New money, old challenges at New York MTA

BY SourceMedia | MUNICIPAL | 11/19/21 11:08 AM EST By Paul Burton

New York?s Metropolitan Transportation Authority finance officials have been breathing a bit easier, primarily due to multiple rounds of federal aid.

The MTA, the nation?s largest mass-transit agency and one of the top municipal issuers, is in store for more than $10 billion from the infrastructure bill that President Biden just signed. That supplements the roughly $14 billion the state-run authority has already received in COVID-19 pandemic relief.

Gov. Kathy Hochul, less than three months into her job, said subway, bus and commuter-rail riders would not receive fare increases this year, breaking from a pattern of biennial fare and toll hikes since 2009. Transit advocates applauded the move, even as skeptics saw Hochul as merely protecting herself for next year?s Democratic gubernatorial primary.

But putting aside the new dynamics, which also include the prospects of billions more from a Manhattan congestion-pricing mechanism, the MTA?s latest financial presentation had a rinse-and-repeat feel.

The refrain is similar: reliance on one-shots such as federal aid; the compelling but unmet need for a sustainable, recurring revenue source; and the need to improve from within, notably reining in labor costs.

?On the surface, clearly the MTA was fortunate in the money it received from the Trump and Biden administrations,? said Nicole Gelinas, a senior fellow with the Manhattan Institute for Policy Research. ?Revenues are better than the worst-case scenario, toll revenues are better than expected and tax revenues have been favorable.

?But they?re not taking this as a chance to say OK, let?s really get some structural balance before 2025.?

The authority envisions a $1.4 billion operating budget gap for that year that could prompt even more deficit borrowing. It expects to rely on federal money and projected fare and toll increases starting in the second half of 2022 to balance operations in the first few out years.

?We?ve been saying this since 2017. We have been structurally out of balance every year since then,? Chief Financial Officer Robert Foran told board members Wednesday as he released the MTA?s final proposed operating budget and rolling November four-year financial plan.

The board will vote on the plan at its regular meeting next month.

?We?ve been saying we need additional recurring revenues coming in every year,? Foran said. ?The pandemic hit, and it just blew us out of the water. We all know that. We?re continuing to balance, and we?re balancing through these additional one-shot federal funds and perhaps deficit financing.?

Risks to the MTA?s future, according to Foran, include the need for regular fare and toll increases, finding and implementing ?innovative savings actions,? and achieving affordable wage settlements.

?We have to look at those hard, ugly choices of things that may have to be done,? Foran said. Those options would include fare hikes and service cuts.

The MTA, which carries about $50 billion of debt including special credits, expects to issue $4 billion of Series 2021A grant anticipation notes on Dec. 1, to cover operating expenses and lost revenues. BofA Securities is the book-running senior manager.

?Things are moving forward with that,? said MTA finance director Patrick McCoy said. ?We?ve had very good discussions with rating agencies and with our working group on structuring.?

Moody's Investors Service (MCO), which assigned a MIG 1 rating, expects federal reimbursements to "provide strong underlying credit support to repay the notes at maturity."

The authority will also pay Public Resources Advisory Group $1 million annually for financial consulting, and Mohanty Gargiulo for swap advisory services. The firms have advised the MTA in these roles since 2016 and 2013, respectively.

PRAG will work with state-certified minority business enterprise Backstrom McCarley Berry & Co. LLC, and state-certified women business enterprise Sycamore Advisors LLC for general financial advisory services in connection with the issuance of MTA and Triborough Bridge and Tunnel Authority bonds and other capital markets activities.

The MTA in April sold $1.43 billion of bonds backstopped by a payroll mobility tax. It marked the first use of that revenue source for long-term borrowing. By securing the debt with revenue from the mobility tax, the deal received AA-plus-level ratings, well above the MTA's transportation revenue bond ratings, which are as low as BBB-plus from S&P Global Ratings.

The authority in December 2020 placed $2.9 billion in PMT bond anticipation notes with the Federal Reserve Bank's Municipal Liquidity Facility.

Traditionally the MTA has based revenue projections on 50% from the farebox, 25% from levies such as the payroll mobility tax, and 25% from bridge and tunnel tolls. Farebox revenue could fluctuate sharply with many affluent office workers staying at home, and with social-justice dynamics pressuring transit agencies such as the MTA to offer discounts to lower-income riders.

?I think that there needs to be a reassessment of that,? said Howard Cure, director of municipal bond research for Evercore Wealth Management. ?More people are working at home. Do they still want to put as much emphasis on [farebox] revenue, as opposed to a new tax or increasing the existing taxes?

?COVID has exposed a lot of issues about the MTA and that?s one of them.?

The watchdog Citizens Budget Commission called on the MTA to improve operational efficiency and roll out planned fare increases while working with the city to step up the Fair Fares 50% discount program for low-income riders.

?Together, these will help stabilize the MTA for the future,? said CBC senior research associate Alex Armlovich.

MTA and city officials are weighing an adjustment to the eligibility requirement for Fair Fares.

?Fair Fares expansion is important, but the program should use New York City?s poverty level instead of the much lower federal poverty level,? said Lisa Daglian, executive director of the Permanent Citizens Advisory Committee to the MTA. ?The cost of living is much higher in New York City.?

While riders have slowly returned, even a ridership count that?s 86% of pre-pandemic means $1 million in lost revenue, according to Foran.

In 2017, Hochul predecessor Andrew Cuomo declared a state of emergency for the MTA. The authority has operated in financial triage mode even before COVID triggered massive shutdowns in the region.

?You remind me of one of those great baseball players that?s got two strikes and he keeps hitting foul balls so he?s staying alive,? board member Neal Zuckerman told Foran.

Skeptics pointed out that Hochul?s no-fare-hike call only covers the period through the gubernatorial primary next June. She is seeking her first full term. Democratic challengers include state Attorney General Letitia James; and New York City Public Advocate Jumaane Williams.

While Hochul has packaged herself to date as the anti-Cuomo, critics saw this move as a Cuomo-style insertion of politics into MTA decision-making.

?It was Cuomoesque with a much more pleasant attitude and demeanor,? Gelinas said. ?But the gubernatorial announcements apart from the board meetings reduce the MTA board?s flexibility on the fare and service-adjustment side.

?It?s fine to have that as a stated policy, but if you do that, OK, have revenue from some other source and I?m not sure that?s going to happen.?

The MTA projects congestion pricing to provide through bonding $15 billion for its five-year capital program. The federal government must approve the plan, which is under environmental review.

One overlooked aspect of congestion pricing could come into play.

While the enabling legislation specified proceeds for capital use, the MTA received temporary permission early in the pandemic to use the funds for operations. That option could still be available.

?If the MTA needs to subsidize operations and limit fare increases, could this money be repurposed for operations?? Cure said.

With its newfound federal cash, the MTA must weigh priorities ? for example, balancing new projects such as expansion of the Second Avenue subway line in Manhattan with less glamorous work such as signal maintenance.

Then there?s the dicey matter of labor contracts.

?Their workers suffered a lot during COVID,? Cure said. ?You had a lot of deaths at the MTA. Will they negotiate hazard pay??

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Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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