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MTA: Sandy Borrowing Necessary

NOV 28, 2012 3:10pm ET
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While New York’s Metropolitan Transportation Authority is still sifting through cost estimates from Hurricane Sandy, one thing is certain: the authority, contrary to what it said right after the storm hit last month, will have to borrow, and borrow big, to fully restore its system.

Financial officials told the authority’s board on Wednesday that the MTA, whose 108-year-old system sustained its worst damage ever, may be on the hook for an estimated $950 million of its nearly $5 billion of losses, assuming standard recoveries from its insurance policies and 75% from the Federal Emergency Management Agency.

And that doesn’t include fortifying the system for another such storm.

“This is just to return us to the functionality we had before Hurricane Sandy struck. It does not include hardening,” Chairman Joseph Lhota told reporters.

The MTA, whose $31 billion of debt makes it one of the largest issuers in the municipal marketplace, plans to issue $4.8 billion in revenue anticipation notes -- $2.9 billion next year and $1.9 billion in 2014.

Debt-service costs will increase by $29 million in 2013 and $48 million in 2014 and 2015 until it repays notes from insurance or federal reimbursements or bond proceeds, according to the MTA’s chief financial officer, Robert Foran. He said selling $950 million of 30-year bonds issued in 2016 would add $62 million to debt service annually.

“We just hope this will not strangle us with debt going into the future,” said board member Allen Cappelli, who chairs the MTA’s bridges and tunnels committee and represents New York City’s Staten Island borough.

In his update to the authority’s four-year financial plan, Foran said savings efficiency targets to offset Sandy, he said, would range from $25 million in 2013 to $74 million in 2015.

“We’ll go through the books and see where we have to save,” Foran said.

The board will vote on its 2013 budget next month. Also in December, it will approve one of four fare-and-toll-increase scenarios, with the hikes to take effect in March. Another set of increases is planned for 2015.

The estimated $5 billion hit from Sandy includes $4.75 billion in infrastructure damage and $268 million in operating losses, the latter consisting of $124 million in lost revenue and $144 million in increased operating costs. While the MTA expects to receive advances from insurers and the federal government, the final settlement could take two to three years.

Foran projects the authority’s year-end cash balance at $26 million, even after the $268 million Sandy loss. Debt-service savings, agency underspending, a $63 million release of the general reserve and a $75 million internal loan from an internal OPEB (other post-employment benefit benefits) account help offset the hit, he said. But, Foran added: “The impact on the financial plan spans multiple years: 2013 and beyond.”

Lhota and Foran emphasized that the estimation of Sandy costs is ongoing. “We’re in a very preliminary stage. We’re in the first inning,” Lhota said.

Reopening South Ferry and Whitehall stations, adjacent to the Staten Island ferry terminal, will take some time, said Lhota. Preliminary estimates peg that renovation at $600 million minimum. South Ferry reopened in 2009 after a $530 million refurbishing, mostly federally funded.

Lhota defended such an expense for a station that sits below the water table. “It’s a major station for Staten Island commuters and one of the early stations in the system,” he said. “South Ferry was destroyed. It wasn’t hurt, it wasn’t cracked, it was destroyed from top to bottom.”

Fitch and Standard & Poor’s rate the MTA’s transportation revenue bonds A, while Moody’s Investors Service assigns an equivalent A2 rating.

Gene Russianoff, the staff attorney and chief spokesman for the Straphangers Campaign rider advocacy group, also worried about the increased debt.

“Funding these needs by MTA bonds will increase pressure on fares through increased debt service -- and it sets a troubling precedent for the funding of the next five-year capital program starting in 2015,” he said after Wednesday’s meeting.

FEMA is expected to cover 100% of Sandy-related expenses incurred through Nov. 14.  But Laureen Coyne, the MTA’s director of risk and insurance management, held out hope that FEMA reimbursement could rise to 90% to 100%.

“We’re not sure yet, but we’re looking into the possibility. It’s going to be a whole program to put together,” Coyne said.

The MTA has maximum insurance coverage of $1.075 billion.

Also on Wednesday, the board approved the finance committee’s recommendation two days earlier for up to $500 million in new-money bonds for capital projects.

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This is a material increase in non reimbursed capital costs, lost revenue and additional operating expenses versus what was reported to institutional investors on a November 5th MTA conference call. The prior information was relied upon to make investment decisions. That said, repairing the system and seeking maximum reimbursement should be the MTA's top priorities.
Posted by paulmansour | Wednesday, November 28 2012 at 4:03PM ET
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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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