CHICAGO The Regional Transportation Authority of Illinois laid out its case this week for the state to centralize and expand its borrowing powers for Chicago area transit needs at the expense of the Chicago Transit Authority, calling the CTA’s bond issuance “costly” and “wasteful.”
The CTA fired back, calling its parent authority, which provides financial oversight, “an unaccountable, bureaucratic agency.”
The proposal outlined by RTA board chairman John Gates in a memorandum to city and suburban leaders is the latest in a series put forth by the RTA as a task force appointed by Gov. Pat Quinn weighs changes to the governance structure of local transit. The aim is to improve regional management. The RTA could lose or gain powers as part of the process.
A preliminary report issued recently by the task force found the current structure leads to duplication, uncoordinated service and a lack of accountability. A final report could come next month with proposals that could be forwarded to the General Assembly for consideration.
The RTA provides financial oversight of the CTA, which operates Chicago’s bus and rail transit system; Metra, which provides commuter rail service between the city and suburbs; and Pace, which operates the suburban bus system.
Of the three, only the CTA is an active issuer with unlimited borrowing power under state statutes. State lawmakers gave Metra the power to issue up to $1 billion of debt in 2008 but it remains unused. More recently Pace has been given authorization to sell $100 million. The RTA can exercise some oversight over CTA bonding in that it must sign off on the service boards’ budgets, which include funds for debt service.
“The service boards’ separate bonding authority has been costly, wasteful,” Gates said in his proposal released Monday.
“The service boards are not in a position to individually borrow money for capital projects in the most cost-effective and consistent manner,” he said.
“All of the service boards have substantial capital needs and yet only the RTA is positioned to borrow in a regional and financially prudent manner,” Gates said.
The RTA has exhausted most of its statutory long-term issuance capacity, although the state’s ongoing $31 billion capital program earmarks $2.7 billion for transit. The RTA wants the state to both centralize bonding authority for the region under its auspice and expand its capacity to $5 billion. Officials have said the additional debt could be repaid with growth of existing sales tax and matching state aid funds, and maintenance savings. It currently has $2 billion of outstanding debt primarily repaid with sales taxes.
Moody’s Investors Service downgraded the CTA’s $2.9 billion of sales tax revenue bonds on Friday one level to A1 and assigned a negative outlook, which the RTA cited in promoting its position.
“The RTA chairman’s proposal to more than sextuple the amount of borrowing it can do would put too much into the hands of an unaccountable, bureaucratic agency,” the CTA said in a statement.
The CTA and RTA have long tussled over the CTA’s move to borrow on its own which was launched a decade ago when it first leveraged federal capital grants. It has since issued more than $800 million of grant anticipation bonds and another $2.9 billion of sales tax-backed bonds.
“Decisions by the RTA will directly threaten the scarce funding that the CTA, Metra and Pace use to provide service. This idea is simply the latest in a series of attempted power grabs that would hurt service, make it harder to reinvest in the system, and make the RTA answerable to no one,” the CTA statement continued.
CTA president Forrest Claypool recently argued in favor of the CTA retaining its autonomy in any shakeup, saying the CTA is accountable to voters who know the “buck” stops with Mayor Rahm Emanuel. The mayor appoints four of seven CTA board members.
In making its case, the RTA argued that scarce state and federal resources make the need all the greater to issue at the lowest cost possible. Pace has capital needs projected over the next decade of $2.2 billion, Metra’s tally is at $9.7 billion and CTA’s needs top $19 billion.
The RTA takes the CTA to task for using a backloaded debt structure. “CTA’s practice of deferring principal payments significantly increases the amount of interest compared to level debt service” which is the more conservative structure favored by the RTA, the proposal read.
CTA sales tax bonds hold a junior lien to that of the RTA and it does not fund a debt service reserve. The RTA funds a debt service reserve and adheres to a stricter borrowing limit based on the level of pledged revenues.
While the RTA’s policies and debt structure reflect a more conservative approach, the CTA wants to leverage to fullest extent possible its revenue streams due to the capital needs of its aging system.
The RTA also argued that the CTA has paid more on average over the past ten years for professional services associated on bond issues to the tune of $2 million per every billion dollars issued.
“This is partly attributable to the fact that while the RTA only has one or two financial advisors associated with each of its bond deals, the CTA often has numerous financial advising firms working on each of its issuances,” the RTA said.
RTA executive director Joseph Costello argued in an interview Monday that every dollar counts.
“Savings are savings and the last time I looked we needed to use every dollar efficiently,” said Costello, who was the agency’s longtime chief financial officer before being appointed to the top post.
“Regardless of the Moody’s downgrade we think our statement stands but the downgrade does underscore the point that we are the lower cost issuer,” Costello said.
The RTA also wants the permanent ability to issue up to $400 million in short-term working cash notes. Existing statutes limit the amount to $100 million but lawmakers have temporarily increased the amount to $400 million in recent years due to give the RTA flexibility to deal with the state’s chronically late aid payments.
The CTA attacked many of the RTA’s claims. Officials noted that CTA and RTA bonds are backed by the same sales-tax dollars which are sufficient to meet the debt service of both agencies so no risks are posed to bondholders. The CTA said it offers a more diverse revenue stream to repay its debt including fares, advertising, concession and federal grant funds.
RTA is currently limited in its ability to borrow and its proposal would represent a costly expansion. The CTA also stressed that its sales tax rating from Standard & Poor’s remains intact at AA. The agency’s $800 million of federal capital grant backed bonds are rated in the single A category.
Moody’s attributed the downgrade Friday to the CTA’s escalating capital needs and what analysts believe is an unfavorable political landscape to raise revenues for the system as the city and state grapple with pension woes. The CTA challenged the reasoning behind the downgrade given its strong sales tax growth and steady fare and non-farebox revenues growth. The CTA last year announced plans to issue $1 billion over the next five years for infrastructure work.
The RTA’s $2 billion of general obligation debt is rated AA with a negative outlook by Fitch Ratings while Moody’s Investors Service assigns a Aa3 and stable outlook, and Standard & Poor’s assigns a AA and stable outlook.
The Quinn task force’s preliminary report found the existing system is “not guided by a strong, clear vision,” is managed by four transit boards with 47 members creating competition among agencies, and lacks accountability with too much duplication and a lack of accountability.
The RTA and its service boards have come under heightened political and public attention following accusations by former Metra executive director Alex Clifford that the board forced him out and offered a generous severance package to keep him from revealing allegations he had made of cronyism at the agency.