NEW YORK--()--Fitch Ratings has assigned an 'A' rating to the Metropolitan Transportation Authority, New York's (MTA) approximately $500 million transportation revenue bonds, series 2013A. Fitch also affirms the 'A' rating on approximately $16.4 billion in outstanding MTA transportation revenue bonds. The Rating Outlook is Stable.
KEY RATING DRIVERS:
--Strategic Importance: The MTA transportation network is essential to the economy of the New York region, with New York City Transit carrying an average of 8 million daily subway and bus riders and Metro-North Commuter Railroad (MNCR) and Long Island Railroad carrying another 528,000 daily commuter rail passengers. And, while an independent authority, the MTA has received significant support from the State of New York in the form of additional tax sources aimed at closing projected operating budget gaps and addressing capital needs.
--Highly Constrained Financial Operations: Despite high debt service coverage ratios, the MTA's financial position is constrained given its extremely large operating profile and high fixed costs, including significant retiree pension benefits. In addition, the MTA's operating subsidies are vulnerable to economic conditions. However, while politically unpopular, the authority is required to offset revenue declines to cover operations through service reductions and fare increases.
--Strong Security Pledge: The bonds are secured by a gross lien on a diverse stream of pledged revenues.
--Extremely Large Capital Needs: The MTA anticipates issuing a total of $10.5 billion in debt and a $2.2 billion Railroad Rehabilitation and Improvement Financing (RRIF) loan to fund the $22.2 billion 2010 - 2014 MTA Capital Program, some of which has already been issued. The MTA has the constant challenge of delicately balancing the large rehabilitation and expansion needs of the system while covering operating expenses and maintaining financial flexibility.
--Growing Annual Debt Burden: The MTA's capacity to continue to leverage resources to fund expansion projects while meeting renewal and replacement needs may be limited in the future if projected financial performance does not come to fruition.
WHAT COULD TRIGGER A RATING ACTION:
--An unfavorable outcome of the MTA's pending appeal related to the unconstitutionality of the payroll mobility tax (PMT);
--Inability to achieve operating efficiencies and implement other key elements of the cost reduction initiatives and/or maintain an ongoing state of good repair and other elements of the capital program;
--Significant cost overruns or delays in the capital program's mega-projects that lead to additional borrowing;
--Additional service cuts or deferral of core capital projects that result in deterioration of key transportation services;
--Deterioration or limited growth in dedicated tax subsidies.
The transportation revenue bonds are primarily secured by a gross lien on the MTA's operating receipts and subsidies, including: transit and commuter rail fares and other operating revenues, surplus toll revenues, and certain dedicated tax sources, state and local operating subsidies, and reimbursements.
The 2013A bond proceeds will be used to finance transit and commuter projects.
The MTA's 2013 - 2016 November Financial Plan (Final Proposed Budget) forecasts a lower cash balance for fiscal year (FY) 2012 but similar projected financial results for 2013-2015 from the July Financial Plan. 2012 now projects a $26 million cash balance compared to $47 million in July. The reduction reflects both positive and negative financial changes since July as well as financial impacts from Tropical Storm Sandy. Lower debt service expenses, higher real estate subsidies, paratransit savings and various agency expenditure efficiencies all contributed favorably. Conversely, higher health and welfare costs, higher overtime expenses and increased electric power costs exceeded estimates. The financial impacts (lost revenues from fares and tolls as well as increased operating expenses) from Sandy are currently estimated at $246 million for 2012. The MTA expects to use $63 million from the general fund and a $75 million internal OPEB loan (to be repaid in 2015) to partially cover operating losses associated with Sandy.
In addition to operating losses, the MTA currently estimates that Sandy is responsible for approximately $4.75 billion in infrastructure damage across the entire system. After insurance ($1.075 billion of maximum coverage) and assuming a 75% recovery from Federal Emergency Management Agency (FEMA) approved loss, an estimated $950 million of infrastructure damage is likely to need to be covered by the MTA. At the MTA's Dec. 19th meeting, the MTA Board approved an amendment to the 2010-2014 Capital Plan to add transit and commuter capital costs related to Tropical Storm Sandy damages. If approved by the Capital Plan Review Board, the MTA currently anticipates interim borrowings for transit and commuter Sandy related projects to be structured as bond anticipation notes (BANs) under either MTA's Transportation Revenue Obligation Resolution or its Dedicated Tax Fund Obligation Resolution. TBTA projects do not require CPRB approval.
The MTA and the MTA Bridges and Tunnels Boards also approved $2.5 billion in BAN issuance authority consisting of $2 billion for transit and commuter purposes under either the MTA Transportation Revenue Obligation Resolution or the MTA Dedicated Tax Fund Obligation Resolution, and $500 million for MTA Bridges and Tunnels under the MTA Bridges and Tunnels General Revenue Obligation Resolution. The MTA and the MTA Bridges and Tunnels Boards also authorized the issuance of bonds to retire the aforementioned BANs.
Borrowing for interim- and long-term financing of capital projects related to Sandy will increase near-term and long-term debt service obligations. Fitch will monitor the FEMA process and other developments related to the projected infrastructure needs including potential additional debt needs. At this time, Fitch believes the MTA retains some capacity to issue additional debt and potentially reprioritize some projects. However, such decisions must be carefully balanced to not impact operations or risk deferred capital improvements that could be detrimental to the system.
Risks to the November Financial Plan are similar to previous plans and include the ability to achieve a favorable outcome from the current labor negotiations, potential volatility in operating subsides (dedicated tax sources), greater than expected elasticity to the board approved fare and toll increases scheduled to be implemented on March 1, 2013 and proposed fare and toll increases in 2015 as well as the ability of the MTA to deliver on planned operating efficiencies. To the extent any of these elements fail to reach current expectations, projected deficits could be significantly larger than currently estimated. While the MTA has a demonstrated history of closing outer-year deficits, it is Fitch's opinion that the options available for new revenue generation are fewer in the current environment; however, the MTA continues to explore and implement new operating efficiencies and cost reduction measures to close outer-year gaps.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);
--'Tax Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Tax-Supported Rating Criteria