Why the MTA’s debt problem mattersBy
The problem with building infrastructure is the need to maintain it in the future. As the MTA is learning right now, the bill always comes due, and someone has to pay. As the authority’s debt service obligations creep ever upward and will remain well above $2 billion a year through 2030 and $1 billion a year through 2040, the riders may inevitably have to bear the costs if the system cannot.
The theory behind debt is a deceptively simple one. When an entity — government or otherwise — needs to build something, it must raise capital to do so. Many corporations or organizations raise that capital by issuing debt based on time value theories of money. A debt-holder will turn over $1 now so that the builder has capital in exchange for a promise of more money in the future. That more money can be bonded from revenue-generating activities such as fare collection.
When building a subway line, debt is the perfect funding vehicle because future ridership projections can be used to estimate a bond issuance, and the revenue from that ridership can be used to pay down the debt. After a certain period of time, the debt will be paid, and the new infrastructure will be a profit generator. Unfortunately, this model of financing breaks down once an entity has to issue debt for maintenance of a vital piece of infrastructure rather an expansion, and the MTA is learning what happens when too much debt is used to sustain instead of expand a a pre-existing subway system.
Right now, the New York City Subways range in age from over 100 to nearing 80, and the MTA is tasked with making sure the system still operates 24 hours a day and improves. Unfortunately, maintaining the current status quo and even incremental improvements are not investments that should be funded with much debt. They don’t lead to an increase in ridership great enough to justify the debt and mean that we’ll be paying for today’s improvements in 10 or 15 or 20 years when more improvements are necessary. That, in a nutshell, is a simplified view of one of the drivers of the MTA’s current financial crisis.
Right now, nearly 20 percent of the authority’s annual expenses consist of debt service payments, and according to the MTA’s CFO, that situation is only going to worsen without city or state help. In speaking with the MTA Board’s Finance Committee yesterday, Bob Foran warned of the spectre of a looming debt service increase. Reuters reported the following:
The New York Metropolitan Transportation Authority might have to raise subway and bus fares by approximately four-and-a-half times the last fare increase to cope with a jump in debt service that kicks in as soon as 2016, Bob Foran, the MTA’s chief financial officer, said on Monday.
The MTA, the nation’s biggest mass transit agency, has a balloon-type borrowing program in which the amount repaid rises sharply in later years. Monday was the first time officials spelled out the impact the rising debt service could have on fares if no additional state or federal aid is received.
An MTA spokesman said fare hikes of the magnitude cited by Foran are not being considered.
We know that the MTA is going to raise fares again in approximately 23 months and will likely continue to request biennial increases to meet the growing expense pie. This debt service warning is a real one that, while seemingly obtuse, riders should take seriously.
As these financial questions arise every so often, I’m often asked if the MTA can declare bankruptcy, and the short answer is that it cannot. Its obligations are state obligations, and the state would have to grant the MTA permission to enter bankruptcy. The authority still has a strong credit rating, and it still is going to issue debt. Meanwhile, commentators including Nicole Gelinas and Joe Weisenthal say that the MTA should be more concerned with the state going bankrupt than vice versa. Neither solution would lead us down a good path.
Ultimately, the lesson is one that few politicians take to heart. Without state contributions, the MTA can maintain its system only through more debt, and the MTA must continue to maintain its system. Since politicians won’t be in office when the MTA must scrounge up $2.5 billion for debt service payments in 2025, Albany is more than willing to shirk current funding obligations and foist them off on future generations. Eventually, we the riders will have to pay one way or another.