CHICAGO — Strapped for traditional funding to renovate one of its aging light-rail lines, the Chicago Transit Authority has hired Goldman, Sachs & Co. and two other firms as advisors to explore alternative financing options, including a public-private partnership.
The CTA board approved a four-year advisory agreement with Goldman Sachs in the lead spot, supported by co-financial advisors Loop Capital Markets LLC and Estrada Hinojosa & Co.
The authority said it chose the firms over others based on their “industry expertise and strong experience with P3s, transit finance and municipal financing.”
The CTA is seeking a means to fund more than $5 billion in improvement and expansion projects involving its Red Line. It envisions the use of P3s to leverage new non-farebox revenue sources and capture real-estate value created by the Red Line.
“Traditional federal, state and local funding sources are uncertain, and may be insufficient to meet our needs within the next several years,” CTA president Forrest Claypool said in a statement. “This agreement will allow the CTA to pursue innovative ideas and possible new funding sources to complete some of the important projects we have planned.”
Under the advisory agreement, the firms will not receive compensation in the first year during which they assess P3 opportunities to aid in funding Red Line projects. The firms would be paid a monthly fee in the remaining years of the contract, along with a percentage of any future transactions.
The CTA can terminate the agreement if it has decided that P3s are not a viable option. The monthly fees beginning in the second year of the contract provide $50,000 to Goldman and $4,000 to each co-advisor, with that amount dropping to $37,500 in the third year for Goldman and to $25,000 in the fourth year.
The co-advisor fees remain at $4,000 monthly. Transaction fees pay Goldman 0.375% on the first $2 billion and 0.25% after that, with the co-advisors receiving 0.0625% on the first $2 billion and 0.05% on any additional amount.
The CTA relies on its own revenues, funding from its parent, the Regional Transportation Authority of Illinois, and other state and federal sources to pay for capital projects, but all fall short of its identified needs.
Illinois’ $31 billion capital budget included $2.7 billion for transit, but the funds have been slow in coming.
The RTA’s current five-year capital program from 2012-2016 totals $3.8 billion, with federal sources accounting for 41% of funding, state sources 26%, carryover proceeds 18%, and CTA bond proceeds 13%. The capital budget for 2012 totals $1.4 billion. The RTA’s $3.9 billion budget also includes the CTA’s $1.24 billion operating budget. The RTA noted that the 2012 budget is the first in recent years not to rely on a transfer of capital funds to cover operations.
The RTA has warned that its services’ boards — the CTA, Metra commuter rail and Pace suburban bus — would need to spend $24.6 billion over the next decade to keep the system in a state of good repair.
The CTA last October sold a mix of sales tax revenue bonds and new-money and refunding capital grant-backed bonds to fund the purchase of rail cars. Moody’s Investors Service rates the capital grants A1 and Standard & Poor’s rates them A. Moody’s rates the sales tax bonds Aa3 and Standard & Poor’s rates them AA.
The capital grant bond ratings apply to a total of $860 million of debt. The CTA has $2.5 billion of debt primarily supported by its sales taxes. The sales tax credit’s strengths include a pledged revenue stream of the agency’s share in sales taxes collected in the region, strong debt service coverage, and an improved pension fund status.
The credit is challenged by the economic impact on sales tax collections and the agency’s vulnerability to chronic state-payment delays.