09/27/2018

S&P Evaluates Kentucky Turnpike Authority’s Obligations

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S&P Global Ratings recently lowered their rating on the Kentucky Turnpike Authority’s economic development road revenue bonds to A- from AA- , and assigned a stable outlook. The bonds maintain their ratings of A+, and Aa3, with Fitch Ratings and Moody’s, respectively. According to S&P, reasoning behind the downgrade is related to their change in issuer credit ratings methodology that was effective in January, 2018, as well as increasing financial pressure; primarily, the Turnpike Authority’s obligation to fund pension contributions for the State Police Retirement System.

The Kentucky Turnpike Authority (KTA) has $1.2 billion of outstanding revenue and refunding bonds, and unlike turnpikes in other states, the debt is not backed by toll revenue. The debt is secured by tax and fee revenue, and payments are subject to legislative appropriation under a lease structure with the State Transportation Cabinet.

In the past, S&P viewed funds from taxes, fees and other turnpike revenue as a dedicated revenue stream for bond payments, but under their revised criteria for credit ratings linked to an obligor’s creditworthiness, they no longer consider these funds to be legally dedicated to bond payments, but rather a general fund revenue source tied to unfunded pension liabilities. Without a dedicated revenue stream for bond payments, S&P’s rating of KTA’s bonds will be linked to the state’s creditworthiness. They will be rated one notch below, and move in tandem with, Kentucky’s issuer credit rating.

Pension Pressures

KTA’s increased financial pressures are partially due to an increase in personnel costs. Over the past five fiscal years, as revenues have remained comparatively flat and operating costs have minimally increased, personnel costs have increased by 26%, while headcount has decreased. The increased costs are primarily due to a more conservative actuarial assumption for pension plans, which added $50 million in additional contributions for the Transportation Cabinet. However, the main contributor to KTA’s financial stress is Kentucky’s State Police Retirement System. KTA is responsible for 50% of pension contributions, and the program was only 26.4% funded as of the June 2017 valuation. KTA currently budgets for the contributions, but is not legally obligated to make the payments, which S&P is taking into consideration.

Aquila Churchill Tax Free Fund of Kentucky Holdings

As of the June 30, 2018 portfolio holdings report, 9.63% of the Fund was invested in Kentucky Transportation Authority bonds, and we believe that even with a ratings downgrade and pension liabilities, KTA is fully able and committed to meeting bond payment obligations.

We believe that one of the benefits of owning shares in Aquila Churchill Tax-Free Fund of Kentucky is having the resources of local portfolio management and credit analysis. Our Lead Portfolio Manager, Royden Durham, located in Louisville, and our local credit analyst, Stan Kramer, will continue to perform in-depth credit research on our KTA bond holdings.

Mutual fund investing involves risk; loss of principal is possible. Investments in bonds may decline in value due to rising interest rates, a real or perceived decline in credit quality of the issuer, borrower, counterparty, or collateral, adverse tax or legislative changes, court decisions, market or economic conditions. Fund performance could be more volatile than that of funds with greater geographic diversification.

Before investing in a Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. The prospectus is available on this site, from your financial adviser and when you call 800-437-1020.