOV (high occupancy vehicle) lanes throughout Los Angeles County, a 1,433-square mile service area. LACMTA operates a fleet of 1,900 buses and 60 miles of light rail trains with 50 stations throughout the county. Between its bus and rail lines, LACMTA provides an average of more than 1.3 million rides per day. The economy of the Los Angeles metropolitan area remains relatively strong, though with slightly higher unemployment, at 6.4% in Los Angeles County, than the U.S. median of 5.7%. Wealth and income levels are slightly above average, though with a population of about 10 million and a very large and diverse service area, there is a wide range of incomes and wealth levels.

Operating revenues from passenger fares are typically inadequate to support the full cost of operating transit systems. In the 2005 budget for LACMTA's enterprise fund, for example, operating revenue from passenger fares is estimated at $299.4 million while operating expenses are expected to total $977.9 million. Of the $678.5 million in subsidies required to balance the budget, $175.9 million is budgeted from Prop. A sales tax revenue and $117.4 million is budgeted from Prop. C sales tax revenue. The remainder of the required subsidy will come from state and federal sources. Effective January 2004, LACMTA restructured its fares, both lowering the base cash fare (to $1.25 from $1.35) and increasing the cost of daily, weekly, and monthly passes. The fare restructuring is anticipated to generate an additional $28 million per year beginning in 2004. The restructuring of fares is expected to generate sufficient revenues to accommodate service expansions planned in the 2005 b! udget and beyond that are intended to improve rider satisfaction by increasing the number of buses available and reducing the amount of time passengers spend standing, for example. Additionally, LACMTA eliminated a total of 233 positions during fiscal 2004 and so far in fiscal 2005, in an effort to reduce costs for service enhancements.

LACMTA's reliance on sales tax revenues to balance the enterprise fund budget reduces the amount of sales tax revenue that is in practice available for debt service. According to the 2005 budget, for example, pledged sales tax revenues would provide 3.4x coverage of annual debt service on all LACMTA's debt that is backed by sales tax revenues. Once operating transfers are subtracted from net available revenues, however, coverage is reduced to 2.3x.

The coverage ratio on LACMTA's bonds may decrease in the future because of significant additional capital financing needs. Additional bonds may be issued against both of the revenue streams. If LACMTA wants to issue debt on a parity basis with the general revenue bonds secured both by gross operating revenues and sales taxes, LACMTA must demonstrate that historic operating revenues cover projected maximum annual debt service (MADS) on all parity debt by at least 3x. An additional requirement is that historic sales tax revenues must cover MADS on all the authority's debt, regardless of security, by at least 1x. Pursuant to the recent revision of the LACMTA's long-range transportation plan, LACMTA's capital projects through 2012 are expected to require $4.8 billion in financing. More than $500 million of capital financing is anticipated from sales tax revenue bonds during before 2012. The bulk of the capital plan will be for bus acquisition and transit corridors. While add! itional bonds may reduce the debt service coverage ratio, it is unlikely the LACMTA will issue enough debt that it would approach its bond covenants, given the reliance on sales tax revenues for non-debt purposes, including subsidizing enterprise operations.

The outlook reflects the expectation that LACMTA will continue to generate sufficient farebox revenues and receive sales tax revenues that will contribute to high debt service coverage.

LACMTA's 2004 bonds will be issued as auction-rate securities and will therefore have a variable interest rate. To hedge the risk associated with the potential for rising interest rates, LACMTA will enter into a floating-to-fixed swap agreement with a counterparty whose rating is at least 'AA-'. Pursuant to the agreement, LACMTA will pay to the swap counterparty a fixed rate of interest on a notional amount equal to principal outstanding on the 2004 bonds. In return for the fixed rate of interest paid to the counterparty, the counterparty will pay a floating rate of interest back to the authority. The floating rate of interest will be 64% of LIBOR (the London interbank offered rate) plus 24 basis points.

LACMTA has considerable experience hedging variable rate exposure through interest rate swaps, which enables LACMTA to predict debt service costs with relative certainty. All of its debt that was issued in a variable-rate mode has been swapped to fixed rates of interest, except for commercial paper programs secured separately by Prop. A and Prop. C revenues, totaling $210.3 million and $137.6 million, respectively. LACMTA's CP is supported by a direct-pay letter of credit, provided by a team of three banks that protect against tender options.

LACMTA's Prop. C revenues secure $1.2 billion of long-term debt secured only by Prop. C revenues. Of that amount, $197 million is swapped to fixed through a swap agreement with AIG Financial Products Corp. An additional $169 million is swapped to fixed through a swap agreement with Goldman Sachs Mitsui Marine Derivative Products L.P., and $218 million is swapped to fixed through a swap agreement with Wachovia Bank N.A. A small amount of Prop. A bonds are also swapped to fixed, with AIG Financial Products as the counterparty. Further diminishing concern about counterparty risk is LACMTA's formal policy of entering into swaps only with highly rated counterparties ('AA-' and above). Pro forma projections of debt service coverage indicate good coverage, mitigating basis risk concerns. The city has prepared a debt and swap management plan, which adequately addresses all identified risks.

