(New York, NY - WNYC) A transit union says in a report that one cause of the New York Metropolitan Transportation Authority's recent fare hikes and service cuts has been hiding in plain sight: financial arrangements called interest rate swaps. Those are deals the authority made with banks on 10 percent of its $33 billion of debt —deals that have gone against the authority and in favor of the banks.
The deals were made between 1995 and 2007, when banks agreed to cover the fluctuating interest rates on some of the authority's bonds. In exchange, the NY MTA said it would pay the banks a fixed rate, plus a small premium. That agreement would've protected the authority if rates had jumped up. But the Amalgamated Transit Union says the NY MTA has taken a net loss on the deals since the economy crashed in 2008 and interest rates fell to sustained, historic lows.
The union says the authority is now losing almost $114 million a year ― and could continue to lose money on the deals for the next 20 to 30 years.
NY MTA spokesman Adam Lisberg disputed the union's calculations, saying the swaps brought predictability to the authority's budget, which needs to be balanced each year. "To compare transactions we entered into years ago, compared to what you can get in risky variable rate debt right now is either irresponsible or deliberately misleading," he said. "They are simply wrong."
He contended that the swaps allowed the authority to save $248 million. The report says that was true until 2007, when the arrangement allowed the NY MTA to pay off its debt at nearly a full point below interest rates that were relatively high. But that was before the economy tanked. Since then, the authority has lost money on the deal.
The report looked at 12 transit agencies or local governments that entered into interest rate swaps. The report's authors insisted in a conference call that, though the deals may have made sense when they were struck, these 12 agencies ― which includes the NY MTA and NJ Transit ― are now bleeding at least a half a billion dollars a year from the budgets of governments and transit authorities around the United States.
James Parrott, an economist with the Fiscal Policy Institute, called on agencies like the NY MTA to seek concessions from the banks, many of which received massive taxpayer bailouts.
He said he doesn't understand why the NY MTA isn't treating its bankers like any other business partners. “The MTA went to all of its vendors from 2008 to 2010 and got concessions from them to reduce the price of contracts," he said. "The only business they didn’t go to is the banks. Why?”
Parrott also noted that the NY MTA is about to go to market to sell billions in new bonds to refinance its capital construction program. "They could say to the banks, ‘If you’re unwilling to renegotiate these credit swaps, we’re not so sure you’re going to get a piece of these bonds,'” he said.
Lisberg called the idea unrealistic. "We need these major banks to provide financing for us," he said. "We’re constantly in the debt markets, it’s how we and every other large government organization works. If we’re buying equipment to use over 30 years, it makes sense to pay for it over 30 years."
In 2010, the NY MTA plugged a budget gap by laying off 1,000 workers and eliminating 750 positions. It also enacted some of the deepest subway and bus service cuts in decades. Riders absorbed a 7.5 percent fare increase in 2011, and further 7.5 percent increases are scheduled in 2013 and 2015.
The banks that hold interest rates swaps with the NY MTA are JPMorgan Chase, Citigroup, UBS, AIG, Morgan Stanley, BNP Paribas and Ambac.