Bloomberg News

New Yorkers See Debt Eat Fares as Health Costs Rise: Muni Credit

July 25, 2012

New Yorkers See Debt Eat Fares as Health Costs Rise

The MTA’s advantage is that its network of subway, bus and commuter rail roads is often the only option for 8.5 million daily users Photographer: Jin Lee/Bloomberg

When New York’s Metropolitan Transportation Authority asks riders to pay more in fares and tolls next year for the second time since 2011, the extra revenue won’t go toward maintaining its aging fleet.

Instead, the $450 million in additional cash that the agency expects to net annually from the 7.5 percent boost will be swallowed by growing health-care, debt-service and pension costs. The planned increases are built into the biggest U.S. mass-transit system’s 2013 budget and four-year financial plan, which officials are set to unveil today.

Such expenses are “the root cause of why I say our financial plan is fragile,” MTA Chairman Joseph Lhota told reporters last week at the agency’s headquarters in Manhattan. “We’re looking to raise about $450 million to deal with the nondiscretionary costs.”

The system, whose oldest subway cars date to the 1960s, faces a quandary familiar to local governments nationwide: how to pay for worker and debt-service costs that are consuming ever-greater shares of budgets even as state aid shrinks. Municipalities including Stockton, California, and Central Falls, Rhode Island, filed for bankruptcy in the past year after failing to keep up.

The MTA’s advantage is that its network of subway, bus and commuter rail roads is often the only option for 8.5 million daily users. That makes the system an “essential service” and enhances the appeal of its debt, said James DiChiaro, a portfolio manager in Armonk, New York, at Cutwater Asset Management Corp., which oversees about $3 billion in munis.

Management Praised

The authority’s steps to raise revenue also help explain why investors are demanding less extra yield to own its debt, said Eric Friedland, head of municipal-credit research in New York at Schroder Investment Management North America. The company oversees $2 billion in munis, including MTA bonds.

“Gradual rate increases are a far stronger management practice” than waiting for costs of pensions and capital projects to climb, said Friedland, who takes the MTA’s Metro- North commuter line to work from Connecticut.

The agency’s finances are improving from 2010, when it faced a $900 million deficit and enacted $93 million in service cuts. Last week, Lhota said the budget would include $29.5 million in service restorations. Officials will update their financial plan, which in February projected cash balances of $1 million this year and $80 million in 2013, and deficits of as much as $137 million in 2014 and $204 million in 2015.

Market Outpaced

Yields on MTA securities, which Standard & Poor’s rates A, its sixth-highest grade, have declined more than interest rates in the $3.7 trillion municipal market.

MTA bonds maturing in 2046 traded July 23 at an average yield of 3.41 percent, the lowest ever, data compiled by Bloomberg show. Debt due in 2038 traded yesterday at an average yield of 3.83 percent, down 0.19 percentage point from its issue this month, the data show. In comparison, yields on top-rated municipal bonds maturing in 26 years declined 0.07 percentage point in the same period, to 2.95 percent, a Bloomberg Valuation index shows.

Transportation debt has returned about 6 percent this year, beating the tax-exempt market’s 5.7 percent gain, according to S&P index data.

The proposed fare and toll increases would take effect in March, pending public hearings and board approval. The planned boosts would follow last year’s 7.5 percent system-wide increase, with a third installment scheduled for 2015. The agency projects that fares and tolls will generate $6.5 billion this year, about half of operating revenue.

Aid Flow

Insufficient state and city aid is to blame for the higher fares, Gene Russianoff, a spokesman for the Straphangers Campaign, a Manhattan-based public-transportation advocacy group, said in an e-mail. Area riders pay the nation’s highest share of operating costs, at about 44 percent, more than in cities including Atlanta, Boston and Chicago, he said.

Debt service, along with the costs of pension, health and other benefits for retirees and almost 66,000 employees are scheduled to rise a combined $989 million by 2015 from this year, according to the February financial plan.

The largest percentage increase comes from post-employment benefits, for which the MTA forecasts a jump of 34 percent by 2015, from $435 million this year. The $2.1 billion in payments this year on debt of $31.5 billion is set to rise 20 percent, while pension costs of $1.3 billion will climb about 9 percent, the agency projects.

‘Cowardly’ Explanation

The share of the budget going toward debt service has risen faster than that for labor expenses, according to agency data compiled by the Transport Workers Union Local 100, the MTA’s largest union. Labor expenses fell to 60 percent of the budget last year from 61 percent in 2006, the data show. Debt service jumped to 17 percent from 14 percent.

“MTA chose to focus on rising pension costs as the ‘cause’ for the fare increase, which is typical of them and somewhat cowardly when the cost of rising debt service way exceeds rising pension/health care costs,” said Jim Gannon, a union spokesman. “It’s a bit of a budget shell game.”

Following is a pending sale:

REGENTS OF THE UNIVERSITY OF CALIFORNIA plan to sell about $920 million of revenue bonds, including $100 million of taxable debt, as soon as tomorrow, according to data compiled by Bloomberg. Proceeds will help finance student housing and parking and refinance debt, according to bond documents. Moody’s Investors Service rates the bonds Aa2, its third-highest grade. (Updated July 25)

To contact the reporters on this story: Esme E. Deprez in New York at edeprez@bloomberg.net; Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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