(Bloomberg) -- The Metropolitan Transportation Authority, the nation’s largest transit system, is warning investors that principal and interest costs threaten to eat up more of its operating budget unless state lawmakers find new sources of funding.
The manager of New York City’s subway, bus and two state commuter lines anticipates its capital budgets will include debt sales for station renovations, signal upgrades, new train cars and buses and expansion projects. The almost $20 billion annual operating budget repays those bonds and without new funding, capital improvements will take up a greater share.
That scenario “could lead to a strain on MTA’s and MTA Bridges and Tunnel’s operating budgets and negatively impact credit ratings,” the agency outlined in documents for an Oct. 1 bond sale and a debt issue set to price next week.
The authority last month unveiled a $65.4 billion capital plan for the next five years. Almost half of it, $33.4 billion, is not yet funded.
The transit system already faces a $15 billion deficit in its current capital program after Governor Kathy Hochul in June delayed congestion pricing in midtown Manhattan, a tolling initiative that would have paid for infrastructure needs. The postponement may also increase debt-service costs, putting even more pressure on the MTA’s operating budget.
The latest disclosure of potential budget stresses shows how dependent the transit provider is on outside financial help from the state and the city, said Daniel Solender, head of municipal securities at Lord Abbett & Co. Hochul and lawmakers last year raised a payroll mobility tax on certain businesses to help boost the MTA’s finances.
“Part of the reason why they’re making it more clear is because congestion pricing got delayed,” Solender said.
Bonds Steady
Hochul has said she will work with the legislature during the state’s own budget cycle next year to find alternative funding for the MTA. The transit agency could be forced to scale back its next capital program, putting repair work at risk, leaving the system more vulnerable to extreme weather events and delaying accessibility projects, according to bond documents.
The MTA, with a transit network more than a century old and $47 billion in debt, anticipates its $19.9 billion operating budget next year will direct $2.8 billion to principal and interest payments, taking up about 14% of that spending plan. The agency seeks to keep that amount at no more than 15%, though it could hit 16% in 2031 and 2032, according to Kevin Willens, the MTA’s chief financial officer.
So far, bondholders this year haven’t sought higher yields on MTA debt even with the capital budget deficits and their risk to the operating budget. An MTA bond with a 5.25% coupon and secured by farebox revenue last traded on Sept. 25 at an average yield of 4%, or 58 basis points more than top-rated municipals, down from a spread of 65 basis points when the debt first sold in March, according to data compiled by Bloomberg.
“It’s an important part of the New York economy,” Solender said about the city’s transit system. “So the belief is that even though it might be a struggle, they will always find a way to fund what they need for spending purposes.”
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