Ratings Agency Downgrades NY MTA, Clouding Financial Picture

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It it weren't enough that the NY MTA faces yawning budget gaps, the loss of its CEO and looming labor negotiations, now Fitch, the smallest of the three main rating agencies, has downgraded the authority's debt, meaning MTA may have to pay more for its debt, worsening its budget woes.

Here's the Fitch press release.  We'll have more soon.

"Fitch Ratings-New York-08 September 2011: Fitch Ratings has assigned an 'A' rating to the Metropolitan Transportation Authority, New York's (MTA) $99,560,000 transportation revenue variable rate bonds, series 2011B.

At this time, Fitch also downgrades the rating on $14.3 billion in outstanding MTA transportation revenue bonds to 'A' from 'A+'. The downgrade reflects higher than expected near-to-medium term financial pressure.

The Rating Outlook is revised to Stable. Fitch will shortly assign short and long-term credit enhanced ratings on the series 2011B bonds.

--Gross lien on a diverse stream of pledged revenues to meet debt service payments;
--Essentiality of the MTA's transit network to the economy of the New York region;
--Demonstrated ability of the MTA to produce solutions aimed at closing projected budget gaps;
--Need to generate sufficient cash to adequately cover operations of the system despite high debt service coverage ratios (DSCRs) as well as some future leveraging on the transportation revenue credit for capital;
--Increasing annual debt burden;
--Significant funding needs for the large $24 billion 2010-2014 Capital Program;
--Capacity to continue to leverage resources to fund expansion projects while meeting renewal and replacement needs.

--Inability to achieve operating efficiencies and implement other key elements of the cost reduction initiatives and/or maintaining ongoing state of good repair elements of the capital program;
--Significant cost overruns or delays in the capital program's mega-projects that would require additional funding;
--Additional service cuts or deferral of core capital projects that result in deterioration of key transportation services of the system;
--Deterioration or limited growth in dedicated tax subsidies.

The transportation revenue bonds are primarily secured by operating receipts and operating subsidies, including transit and commuter rail fares and other operating revenues, surplus toll revenues, and certain dedicated tax sources, state and local operating subsidies, and reimbursements.

The downgrade reflects higher than expected near-to-medium term financial pressure stemming from increasing operating costs (projected to moderate in growth in the outer years) and pension obligations and growing annual debt service obligations from expected near-term issuance associated with the capital program. This is exacerbated by the strong likelihood that operating subsides (dedicated tax sources) will not grow as anticipated in the near term leading to wider deficits. The Stable Outlook reflects the authority's institutional focus on monitoring developments and willingness to take corrective action albeit that the options available are fewer in the current environment.

While the MTA forecasts a sizeable surplus of $170 million in 2011 as well as a modest surplus of $4 million in 2012 growing to $125 million in 2013, underlying assumptions related to management's continued ability to implement new cost containment initiatives, growth in operating subsidies (regional dedicated taxes, mortgage taxes and the payroll mobility tax) as well as yields on toll and fare increases are of concern and must still come to fruition. Forecasted deficits of $54 million in 2014 and $178 million in 2015 may be greater than estimated if the underlying assumptions on either the expense or revenue side are not achieved in the near term.

The July financial plan forecasts labor expenses, primarily driven by significant increases in health and welfare costs as well as pension benefits, to grow to $8.3 billion in 2015 from $6.9 billion in 2010 or 3.7 % annually. Similarly, non-labor costs are expected to increase 7.3% annually to $3.7 billion in 2015 from $2.6 billion in 2010. To the extent operating efficiencies including 3 Zeros / Accelerated Zero (wage freezes) and other MTA initiatives come to fruition, growth rates will be lower. Operating subsidies are forecasted to increase to $6.2 billion in 2015 from $4.8 billion in 2010 or 5.24%. Increased fares and tolls are expected to offset some of the growth in operating expenses.

The MTA's July Financial Plan shows improvement from previous financial plans that forecasted larger deficits, and Fitch recognizes management's expense control actions and the demonstrated ability to navigate through the difficult economic environment impacting the greater New York City area and surrounding region. However, it is Fitch's opinion that the MTA will face significant challenges related to meeting the plan over the next several years as significant new debt is issued to finance the $23.8 billion 2010-2014 capital program.

Operating revenues from transit, bus, commuter rail and the bridges and tunnels year-to-date (YTD) through May are tracking close to budget, while total operating expenses are tracking slightly below budget, at around 1.2%. Receipts from dedicated operating subsidies including new state aid, state dedicated taxes and real estate related taxes have been mixed through May. New state aid comprised of the payroll mobility tax (PMT) and MTA Aid (license fee, vehicle registration fee, taxi fee and automobile rental fee) are currently tracking with budgeted estimates, while real estate taxes consisting of the regional mortgage recording tax and New York City urban taxes are tracking around 10% higher, reflecting some rebound in the real estate market. The sustainability of this turnaround is uncertain.

The MTA's 2010-2014 $23.8 billion capital program comprised approximately $18.1 billion in core projects on the existing system and $5.7 billion for expansion projects. As with prior capital programs, long-term debt is expected to finance a significant portion of the 2010-2014 capital program. To the extent that forecasted financial performance is not met, the MTA may be forced to scale back debt financing to fund a portion of the program. The political pressure to keep construction going to support jobs will be a counter-weight. Deferred maintenance or a decrease in system reliability would be potential credit concerns.

The MTA is responsible for North America's largest transit network, serving 2.6 billion riders annually. The authority's network is essential to the economic well-being of the region, handling 80% of all daily trips to Manhattan's business district."