Floating-to-fixed rate swaps are on standard International Swap Dealers Association (ISDA) documents and relate to series 2004 bonds, due in 2027. Swap expiration is coterminous with bond maturity, mitigating rollover and amortization risk. All swap payments are on parity with the 2004 bonds debt obligations. Termination risk, while remote in the near term, is not a concern over the longer term due to LACMTA's 'A' credit rating on the 2004 bonds, which is comfortably above the ratings trigger of 'BBB' or below. Termination payments would be subordinate to swap payments and any parity debt service payments.

LACMTA's general revenue bonds have previously been issued as fixed rate bonds. With the 2004 bonds, 72.5% of the general revenue bonds outstanding will be swapped-to-fixed variable rate debt. Since the entire bond issue is hedged via the swap, there is no net variable rate exposure.

The economy of Los Angeles County is large and diverse, with strong links to international markets via its ports infrastructure and favorable demographic trends. Traffic at the ports of Los Angeles and Long Beach, as well passenger traffic at Los Angeles area airports, show substantial increases over 2002. The infrastructure in place should further that trend with continued U.S. consumption of foreign goods, particularly from Asia. The defense and aerospace industries remain leading components of the regional economy, with Boeing and Northrup Grumman employing the second and third largest number of workers in the Los Angeles area, at 22,058 and 20,000, respectively. Unemployment remains above the U.S. average, at 6.4% in Los Angeles, compared with 5.7% in the U.S., but is about average for California.

The county estimates its population grew 5.2% between 2000-2003 to 9.98 million. Relative county income levels have improved against national averages in the past several years, after a period of decline during the 1990s. Per capita effective buying income (EBI) for 2002 was 90.1% of the nation's, and median household EBI was 100.5%. Per capita retail sales also declined in the 1990s, but rebounded somewhat to 86.7% of the national average in 2002. Total preliminary assessed value (AV) for fiscal 2004 rose 8.2% over the prior year to $656.1 billion, or a strong $65,745 per capita.

LACMTA was established in 1993 as a single entity that consolidated transit operations for the region, and became the successor entity to the formerly separate Los Angeles County Transportation Commission and the Southern California Rapid Transportation District. A 13-member board oversees LACMTA, including the mayor of Los Angeles and the county supervisors as well as appointees.

More than half (55.3%) of LACMTA's budget comes from sales taxes collected pursuant to Prop. A and Prop. C sales tax revenues and separate sales taxes collected by the state and distributed by formula. Prop. A and Prop. C were authorized by voters in 1982 and 1991, respectively, and each is a one-half of 1%. Neither Props. A or C sales tax revenues is limited in the duration of its collection, so there is no need for periodic voter reapproval. The Prop. C and Prop. A sales taxes have each been challenged, but the constitutionality of each tax was upheld in separate court cases. The potential for future successful challenges to the validity of the taxes seems remote. Budgeted 2005 sales tax revenues are $1.58 million, an increase of 0.6% over 2004, and consistent with the 0.6% increase of 2004 sales tax revenues over audited fiscal 2003. The next leading category of revenues is grants from the state and federal governments, totaling $611 million, or 22.4% of budgeted reve! nues. Farebox revenue and advertising revenues are 10.5% of revenues. About 39% of budgeted expenditures are for bus operations and capital, and 18% for rail transit. Eleven percent of expenditures are for debt service and 9% for streets and highways. Additional expenditures are for assistance programs to partner local transit service providers.

Financial deficits in LACMTA's enterprise fund--one of the funds used to account for overall operations and activities--continue, and are expected to stay at the fiscal 2003 ending result of $62.4 million for fiscal 2004 and budget year 2005. Although the deficit is sizable and structural in nature, the LACMTA is not obligated to refund the transfers utilized to address the gap.

The 2004 bonds are refunding the 1996 series A bonds, and are on parity with the series 2003 bonds (workers compensation funding program), of which $76.2 million is outstanding as of Sept. 1, 2004. The bonds are secured by a pledge of gross operating revenues and net available Prop. A, Prop. C, and other money available to LACMTA. Legal provisions are restrictive and include a two-pronged ABT. First, the ABT requires 3.0x coverage of MADS (based on pledged gross operating revenues) from actual historic revenue collections. Secondly, the ABT requires that for any additional Prop. A or Prop. C bonds (either on a senior or parity lien to the current issuance), revenues derived from Props. A and C sales taxes must be equivalent to 1.0x MADS on all outstanding and proposed debt. Legal provisions also require a debt service reserve fund. The bonds' final maturity is 2027, or two years farther out than the bonds being refunded.