Watchdog group wants Federal Reserve to buy bonds to prop up New York MTA
The Federal Reserve could purchase New York Metropolitan Transportation Authority bonds to prop up the transit agency reeling from the COVID-19 crisis, according to a watchdog group.
Research of the state and MTA budgets by the good-government organization Reinvent Albany said other moves could include federal recovery grants for the nation’s largest mass transit system, which has experienced a ridership drop of up to 90% on its subways amid work-at-home mandates and fears of the coronavirus spread.
“These shortfalls, along with fare and toll reductions, point to the need for more federal rescue funds, as the $4 billion from the federal Stimulus 3 does not fully solve funding needs,” said Rachael Fauss, Reinvent Albany’s senior research analyst.
The Fed, which is allowed to own government debt and agency debt with government backing, cut interest rates to zero during the coronavirus pandemic and began an unlimited quantitative easing program to help stabilize the credit markets. It has $5.3 trillion in assets.
The state-run MTA has roughly $800 million of bond anticipation notes due May 15. It is one of the largest municipal issuers with $45 billion of debt, including special credits.
It is hemorrhaging upwards of $140 million per week, officials have acknowledged. S&P Global Ratings and Fitch Ratings have downgraded the MTA’s primary transportation revenue bond credit while Moody’s Investors Service and Kroll Bond Rating Agency have the authority on review for downgrade.
The MTA operates New York City’s subways and buses, Long Island and Metro-North commuter railroads, and several interborough bridges and tunnels. Through Monday, 33 employees have died from COVID-19, which has killed more than 2,700 people in the city.
“The state also faces huge shortfalls because of COVID and appears unable to bail out the struggling MTA,” Fauss said. “The MTA is running low on cash and faces plunging revenue and a frozen national municipal bond market.”
While the $2.2 trillion CARES Act allocated $25 billion to mass transit nationwide, the federal government is distributing aid proportionally according to a Federal Transit Administration ratio. FTA, a unit of the U.S. Department of Transportation, has earmarked $22.7 billion to large and small urban areas, and $2.2 billion to rural areas.
That effectively is “watering down the total potential impact to the largest systems,” said Tom Kozlik, head of municipal strategy and credit for Hilltop Securities.
Farebox and general revenue-backed transportation bonds face steeper challenges, according to Kroll.
“Issuers’ ability to navigate the current period will vary depending on the entity and the available resources at hand,” Kroll said in a commentary. “An interesting case in point is the MTA.”
While ridership on subways and buses will continue to plummet amid the pandemic, Kroll said three pillars supporting the MTA’s credit rating are the available gross revenues used to meet pro rata monthly debt service requirements before their release for operations; a strong management team; and the essential nature of the MTA to metropolitan New York’s economy.
According to Municipal Market Analytics, the support of the state and federal governments confirms the importance of the MTA to the region.
"So even as the MTA’s finances become increasingly strained, and rating agency assessments begin to be downgraded, a default on MTA bondholders seems even less likely today than it did pre-pandemic," MMA said in a commentary on Tuesday. When social-distancing protocols relax, according to MMA, the MTA could see a much faster operational recovery than most other municipal credits.
Gov. Andrew Cuomo on Friday signed a $177 billion fiscal 2021 spending bill that raises the MTA’s ceiling for capital borrowing to $90.1 billion and calls for other intricate measures. Operations borrowing will not count toward the debt cap.
The bill also enables the MTA to temporarily break a capital account lockbox and use revenues from a planned congestion pricing mechanism for Manhattan and Internet and mansion taxes for properties valued above $25 million for operational needs. All passed as part of the previous year’s budget.
Any capital-to-lockbox shift requires both MTA board and state Division of the Budget approval. DOB Director Robert Mujica is also an MTA board member.
Still, prospects for congestion pricing in the short term appear iffy.
“Congestion pricing is assuming traffic resumes, then you also have the delays with the federal government,” said Howard Cure, director of municipal bond research for Evercore Wealth Management. Before the virus outbreak, the state and federal government were at odds over environmental studies related to congestion pricing.
The state budget also allows the MTA to borrow up to $10 billion for operating costs through 2022 due to the COVID emergency. “Adding $10 billion in debt-service payments over two years would be a huge increase and result in higher service payments,” Fauss said.
State Comptroller Thomas DiNapoli has projected MTA debt to rise to $54 billion by 2023.
Separately on Friday, the city and MTA closed a deal on the redevelopment of the MTA’s former headquarters at 347 Madison Ave. in East Midtown. The deal could generate more than $1 billion for MTA capital projects, with $600 million counted towards the city’s commitment to the 2015 to 2019 MTA capital program.
The budget includes a reporting requirement to the state legislature, New York Mayor Bill de Blasio and the City Council, the MTA board and the state Capital Program Review Board to explain revenue losses and the need for operations borrowing, which will also be posted on the MTA website.
Another requirement calls on the state and city to each contribute $3 billion “concurrently” toward the MTA’s 2020-2024 capital plan. The capital appropriations legislation includes the state’s $3 billion, which includes the “set-aside” funds for the state legislature to distribute.
In addition, should the city not pay toward its $3 billion on the state budget director’s schedule, the state comptroller can redirect other state aid for the city to the city’s MTA capital plan contribution.
Reinvent Albany and other advocacy groups, including Regional Plan Association, Tri-State Transportation Campaign and the Permanent Citizens Advisory Committee to the MTA, have called for public revelation of the size of this pot and the individual earmarks when finalized.