New York MTA Plans $1B Refunding Sale

New York’s Metropolitan Transportation Authority has scheduled a $1 billion sale of transportation revenue refunding bonds and dedicated tax-fund bonds for Thursday, after a one-day retail period.

Morgan Stanley is lead manager.

The sale comes as budgetary uncertainty hovers over the authority, which runs public transportation in the New York City region, including 12 counties in New York State and two in Connecticut.

A state Supreme Court ruling that invalidated the payroll mobility tax has jeopardized a key MTA revenue stream, estimated at $1.3 billion annually. The authority’s unions have worked without a contract since January. And MTA officials are weighing how to implement their latest round of commuter fare increases.

In addition, health care and pension costs are rising.

The MTA expects to continue its aggressive borrowing program to fund a portion of its $22 billion approved capital program for 2010 to 2014. Major capital projects include the Second Avenue subway, the extension of the No. 7 transit line, East Side access for Long Island Rail Road trains and the Fulton Street Transit Center.

“The MTA faces a challenging environment as it manages its operations and a substantial capital plan,” said Moody’s Investors Service, which rated the bonds A2. “While ridership and associated revenues are gradually increasing, dedicated tax receipts are still below pre-recession levels.”

Moody’s praised the MTA’s flexibility in managing a complex portfolio that includes variable-rate debt and swaps.

Fitch Ratings and Standard & Poor’s rate the bonds A.

Proceeds from the Series 2012F bonds will refund transportation revenue bonds and about $285 million of Series 2002A dedicated tax fund bonds. The MTA plans a follow-up sale in October.

“Current market conditions are expected to yield significant debt-service savings,” Fitch Ratings said.

A gross lien on a diverse stream of pledged revenues secures the bonds.

According to Standard & Poor’s credit analyst Joseph Pezzimenti, the two transactions should provide overall refunding savings while not materially changing the amount of debt outstanding. “As a result, we view the cross-credit refunding plan as credit neutral,” Pezzimenti said.

According to the MTA website, the authority has $31.5 billion of debt outstanding, including bonds and notes. “The MTA is doing lots of bonding to pay for its current capital projects,” said transit historian and former MTA executive Peter Derrick.

Rating agencies, meanwhile, are monitoring the MTA’s and New York State’s appeal to the Aug. 22 ruling by Justice R. Bruce Cozzens of the state Supreme Court in Nassau County that the payroll tax law, passed in 2009, “does not serve a substantial state interest.” Nassau and Suffolk counties, and several of their Long Island communities, had challenged the law.

Moody’s called the ruling a credit negative. The tax, 34 cents on every $100 of payroll costs, raises an estimated $1.3 billion annually. Standard & Poor’s took no rating action because the state is still collecting the tax.

Derrick, a visiting scholar at New York University’s Rudin Center for Transportation Policy and Management, thinks the state appeals court will rule in the MTA’s favor. The agency has won four similar appeals.

“Everyone I’ve talked to that’s commented on the case thinks the MTA will win. The ruling was based on the assumption that this is a local tax, and it’s hardly a local tax. But if they lose, that’s $1 billion we’re talking about.”

MTA officials are expected during the fall to disclose their plans for increasing fares and tolls. The authority’s board would decide on the hikes in December and the increases would take effect in March.

Chairman Joseph Lhota last week said the authority might reduce or eliminate fare discounts to close the budget gap. Speaking at a business forum, he said that because of the discounts, the MTA collects an average of $1.63 per trip, even though the base fare is $2.25. The base fare could rise to $2.50 in the short term.

Derrick said fare increases are more politicized in New York than in other cities. “Any time you discuss fare increases, the politicians jump up and down,” he said. “I don’t think eliminating the 7% discount is a good idea, but the fares do have to go up. We don’t seem to have these discussions in London, where the fares are much higher. In other European cities, the fares are the same or higher. In Toronto and Montreal, you have $3 fares.

“Why don’t we just decide what percentage is paid for by riders and what percentage is by taxpayers?”

Lamont Financial Services Corp. is the financial advisor for the bond sale. Hawkins Delafield & Wood LLP is bond counsel.

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