Fitch Affirms Metropolitan Transportation Authority (NY) Revs at 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A' rating for the Metropolitan Transportation Authority, New York's (MTA) approximately $19.5 billion in outstanding MTA transportation revenue bonds. The Rating Outlook is Stable.

The 'A' rating reflects the gross lien on a diverse stream of pledged revenues, the essentiality of the MTA's transit network to the economy of the New York region, and the demonstrated ability of the MTA to produce near-term solutions for its operating and capital needs. The rating also reflects the need to generate sufficient cash to adequately cover operations of the system despite high debt service coverage ratios (DSCRs).

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 8.05 million daily subway and bus riders and Metro-North Railroad and Long Island Rail Road (LIRR) carrying another 576,000 daily commuter rail passengers. 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 DSCRs from gross pledged revenues, the MTA's financial position is constrained given its extremely large operating profile and high fixed costs, including significant retiree pension benefits. In addition, some of the MTA's operating subsidies are vulnerable to economic conditions. While the MTA is required to provide a balanced current year budget, some tools available to meet a balanced budget, such as service reductions and fare increases, are politically unpopular.

Solid Security Pledge: The bonds are secured by a gross lien on a diverse stream of pledged operating revenues consisting of transit and commuter fares and excess bridge tolls and non-operating revenues consisting of various regional taxes.

Extremely Large Capital Needs: The MTA anticipates issuing a total of $10.5 billion in debt (excluding Sandy Recovery) and a $2.2 billion Railroad Rehabilitation and Improvement Financing 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 or additional operating subsidies do not come to fruition.

RATING SENSITIVITIES

Negative: Inability to achieve future projected 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 could pressure the rating.

Negative: Significant cost overruns or delays in the capital program's mega-projects that lead to additional borrowing or deferral of core capital projects may lead to negative rating action.

Negative: Receipts in dedicated tax subsidies that are measurably below forecasted levels could pressure the MTA's financial flexibility and pressure the current rating.

Positive: Given small near-term operating surpluses but medium-term projected deficits positive rating movement is unlikely at this time.

SECURITY

The transportation revenue bonds are 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.

CREDIT UPDATE

The MTA's 2015 - 2018 July Financial Plan forecasts deficits beginning at $252 million in 2014 growing to $1,114 million in 2018, before prior year cash balances and adjustments are applied. The projected year-end balances improve after the application of cash balances and adjustments including fare and toll increases of 4% in 2015 and 2017 and MTA initiatives such as various MTA efficiency measures and policy actions (positive and negative from a cash flow perspective) including the recent commuter rail labor settlement, funding of the labor settlement from previously identified money for OPEB and pensions as well as increased costs for safety related investments. Incorporating the cash balances and adjustments, the MTA projects a cash positive position of $162 million in 2014, $10 million in 2015, $146 million in 2016 and $113 million in 2017 while a deficit of $262 million is projected for 2018.

Since the February 2014 financial plan the MTA has had both favorable and unfavorable re-estimates to their operating and non-operating revenues and cost profile. Favorable re-estimates include lower health and welfare/OPEB current payment estimates, lower debt service, better than expected projected energy costs for 2015-17, lower pension re-estimates, higher passenger toll revenues, higher real-estate receipts for 2014 (partially offset by lower projections for 2015-17), delayed opening date of East Side Access and related impact on operating expenses and reduced 2013 spending that increased the carryover balance.

Offsetting the positives are lower than expected PMT receipts, higher overtime re-estimates, higher safety investments, additional operational and maintenance needs and additional service investments and customer enhancements. Nevertheless, the favorable results significantly outweigh the unfavorable results by $635 million through 2017. However, the aforementioned commuter rail labor settlement is projected to increase labor costs by approximately $1.3 million through 2017, resulting in a $645 million net unfavorable through 2017. The July plan reflects these additional costs, which are incorporated in the cash balances above.

While there continue to be significant risks to the MTA's near-term financial profile including additional labor settlements at the same levels as recent negotiations have concluded at, potential volatility in some operating subsides (real estate related dedicated tax sources), greater than expected elasticity from future proposed fare and toll increases and the ability of the MTA to deliver on planned operating efficiencies, the recent labor settlements with TWU and commuter rail unions will provide some level of cost certainty for the foreseeable future.

To the extent that any of these elements fail to reach current expectations, projected year end cash balances 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. The MTA has made significant progress in implementing operation efficiencies (above levels previously considered in some cases) and the MTA continues to explore and implement new operating efficiencies and cost reduction measures.

The MTA's 2010-14 Capital Plan continues to make strides in addressing a state of good repair on the existing system while upgrading and enhancing some elements such as safety and communication. The mega projects including 2nd Ave. Subway, East Side Access, Fulton St. Transit Center and the 7 line extension (city funded) continue to make strides to their completion dates. The 2015-19 Capital Plan is expected to cost between $27-$30 billion and aims to address continued state of good repair projects ($20 billion), enhancement projects ($2-$5 billion) and expansion projects ($5 billion). Other key elements of the plan focus on safety, making the system more resilient and improve the overall quality of service and experience.

The essentiality of the system to the greater NYC area and surrounding counties is manifested by more than eight million daily riders. As previously demonstrated, Fitch expects the MTA will successfully implement its Capital Plan with funding from MTA bonds and its City, State and Federal partners. MTA bonds across all liens are possible, including transportation revenue bonds, dedicated tax fund bonds and potentially leveraging the payroll mobility tax for a new credit. Fitch will continue to monitor the size, scope and funding of the Capital Plan and Capital Plan Review Board (CPRB) approval process and comment further on future borrowing plans.

Additional information is available at 'www.fitchratings.com'.

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:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=861894

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Contacts

Fitch Ratings
Primary Analyst
Chad Lewis
Senior Director
+1-212-908-0886
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY, 10004
or
Secondary Analyst
Emma Griffith
Director
+1-212-908-9124
or
Committee Chairperson
Greg Remec
Senior Director
+1-312-606-2339
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Chad Lewis
Senior Director
+1-212-908-0886
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY, 10004
or
Secondary Analyst
Emma Griffith
Director
+1-212-908-9124
or
Committee Chairperson
Greg Remec
Senior Director
+1-312-606-2339
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com