Fitch Ratings has assigned an 'A' rating to the Metropolitan Transportation Authority, New York's (MTA) approximately $1 billion transportation revenue refunding bonds, series 2012F. Fitch also affirms the 'A' rating on approximately $16.6 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 7.8 million daily subway and bus riders and another 574,000 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 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 of a recent NY Supreme Court ruling that deemed the payroll mobility tax (PMT) unconstitutional.
--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.
Bond proceeds will be used to refund a portion of the MTA's outstanding transportation revenue bonds and dedicated tax fund bonds. Current market conditions are expected to yield significant debt service savings.
Fitch is closely monitoring the MTA and the State of New York's appeal to the August 22 ruling by Justice Cozzens of the Supreme Court, Nassau County related to the PMT. Justice Cozzens ruled that the PMT was passed unconstitutionally, based upon his conclusion that the legislation enacting the tax did not address a matter of substantial state concern and therefore required passage with a Home Rule message or by two-thirds vote in each House of the State Legislature.
Fitch notes that the 'Home Rule' based challenge to the PMT has been considered and rejected in four prior court challenges. In addition, New York State and the MTA have successfully defended 'Home Rule' challenges to past MTA legislation. Furthermore, the Nassau ruling does not prevent collection or require refunding of the PMT. To the extent the MTA and the State are unsuccessful in their request to have the highest Appellate Court hear the case, additional appeals in intermediate appellate courts will take place and could delay resolution of the issue for some time. In the interim, it is Fitch's expectation that the PMT will continue to be collected.
For the first five months of FY 2012, passenger and toll revenues are tracking slightly ahead of budget at 0.8%. Transit and bridge and tunnel revenues are generally flat while Long Island Rail Road and Metro North Rail revenues are 4.1% and 2.2% higher, respectively. Through May, operating expenses are tracking approximately $85.9 million or 2.4% below budget. Partially offsetting the positive operating results is higher than budgeted overtime expenses of approximately $17 million due to additional signal inspection and maintenance, the FasTrack Program and some timing related to employee overtime payments.
Revenues from New State Aid are currently tracking $8.3 million or 0.9% lower than budget, far better than earlier in the year. PMT receipts are tracking around $27.1 million higher than anticipated; however, these gains are offset by some technical issues at the State level associated with other MTA aid and taxes. These issues are expected to be resolved and may provide additional funds to the MTA. Fitch will continue to monitor operating revenues and dedicated operating subsidies as well as the MTA's ability to implement and achieve various planned operating efficiencies.
The MTA's 2013 - 2016 July Financial Plan forecasts a surplus of approximately $47 million in 2012, including a prior-year carry-over of approximately $297 million and projects a cash surplus in 2013 of $46 million after the assumed toll and fare increase in March of 2013 as well as other MTA initiatives. Deficits are projected for 2014 - 2016, beginning at $661 million and growing to $1,214 billion, prior to additional planned fare and toll increases and operating efficiency initiatives. After implementation of fare and toll increases and other initiatives, projected deficits decline to $129 million in 2014, $14 million in 2015, and $231 million in 2016.
Projected deficits, similar to prior financial plans, are driven primarily by retiree and employee healthcare and pension costs that are expected to grow well beyond inflationary rates. While the MTA faces significant challenges, management has demonstrated the ability to continually identify and implement cost reductions and operating efficiencies to offset expense growth outside of their control.
Risks to the delicately balanced plan 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 proposed fare and toll increases in 2013 and 2015 and the ability of the MTA to deliver on planned operating efficiencies. To the extent that 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
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