Mass. Plan Has Investors Wondering

Investors who own billions of dollars of debt issued by the Massachusetts Turnpike Authority and the Massachusetts Bay Transportation Authority are waiting to see how they would fare if the agencies are consolidated or merged in order to reduce costs.

Massachusetts Gov. Deval Patrick and Senate leaders each have reform proposals for the agencies, while the House was set to release its own transportation bill late Friday.

Patrick's blueprint calls for folding MassPike into the Executive Office of Transportation and includes raising the state's gas tax by 19 cents in order to provide more revenue for both MassPike's operations and the MBTA, which he would leave as a stand-alone agency for now.

The Senate's "reform before revenue" plan involves merging MassPike and the MBTA into a mega-transportation authority with the state's Highway Department. That bill, which Senate members passed last month, does not include gas-tax or toll increases.

House members were expected to propose their own plan. No details were available Friday afternoon.

Meanwhile, MassPike and MBTA bondholders are waiting by the roadside to see what will happen to their investments as the existing debt ultimately could end up on the commonwealth's books or be taken on by a new transportation authority with bonding power.

MassPike has $2.2 billion of debt and the MBTA has $5.2 billion.

"Investors are thoroughly confused and have no idea what the ultimate credit will be at this point," said Bob MacIntosh, vice president and co-director of Eaton Vance's municipal bond group.

MacIntosh said the various transportation reform proposals did not appear to be having much of an impact on prices for the bonds in the secondary market, as investors remain confident debt service will be paid. But there is still uncertainty as to what the ultimate credit behind the bonds will be.

"I think worst case, probably there's an assumption out there that the commonwealth of Massachusetts would be picking up the credit, or [the bonds will] be pre-refunded," he said. "It's just that nobody knows, so it's hard to value things without knowing what they're really going to get at here."

In a pre-refunding, an issuer typically sells new debt or uses cash to fund an escrow account that pays principal and interest on the refunded bonds until they can be retired at a date prior to the stated maturity, usually as of the earliest call date.

Long-term insured MassPike bonds issued by various entities have been trading in the secondary market with yields around 5%, with long-term unenhanced MBTA bonds also trading in the secondary market with yields around 5%.

Fitch Ratings and Moody's Investors Service rate MassPike's bonds in the triple-B category. Fitch has them on its rating watch negative list and Moody's assigns a developing outlook.

Standard & Poor's rates MBTA's $3.38 billion of outstanding sales tax bonds and more than $800 million of outstanding special assessment bonds at AAA. Moody's rates the sales tax debt Aa2 and the special assessment bonds Aa1.

The two transportation authorities face financial challenges.

MassPike plans to use approximately $13 million of reserve funds to help balance its budget for fiscal 2009, which ends June 30. The authority last month approved postponing a toll hike with the stipulation that it will receive $100 million from the state's coffers by July 1 or the board will implement a toll increase at that time.

In addition, the authority faces a potential $350 million swap termination payment if Standard & Poor's downgrades Ambac Assurance Corp., the insurer of the derivatives, by one notch.

The MBTA last month approved a fiscal 2010 budget with the understanding that state funds would help fill a $160 million deficit. Debt service costs for the authority will total $445 million in fiscal 2010, which begins July 1, and principal and interest payments account for 30% of the MBTA budget.

Rising employee health care costs are also a challenge for the authority. The Massachusetts Taxpayers Foundation last week released a report indicating that the MBTA could save $812 million to $1.22 billion over 20 years if the authority implemented reforms that would require additional employee contributions and scaling back on certain benefits. For example, all MBTA retirees over 65 receive free lifetime health insurance.

"This is an extraordinarily generous benefit program, both the pension and health care ... clearly among the most generous benefits programs in America," said MTF president Michael Widmer. "Not only in public transit - I mean public or private benefit programs across the entire country."

The MBTA will spend $109 million in health care costs in fiscal 2009. That number is expected to grow to $244.7 million in fiscal 2016, according to the MTF report.

The governor's proposal would move MBTA employees and retirees into the current health care plan for state employees, the Group Insurance Commission, and generate roughly $400 million to $600 million of savings over 20 years, according to the MTF. The Senate bill does not generate health care savings, Widmer said.

Proponents of combining the transportation agencies say that merging authorities and departments would eliminate redundancies, reduce payroll, and offer cost savings.

Senate President Therese Murray has said the Senate bill would generate $6.5 billion of savings over 20 years. But critics question the Senate's calculations.

While some departments would be reduced in size or folded into other areas, the two different transportation systems operated by MassPike and the MBTA - tolled highways and a state-wide public transit system of buses and subways - have distinct needs.

Jim Colby, a senior municipal strategist at Van Eck, said there's a great deal of curiosity in the investor community as to what a potentially new transportation bonding authority would look like, and skepticism about what savings it would offer in comparison to how the state funds transportation needs now.

"It is not yet clear that bondholders are going to benefit to any great extent from the merging of the two entities - that's really what my concern is," Colby said. "If you set the income and balance sheets side by side, you see that there are some mismatches with respect to some of the expense line items that need to be addressed. So, that's all under the covers and I don't see that there's much for bondholders to do here other than watch because it's the political process that is going to make this happen."

Bringing two different transportation systems together could allow for various revenues streams to flow into the same pot. Roadways could potentially benefit from revenue from mass transit fares and bus and train lines could tap into toll revenues, depending upon how a combined transportation authority is formed.

At the Port Authority of New York and New Jersey, a large bi-state agency, revenues are consolidated so that the different systems can dip into various revenue streams, said Moody's analyst Maria Matesanz. The Port Authority oversees the metropolitan area's three major airports, Manhattan's bus terminal, tunnels, bridges, and a PATH commuter line, among other entities.

"The PATH ... operates at a net loss and the bridges and tunnels and the airports operate at a more of a profit, so they help subsidize the transit operations," Matesanz said.

Whether a similar format could help Massachusetts depends on how lawmakers revamp the state's transportation agencies, balancing debt obligations, operating and infrastructure needs, and the combined sources of revenue.

"It depends how it's structured," Matesanz said. "And in order to combine the two [agencies] and not impair existing bondholder contracts, all the outstanding debt would have to be either refunded or absorbed by the new entity with the new securities pledged. On a going-forward basis, it really depends on what the security structure looks like, what the revenue streams look like, and what, if any, dedicated commonwealth pledge there might be."

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