Credit agency downgrades turnpike's bond rating

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One of the nation's "big three" credit rating agencies has raised a caution flag about the Pennsylvania Turnpike's financial future because of the transportation funding bill that the state Legislature passed last summer.

New York-based Fitch Ratings Ltd. announced it has downgraded the turnpike's $2.1 billion in outstanding revenue bonds by one step, from AA- to A+, thereby crossing the line from "high grade, high quality" to "upper median grade."

The move means the turnpike will likely have to pay a higher interest rate on future borrowing for such capital improvements as the new bridge over the Allegheny River and widening the east-west mainline to six lanes between Irwin and New Stanton.

At the same time, Fitch affirmed its F1+ rating on approximately $525 million of bond anticipation notes sold thus far so the turnpike could provide money for the Pennsylvania Department of Transportation as part of a partnership created by Act 44, the transportation funding bill. F1+ is the highest short-term credit rating that Fitch issues.

Fitch said its downgrade reflected how the turnpike's mission has changed "from a self-supporting entity to one subsidizing statewide functions ... as excess toll revenues will now flow out to meet Act 44 payments."

Turnpike Chief Executive Officer Joe Brimmeier played down the significance, saying it's not uncommon for the ratings agency to differ in their judgment when circumstances change.

"The AA- Fitch ratings we've enjoyed over the past decade were based upon the turnpike using all proceeds for its own purposes," he said. "With the passage of Act 44, that is no longer the case. Now, the commonwealth as a whole is also a beneficiary."

Fitch said the turnpike's overall debt could reach $13 billion to $14 billion over the next 12 years not only for standard improvements but also for its obligations under Act 44, which calls for the turnpike to raise tolls by 25 percent next year and 3 percent a year thereafter, and to convert I-80 across the state to a toll road charging the same rates.

Fitch also concluded that the planned toll increases may not be sufficient and "additional leveraging and/or higher toll rates may be needed."

Over the next 50 years, Act 44 is expected to generate $116 billion, with $83.3 billion turned over to PennDOT for roads, bridges and public transit; up to $8 billion to be reinvested in I-80 for capacity and safety improvements; and up to $24.8 bilion to be dedicated to yet unspecified transportation projects.

Although the turnpike has yet to collect a penny in new revenue, it has borrowed $532 million through short-term bonds to provide PennDOT with $520 million over the past nine months.

The turnpike is to sell another $246.5 million in short-term bonds in financial markets tomorrow to help make a final $230 million payment to PennDOT on April 30 to fulfill its $750 million obligation for the 2007-08 fiscal year that ends June 30.

Act 44 requires the turnpike to make equal payments of $212.5 million in July, October, January and next April to provide $850 million to PennDOT for the 2008-09 fiscal year. The amount increases to $900 million for 2009-10.

In July, the turnpike expects to market from $300 million to $400 million of the revenue bonds that Fitch has downgraded to A+ for ongoing capital improvements.

Fitch noted that a key issue of Act 44 and the turnpike's financial future is that converting I-80 from a free interstate to a toll road as part of a naitonal pilot program requires approval of the Federal Highway Administration. Fitch said that could take up to six years to decide.

Its report talked about the turnpike "taking on new obligations in an uncertain political environment," the potential that capital projects could be deferred and other factors that could adversely impact what have been "historically robust levels" of revenue to cover debt service.

While acknowledging Act 44 has some "missing pieces," Mr. Brimmeier said "we are moving ahead with our plans. We believe Act 44 remains the best mechanism to fund Pennsylvania's transportation shortfall."

Moody's and Standard & Poor's are the other two major credit rating agencies, neither of which has changed outlooks. The Pennsylvania Turnpike Commission usually cites the former, including last weekend, when officials responded to a report from the Reason Foundation that claimed they operate one of the least efficient toll roads in the nation.

Mr. Brimmeier said the Reason report was fundamentally flawed and that the major Wall Street bond rating agencies have consistently given the turnpike high marks for operations, maintenance and administrative expenses per roadway mile.

"The experts -- the real experts -- are constantly reviewing our finances and transactions and our record speaks for itself," he said.

Joe Grata can be reached at .


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