The clock is ticking for the biggest mass-transit system in the nation.
New York’s Metropolitan Transportation Authority needs $12 billion of federal funds by late March to avoid drastic cuts to subway and commuter-rail service as the coronavirus has decimated revenue and ridership. While mass-transit providers will have an advocate in President-elect Joe Biden, a long-time Amtrak rider, he doesn’t take office until Jan. 20, one month after the MTA approves its 2021 budget.
A Democratic-controlled Senate could also provide a bigger stimulus package for public transportation systems, but the fate of that chamber rests on two Georgia run-off elections in January. Biden said Monday that Congress should immediately pass a Covid relief package but there’s no active negotiations between House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell.
The MTA is seeking federal funds to help cover budget deficits this year and next. It’s set to unveil Wednesday its 2021 budget proposal during a monthly board meeting, followed by a vote next month. Without more federal help, that plan will include service cuts of as much as 40% on subways and buses and 50% on commuter-rail lines.
“We’re going to continue to fight and advocate for that,” Pat Foye, MTA’s chief executive officer, said in a phone interview about the $12 billion request. “As the largest public-transit agency in North America, our losses caused by the pandemic are greater than any other agency in the country.”
Transportation needs dominate the New York City region, where officials are waiting for federal funds to begin work on the Gateway project, a $11.6 billion commuter-rail tunnel under the Hudson River that connects Manhattan and New Jersey. The MTA is also waiting for federal guidance to implement congestion pricing, a new revenue source originally pegged to support $15 billion of debt for capital needs but could also help cover operating costs.
In addition to massive service reductions, the MTA has warned it will be forced to issue debt to cover operating expenses and also lay off more than 8,000 workers. Those changes could result in an estimated $65 billion loss in gross domestic product annually for the New York City region, costing a potential 450,000 jobs by 2022, according to a report released last month by the NYU Rudin Center for Transportation Policy and Management and New York-based consulting firm Appleseed.
Biden’s already focused on mass-transit. Phillip Washington, chief executive officer of the Los Angeles County Metropolitan Transportation Authority, is heading Biden’s transportation panel within his transition team. That group also includes Polly Trottenberg, New York City’s Transportation Commissioner.
“Long term there is a lot of political support for the MTA to remain a viable system,” said Dora Lee, director of research at Belle Haven Investments, which manages $13.3 billion of municipal securities, including insured MTA debt. “It’s very integral to and essential to the New York City economy and by proxy the New York State economy.”
Still, investors are skeptical the MTA will receive the full $12 billion from Congress. The agency, which owed nearly $46 billion of debt, as of Oct. 16, may be forced to sell deficit bonds to paper over budget deficits. The MTA debt already faces “suffocating levels,” with principal and interest payments forecast to take up 25.7% of revenue in 2021, according to state Comptroller Thomas DiNapoli.
The MTA plans to borrow for a second time through the Federal Reserve’s Municipal Liquidity Facility. The MTA and Illinois are the only entities to use that program as low interest rates have limited such borrowing to the most financially-stressed credits. The lending facility is set to expire Dec. 31.
An increase in MTA debt shouldn’t scare away bondholders as the agency’s ridership and revenue should return to more normal levels over time, said Richard Schwam, a municipal credit analyst at AllianceBernstein LP, which manages $49 billion of state and local debt, including MTA bonds. The MTA estimates pre-pandemic ridership may not return until almost 2023.
Before the pandemic, riders packed shoulder to shoulder into subways, buses and commuter rails as the network serves more than 15 million people across New York City, southeastern New York State and Connecticut. A coronavirus vaccine would help regain riders’ trust that the MTA system is safe.
Even if Congress declined to give the MTA any funding, the system can temporarily rely on deficit financing and the MLF program to raise necessary cash, Schwam said. Investors who can ride out the MTA’s financial stress may see a benefit for staying with the credit, he said.
“People will want to own it and are generally confident that even though it’s going to be bumpy for a couple of years, eventually you’re going to get a really nice gain out of an investment like that,” Schwam said.
Some MTA bonds are trading cheaper than they typically do. While the additional yield that investors demand to hold MTA debt rather than top-rated municipals has decreased since the pandemic struck in mid-March, that yield difference is still wide compared to how the bonds traded before the virus.
An MTA bond sold in February 2016 with a 5.25% coupon and maturing in 2056 last traded on Monday at an average yield of 3.8%, 224 basis points more than AAA-rated municipal debt, according to data compiled by Bloomberg. That yield difference is much wider than when the debt traded in January of this year at an average 3 basis points above top-rated munis.