Fitch, the investor ratings company, has assigned nearly $100 million in MTA revenue variable rate bonds an A rating and has downgraded over $14 billion in preexisting debt from an A+ to an A, the company announced today. According to the press release, available on Transportation Nation, “the downgrade reflects higher than expected near-to-medium term financial pressure.”
The release explains further:
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.
The downgrade comes following the release of a long-term capital plan that relies heavily on debt-backed bonds and other shaky assumptions. Transit advocates were none too pleased to hear the news. “Just like in Washington, decisions made by our elected officials in Albany caused this downgrade,” Paul Steely White, Executive Director of Transportation Alternatives, said. “The State’s raids on public transit funding have forced the MTA to pay for subways and buses with debt. Now, it will cost more for the MTA to run the system, and this will hit New Yorkers where it hurts—fare hikes and service cuts; unless our elected officials in Albany find secure revenue for public transit.”
Apparently my talk of debt earlier today was not all that premature.
9 comments
What a bunch of quacks these ratings agencies are. Weren’t some the most risky investments something like A+ the day before the financial bubble burst back in 2008? And now this policital charade of downgrading the US? C’mon…
Why should massive debt be any bigger an issue with the MTA than all the other entities in the same situation?
For over 10 years we’ve watched a surplus and booming economy change into a debt-fueled, war-industry resulting in economic disaster.
The Great Regression will take longer to fix than the 1930s simply because the power elite are fighting it tooth and nail. Businesses and the rich have more money than ever and still they demand to ignore infrastructure and destroy what’s hanging on of the middle class. There’s only so much money and they want it all.
Happy post 9/11….
The problem is Fitch is just moody. LOL Seriously quack is the most accurate term to describe the rading agencies without using explitives.
Unlike full faith and credit bonds, which require a state referendum, these are “moral obligation bonds.”
Funny, but as a person who feels many moral obligations in my life, I don’t feel much of a moral obligation to pay them back.
But let’s wait until there is a wave of state and local (and federal) defaults on debt and retirement obligations before taking action. No reason to be an innovator here.
Remember the phrase “run the government like a business?” Well, what would a business do? Default and renegotiate, that’s what.
The bondholders have an enforceable lien on MTA gross revenues, though how the foreclosure equivalent would work is unclear. It’s pretty valuable given the amount of subordinate obligations you could cut – e.g. the 10% of costs that pensions represent could be eliminated as the MTA’s pension obligations would likely be wiped out in a bankruptcy, should the state not step in with a bailout.
“No way I’m out of money – I still have more checks!!
I don’t think it’s entirely fair to compare this to the downgrade of federal debt – in theory the federal government can simply print more money, which is not an option the state of New York has.
But on the other hand, much like a US Treasury bond, I would think anyone buying an MTA bond goes on more than just the rating. The information they relied on in their rating change is not new to anyone. I doubt this will change the interest rate very much, if at all. It’s only symbolic.
Independently of stupid decisions like downgrading the US debt due to a $2 trillion error, ratings agencies consistently overrate private bonds and underrate public bonds. That is, at equal ratings, a private-sector bond will default at a higher rate than a public-sector bond.
Alon, they are over-rating state and local government bonds for the same reason they over-rated mortgage bond — they assumed that the potential for default on each individual bond is independent of the potential for default on other bonds.
Let’s say New York City’s schools and transit system are being devastated by soaring retirement and debt costs, and tax revenues are falling as people and businesses move away — leading to higher taxes on those who remain.
Meanwhile, New Jersey defaults on its debt and pension obligations, and restores transit service and schools while cutting taxes. And then sends economic development recruiters to New York to lure jobs away. How could New York respond?
We are in effect in that situation now. Texas has lower taxes in part because it is underfunding its public employee retirement, but this is covered up (for the moment) by rapid population growth. When the growth stops? Texas becomes Califonia.