The Metropolitan Transportation Authority's bond ratings may be too high, according to a report released by Bank of America-Merrill Lynch yesterday.

Although the New York Legislature approved a bailout package in May that addressed the authority's short-term capital and operating needs, its reliance on state and local partners is cause for concern, the report said.

"Endemic to mass transportation funding, the MTA [transportation revenue bonds] are not self-supporting from operating revenues and require substantial state and local government subsidy," the report said. "We are concerned over the impermanence of the appropriated subsidies, and the episodic petitioning of political officials to make this financing structure work."

The MTA bailout package created new revenue streams for the authority, primarily from a payroll tax on employers in the 12 counties it serves. The MTA expects to sell $6 billion of bonds against the revenue streams, but even so it projects a nearly $10 billion funding gap in its proposed $28.08 billion, five-year capital plan.

Last week, Moody's Investors Service took the MTA's transportation revenue bonds off of its watch list for possible downgrade, affirming its A2 rating. Standard & Poor's and Fitch Ratings assign A ratings to the credit.

The Bank of America-Merrill Lynch report, released yesterday, said that the credit should be viewed as Baa1/BBB-plus equivalents. Transportation revenue bonds appear to offer an attractive yield compared to the firm's A-rated and BBB-rated municipal transportation revenue bond indexes using a yield-to-worst scale that calculates the worst possible yield a security might produce, the report said.

Howard Sitzer, a Bank of America-Merrill analyst, said the transit system has extensive needs but the uncertainty of its funding is cause for concern.

Sitzer said they looked at transportation revenue bonds maturing in 2032 with a 4.5% coupon that had a yield to worst of 5.02% based on trading last week. While that seemed attractive on a yield to worst basis, it was 65 basis points above an option-adjusted triple-A municipal scale.

"Those bonds appear a little bit cheap on a yield basis, but on a spread to a triple-A scale, 65 basis points to me seems a little bit narrow," Sitzer said. "Professionals look more at an option-adjusted spread, and on an option-adjusted basis the bonds aren't so cheap."

The authority's dedicated tax-fund credit should also be considered lower rated, the report said. The DTF bonds are backed by dedicated petroleum taxes and motor vehicle fees. Standard & Poor's rate the bonds AA and Fitch rates them A-plus. Moody's does not rate the credit. According to the B of A-Merrill report, the credit should be rated equivalent to an A3/A-minus.

The MTA most recently sold bonds on its dedicated tax fund credit in April with a deal that comprised $500 million of tax-exempt bonds and $750 million of taxable Build America Bonds. The longest maturity of the tax-exempt bonds, 21-years, priced to yield 5.02% on a 5.25% coupon. This was 64 basis points above MMD's double A GO yield curve on that day and 19 basis point below the single A curve.

Standard & Poor's analyst Laura MacDonald said she hadn't seen the report and couldn't comment on it. "We have our ratings that are based on our criteria and our view of the credit," she said.

The MTA historically has projected deficits in out years but managed to balance the budget through a combination of fare or toll increases, operating expense reductions, and finding additional revenues, MacDonald said.

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