MTA's Rising Debt and Payroll Cost Take Toll on Bond Rating

(Bloomberg) -- The Metropolitan Transportation Authority’s rising labor and debt-service costs are eating away at its bond rating.

S&P Global Ratings Monday lowered the rating of the busiest mass transit system in the U.S. to A+ from AA-, as the amount of cash left over after it pays its debts fell below a key threshold, the rating company said. Net debt-service coverage, or the amount of cash left over after the MTA pays operating expenses, may fall below 1 times annual debt-service cost. The MTA is facing budget deficits of $403 million in fiscal 2020 and $602 million in the following year.

"The budget gaps they’re projecting in the out-years are still large and could be challenging for the MTA to resolve," said S&P analyst Paul Dyson. The MTA has already squeezed hundreds of millions of dollars in savings from its budgets in the last several years, he said.

The downgrade comes as New York’s subway and bus system suffers from rising delays and ridership declines. In July, Governor Andrew Cuomo, who controls the MTA, declared a “disaster emergency" and called for a plan to deal with the causes of the delays, including signal malfunctions, power failures and broken track. Subway ridership has declined 2 percent from its 2015 peak despite the city’s increases in population, employment and tourism, New York’s Independent Budget Office said last week.

Bus ridership has been falling for years, attributed to slow and unreliable service, as well as the rise of on-demand taxi service from companies such as Uber and Lyft.

Both Cuomo and New York Mayor Bill de Blasio agree the MTA, which has $38.6 billion in debt, requires more capital investment. They disagree on who should pay for it and how. Cuomo has proposed a plan to charge motorists a fee to enter Manhattan while de Blasio advocates increased taxes on residents earning more than $500,000 per year to pay for upgrades. De Blasio didn’t include money for the MTA’s $836 million “stabilization plan" in its budget. Cuomo committed to paying half.

The MTA is being squeezed by rapidly rising payroll, health-care and debt costs. Labor expenses are projected to climb to almost $11 billion in fiscal year 2021, a 19 percent increase over fiscal year 2016. Debt service is projected to grow 29 percent to about $3.2 billion.

Meanwhile, fare and toll revenue, and state and local support is projected to grow at a rate of 6.3 percent.

On the positive side, the MTA has a long record of solving budget deficits and benefits from strong fundamentals, including the city’s economy and the MTA’s monopoly on mass transit, Dyson said.

“We still remain confident that management will make the tough decisions necessary," he said.

S&P’s rating action recognizes the MTA’s need for additional revenue to support operations and capital investment, said agency spokesman Aaron Donovan. The transit agency is focusing on reducing construction costs and reforming its procurement process, he said.

“The MTA’s bond ratings remain extremely strong and we’re grateful that S&P continues to recognize our ‘very strong management and governance policies, with very strong financial policies’," Donovan said in an emailed statement.

--With assistance from Henry Goldman

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net.

To contact the editors responsible for this story: James Crombie at jcrombie8@bloomberg.net, William Selway

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