Mass transit investors sanguine despite looming 'fiscal cliff'

Mass transit investors are looking past the well-publicized "fiscal cliff" facing public agencies and taking comfort in the more stable revenue streams like sales taxes that back their bonds.

"They're all facing lower ridership and diminishing federal pandemic relief," said Sheila May, director of municipal bond research at Boston-based GW&K Investment Management. "That narrative is real, but for bondholders, for those of us who look closely at what's securing our bonds, that narrative is running alongside the one that we're seeing from the security," she said. "We're insulated from a lot of the problems."

Agencies across the country are looking to revamp their revenue and debt structures to relieve operating pressures in light of ongoing weak ridership. Bond buyers point to stepped-up state support for New York's Metropolitan Transportation Authority, one of the municipal market's largest debt issuers, as a template for other struggling agencies.

The MTA is also looking to a new credit backed by a controversial congestion toll program to help finance its massive capital program. The Chicago Transit Agency, which is considering new funding streams like higher gas taxes or expanded tolls, has established a new transit tax increment financing district to help cover costs of a major new expansion.

GW&K Investment Management

U.S. transit agencies won a total of $70 billion of federal stimulus funds in 2020 and 2021 when ridership evaporated during the pandemic. The Infrastructure Investment and Jobs Act allocated an additional $18 billion annually for public transportation programs through 2026, according to the Congressional Budget Office. And President Joe Biden's 2024 budget included additional operating support for large urban transit districts, although Congress has yet to approve the measure.

Most of the federal funds need to be obligated by the end of this year even as ridership is projected to reach only 80% of pre-pandemic levels amid work-from-home trends.

Investors have long viewed public transit as an essential service that requires additional support layered on top of the farebox. The roughly $84 billion transit debt market is made up of a variety of credits, pledges and structures, with most bonds backed by a dedicated revenue stream like sales taxes that function independent of ridership.

"We find it important to understand that most transit bonds are not purely farebox- backed with many backed solely by sales taxes, which have performed very well over the past few years," said Jennifer Johnston, director of municipal bonds research at Franklin Templeton Fixed Income. More state or local support will be needed to help agencies recover, Johnston added. "We have already seen some positive movement in state/city support across the country. The decisions could be difficult, but they will have to be made," she said.

Of the larger urban credits, those that have been able to win additional support, like the MTA, have seen positive rating actions, while others, like the San Francisco Bay Area Rapid Transit District and the Washington Metropolitan Area Transportation Authority, have suffered negative rating actions. Like BART and WMATA, the CTA and its parent the Regional Transportation Authority of Northeastern Illinois, is in the process of lobbying state lawmakers for more support that they say is key to closing massive structural gaps.

The MTA dominates the public transit debt market with $44.3 billion of outstanding debt. Of that, 42%, or $18.5 billion, is the transportation revenue bonds, which are backed by farebox revenue among other sources. Another 24%, $10.6 billion, is the MTA's payroll mobility tax credit.

Belle Haven Investments has avoided MTA debt due to its reliance on fares, said the firm's director of research Dora Lee.

"We haven't purchased MTA in quite a while because of this concern of declining ridership," Lee said. "We are favoring those [transit bonds] that are specifically secured by sales tax streams or a specific stream of revenue that's insulated from the operations of a mass transit agency and isn't subject to the political brinksmanship that happens over who funds what at a public transit agency."

New York State last year agreed to increase the payroll mobility tax rate, a move that the MTA estimated would generate an additional $419 million in 2023 and more than $1.1 billion a year in future years.

In a PMT bond refunding last year, solid investor demand allowed the MTA to upsize the deal to $1.13 billion from $700 million.

Johnston said Franklin Templeton, which owns MTA, has closely followed the agency's struggles. "We think that the issues facing mass transit today are probably most acute for the MTA," she said. "But understanding the payment streams backing the bonds and the efforts of the state, city and MTA itself certainly will make the MTA an example the whole market follows."

May said the state's support for the MTA offers a template for other agencies. "They all saw the fiscal cliff coming and they stepped up – they had to, it's a key infrastructure asset for the nation's largest transit system," said May. "The same discussion is being had across the country. It's just a question of how committed each of the states are to solving the transit problems."

As the agency continues its move away from the farebox, investors are watching implementation of its controversial congestion pricing plan. The MTA has said it may see up to $1 billion in annual revenue from the toll that it will use to float $15 billion of new money debt.

"That's the big one everyone is anticipating," Lee said. "The real test for the MTA is, once they get this influx of revenues, can they make a system that is desirable again and improve ridership over and above pre-pandemic levels?" Lee said.