Jan
25

Why the MTA’s debt problem matters

By

The latest glimpse at the MTA's debt service obligations. (Via)

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.



Categories : MTA Economics

13 Responses to “Why the MTA’s debt problem matters”

  1. Yanir Maidenberg says:

    I raise the question, then, why isn’t the MTA (or the state) more concerned with expansion – a win-win situation? In such a money-centered society, shouldn’t the MTA be a better businessperson?

  2. R. Graham says:

    Like all bubbles, the key question is: when will this bubble pop?

  3. Scott E says:

    Does, or did, the MTA ever pay down its debt ahead of schedule? Homeowners always hear that making 13 mortgage payments in a year instead of 12 (every other biweekly paycheck) makes a huge difference. Same thing. Get a small jump on paying down debt (even by a 25 cent fare hike) and the benefits will balloon.

    • Chris says:

      Generally speaking, that’s not possible. Bonded debt usually cannot be prepaid, under the terms of the bond’s identure.

  4. SEAN says:

    There’s always the option of default. Several states & counties are looking at this option to get out from under union contracts. That may work in the short term, but will be desasterous long term.

    Most people in government & business don’t pay much atention to the long term effects of the choices they make because they wont be the ones cleaning up any of the mistakes that result from said choices.

    • R. Graham says:

      Which is exactly the problem with our politicans today. They only care about what affects them and not us the people in the short term. Leave it to the next sucker to figure out how to solve these problems. Especially when we reach the day when transit becomes unaffordable in the urban environment of NYC. The number of jobs that will kill alone is disasterous.

      If I as an employer have to keep continuing to pay your more just to come to work or consider giving you credits for it, then why do I need to have this extra position? Might as well cut it and do the work myself or add it on to someone else’s responsibilities, especially if they’re getting paid more.

      This cause will lead to an effect. It’s time for all levels of government to begin taking public transportation seriously as population levels continue to meet projections.

      • Chris says:

        Default’s not a meaningful option for the MTA. In any case, it’s not clear at all that a bankruptcy judge would allow the MTA to reduce its debt in a bankruptcy proceeding, because it’s pretty obvious to everyone that the MTA has the capacity to repay its debt by following a pretty obvious plan:

        (1) Dramatic increases in fares (if you doubled all subway fares do you really think ridership would drop 50%? Not even close. The MTA’s bottom line would grow enormously.)

        It’s one step. Bankruptcy doesn’t allow an entity to escape its debt simply because its options for debt reduction are politically unpalatable.

        • Justin Samuels says:

          We’re already in that direction, the last increase was at least a 20% increase. The next increase is supposed to be two years away. But the federal government is already talking about reducing its contribution to mass transit operations around the country by one billion, meaning the MTA would lose another 150 million. What does this mean? Basically, whenever the House cuts this funding, fares would have to increase. Basically, a much bigger cost of maintaining the system will be born by fareholders, as the overall public seems to not be interested in paying for services they don’t use (most Americans don’t use public transportation that much, if at all).

          But this isn’t limited to mass transit. Public university tuitions have skyrocketed, as states cut back their contributions to public universities. All of this, in a way, is defacto privatization of state services.

        • Al says:

          You can be sure that if you double the fare ridership will drop dramatically. There are many folks who can barely afford to ride the subway now, they certainly would have to find alternate means of transportation. There are some folks who can absorb a 100% fare increase, but even those folks will look for alternate means of transportation. It will also make car travel more attractive, which is something NYC does not need.

          Even if more money came in to the MTA, what makes you think they would spend it to pay down debt? I have very little faith that the MTA the way it is currently run even remotely understands the concept of fiscal responsibility.

  5. Ray says:

    Ben, very interesting piece. Yet, I can’t agree that bonded debt should only be used for expansion. Our 100 year old system should have twice over it’s history been rehabilitated/modernized/reconstructed through fare box backed bonds. Instead it seems debt was used to suppress fares while supporting the massive and inefficient operations/ administrative structure. Yes, its apparent some cosmetic repairs were made, and a few lines now enjoy mid? 20th century amenities, but we all know how much more should have been accomplished with the debt that has been assumed.

    Enter the present and we have a system in dire need of an overhaul, debts to the moon, and a host of monumental projects that we must complete at ANY cost. Expansion is part of any reasonable capital plan, but it should be only a “share” of the funds. Managers are responsible for what’s reasonable… 20%, or 30% of each program. I’d be curious to know what the ratio is today. School me. Are all our monumental projects arguably out of bounds in terms of state of good repair/rehabilitation, save Fulton Street?

    There’s no reason why we should be building Capital Project Cathedrals while Herald Square feels (in every way) like a station in Calcutta (and such a comparison may offend Calcuttans, for which I’m sorry). The capital program is out of balance. I think Walder agrees, but may be unable to change course. Is it the legacy of the baby boomers? (and I am one for the record)… Like Bush’s federal deficits, is this another mess we can’t ‘expand our way out of’ in our lifetimes. Like increasing taxes, a future of ever higher fares seems inevitable.

  6. Larry Littlefield says:

    It should be noticed that part of that debt was used for the dramatic fare decreases of the late 1990s and early 2000s, with all the Metrocard discounts.

    Win for past farepayers, represented by the Staphangers Campaign. Loss for future farepayers, represented by no one.

    But the Straphangers could argue that the cuts in fares, combined with the repair of the system, contributed to the 50 percent ridership increase on the subway. If that increase is maintained through fare increases, it could be argued it was a working capital “investment.”

    But I don’t agree.

  7. Larry Littlefield says:

    “Managers are responsible for what’s reasonable… 20%, or 30% of each program. I’d be curious to know what the ratio is today. School me.”

    Expansion projects have been a very low share of the capital projects. Most have been normal replacement, or state of good repair which really means too late normal replacement after deterioration.

    As far as I know there is no current capital plan, but in the most recent one proposed it was 80% ongoing maintenance and 20% expansion. And remember, there are three major expansion projects going on, and when those are done there are likely to be zero new ones.

    Going forward, several projects are described as expansion when they are really normal replacement — ie replacing signals that have to be replaced anyway with new singals that allow more trains to run.

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