Just as the Utah Transit Authority is eying a $1 billion project to extend TRAX light rail through the soon-to-be-vacated state prison site and on to Lehi, it heard a warning Wednesday that its bond rating may soon be downgraded.

A lower bond rating increases the cost to borrow money — and heavy borrowing likely would be needed for the expensive new TRAX project being proposed.

UTA already is $2.1 billion in debt, incurred as it accelerated building the TRAX and FrontRunner rail systems in recent years. Debt service is now UTA’s single-largest annual expenditure, costing $119.6 million this year.

The potential drop in UTA’s bond rating is not because of that new TRAX extension nor any problems with UTA management, but because the Standard & Poor’s financial analysis company is changing how it rates transit agencies nationwide, its board was told Wednesday.

Brian Baker with Zion Public Finance, the bond counsel for UTA, said Standard and Poor’s is changing to give more emphasis on how much of an agency’s revenue comes from services provided, such as from fares, which may downgrade transit agencies nationwide — especially those that offer no-fare service.

About 20 percent of UTA’s revenue comes from fares, he noted, while the lion’s share comes from sales tax.

Standard and Poor’s currently gives UTA its highest AAA rating. Other rating agencies give UTA scores that are two notches lower: AA by Fitch and Aa2 by Moody’s.

Baker warned that Standard and Poor’s, under its new criteria, is expected to perhaps lower its UTA rating by one notch to AA+. “It’s still a very good rating,” Baker said.

With the already lower ratings from the other two companies, he said the change may not actually cost UTA much the next time it borrows through bonding. “It may be microscopic,” he said.

But he said he wanted to give a heads-up to the board “that it is something that is possibly coming down the road,” so that if the rating drops, “We could just say, ‘Nothing has changed at all … our [transit] coverage continues to improve, our sales taxes continue to go up, we continue to be a well-managed organization. But S&P changed their criteria,” he said.

In recent years, UTA had publicly said that it considered its rail system essentially completed — and said it sought recent sales tax hikes to improve bus service by expanding routes and increasing frequency.

That changed recently when the Point of the Mountain Development Commission released studies estimating development of the old state prison site could fuel significant growth throughout the Wasatch Front, but doing it right requires $3 billion in transportation projects — including the TRAX extension.

(Christopher Cherrington | The Salt Lake Tribune)
(Christopher Cherrington | The Salt Lake Tribune)

It is pushing to accelerate extending TRAX quickly. While that project had existed in long-term plans, it had not been envisioned for decades.

Zions Public Finance told the Point of the Mountain Commission that if UTA borrows money for the TRAX expansion through 20-year bonds, begins construction in 2022 and finishes in 2025, debt payments for it would start at about $46.8 million in 2023 and increase to a maximum of $73.6 million by 2025.

It said options for paying off that debt include raising sales taxes, or looking at “tax increment financing” to capture some of the increase in property tax values resulting from adding TRAX to the Point of the Mountain area.

UTA, the Utah Department of Transportation and regional planning agencies are seeking $800,000 for a study to evaluate key questions about the TRAX expansion before deciding whether to proceed.