Fitch Ratings has assigned an 'A' rating to the following Metropolitan Transportation Authority, New York (MTA, or the authority) transportation revenue bonds:
--$600 million, series 2010B-1 (Federally Taxable - Issuer Subsidy - Build America Bonds);
--$50 million, series 2010B-2.
Fitch also affirms the 'A' rating on $12.6 billion in outstanding transportation revenue bonds. The Rating Outlook is Negative for all bonds.
The proceeds of the transportation revenue bonds, expected to be issued on Feb. 11, 2010, will be used to fund a portion of the authority's transit and commuter projects and to pay the cost of issuance.
The transportation revenue bonds are primarily secured by operating receipts and operating 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 Negative Rating Outlook reflects the greater than expected financial stress the MTA is facing due to a combination of adverse events as well as a limited number of available solutions to satisfy its obligations in the near term. While the MTA has historically projected large operating deficits that have reduced in size recently, it has a demonstrated track record of meeting a balanced operation. Nevertheless, the habitually narrow margins and gaps are of concern as the fiscal and operational stability of the system are important to the rating. To the extent that the economic pressures affecting the dedicated operating subsidies continue in the near term, the narrow balances could worsen. Without additional resources from the state, which are less likely now, the MTA will need to address funding gaps on its own through a combination of fare and toll increases beyond those already planned, larger service cuts and/or a significant change in the capital plan, more than 64% of which is for state of good repair. To the extent that pressure on the MTA's revenue streams continues and the MTA begins to defer essential maintenance, the rating could be pressured.
Recent developments that have further pressured MTA's finances include:
--Excess mortgage recording and urban taxes fell 41% in 2008 and are forecast to decline at least 60% in 2009, to $150 million from $883 million in 2007;
--As part of the state's deficit reduction plan, the state reduced its prior appropriations to the MTA by $143 million in 2009 (this represents the first time the state has taken such an action to reduce dedicated taxes that have already been collected on behalf of the MTA) with reduced state collection expectations of $49 million in 2010 and $74 million in each of 2011-2013;
--Receipts from a recently enacted payroll tax are significantly under projections by approximately $229 million for 2009 and while the state believes nearly 80% ($179 million) of the shortfall is the result of timing and will be made up in 2010, the state also projected lower receipts of $50 million a year starting in 2010;
--In December, MTA received an unfavorable ruling in a legal proceeding that challenged an August arbitration award with the Transportation Workers Union local 100 meaning that higher-than-expected wage increases will cost the MTA approximately $90 million in 2010, $200 million in 2011, and $250 million in 2012.
Through cash management actions, including utilizing reserves, lower estimated debt service costs, and delaying pension payments, MTA will satisfy its 2009 cash obligations with a $31 million year-end balance but will move the problem into 2010. To address the shortfalls going forward, the MTA plans to implement a myriad of solutions, which include: rolling back the discount for school transportation with one half eliminated in September 2010 and the remainder discontinued in September 2011. This is expected to save $31 million in 2010, $62 million in 2011, and annualized savings of $170 million in 2012 and beyond.
In addition, due to the extraordinary rise in paratransit costs, MTA expects to save $40 million in 2010 and $80 million thereafter by improving scheduling, increasing the use of vouchers and taxis, coordinating feeder service with accessible fixed route service, and eliminating the most expensive carriers. Also, MTA will reinstate service reductions, such as discontinue under-utilized subway routes and eliminate low-performing weekend express bus service which will result in cost savings valued at $62 million in 2010 and $129 million each year thereafter. The total combined actions are expected to result in a $2 million cash balance in 2010, $1 million in 2011, a deficit in 2012 of $188 million and a $65 million cash balance in 2013.
The 'A' rating on the transportation revenue bonds reflects the gross lien on pledged revenues, the essentiality and performance of the transit services supported by diverse pledged revenues, the importance 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. While the 'A' rating reflects the MTA's historically robust debt service coverage, Fitch incorporates the expectation that future leveraging on the transportation revenue credit will occur. Given the near-term pressure the MTA is facing, it will need to delicately balance funding for capital projects and excess cash for operating support of transit and commuter rail service.
Primary risks for the MTA include the ongoing significant capital and operating needs in the medium- to long-term, the vulnerability to fiscal stress during economic downturns, the declining nature of the operating subsidies, and the continued reliance on debt financings to help fund capital needs. Additionally, the MTA's long-term needs for growing levels of public subsidy and/or new operating and capital funding solutions as well as periodic rate increases for transit and Triborough Bridge and Tunnel Authority (TBTA) crossings (general revenue bonds rated 'AA' and subordinate revenue bonds rated 'AA-', with a Negative Outlook by Fitch; see Fitch press release dated Sept. 3, 2009) exposes the MTA to political risk. In addition, MTA relies on sizeable transfers from TBTA to support its transit and commuter rail services, but TBTA has an increasing dependence on sustained revenue growth which could pressure its ability to fund these transfers.
The MTA submitted a proposed MTA capital program for the transit and commuter system for the 2010-2014 period, totaling $25.6 billion, for approval by the Capital Plan Review Board (CPRB). The CPRB vetoed the program without prejudice on Dec. 30, 2009, allowing the state legislature to review funding issues in their 2010 session. The proposed program is comprised of approximately $18.8 billion in core projects on the existing system, $5.7 billion for expansion projects, $1 billion in MTA-wide security/safety programs and interagency police/planning/business service center. Additionally, the TBTA has a core program of $2.5 billion, not subject to CPRB approval. Additional heavy reliance on debt for capital would likely place increasing pressure on the MTA's operating budget and its already significantly constrained financial flexibility. Fitch expects the MTA to proactively control operations and maintenance costs while implementing fare and toll increases (scheduled to occur in 2011 and 2013). Nevertheless, the MTA faces endless capital needs and operating challenges, so timely action will be absolutely necessary to maintain adequate levels of service, safety and state of good repair on existing facilities, as well as current and planned capital expansion projects.
The MTA is responsible for North America's largest transit network, serving 2.6 billion riders annually. The authority's network is essential to the economic well-being of the region, handling 80% of all daily trips to Manhattan's business district.
The application of the following criteria was used to derive the rating of the above referenced bonds:
--'Rating Criteria for Infrastructure and Project Finance', (Sept. 29, 2009);
--'Global Toll Road Rating Guidelines' (March 6, 2007).
All are available on the Fitch Ratings' web site at 'www.fitchratings.com' under the headers Global Infrastructure & Project Finance/Rating Criteria.
Additional information is available at 'www.fitchratings.com'.
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