Fitch assigns an 'A' rating to the Metropolitan Transportation Authority, NY's (MTA) $475 million transportation revenue bonds, series 2006A. Bond proceeds will be used to finance a portion of the MTA's transit, commuter rail and MTA Bus capital program and to pay the cost of issuance. The series 2006A bonds are expected to sell via negotiation by a Bear Stearns-led syndicate on or about July 12. Fitch affirms the 'A' rating on $9.2 billion in outstanding transportation revenue bonds. The Outlook is Stable.
The transportation revenue bonds are primarily secured by operating receipts and operating subsidies, including transit and commuter rail fares and other operating revenues, surplus toll revenues and certain dedicated tax sources, state and local operating subsidies, and reimbursements. Key credit strengths include the gross lien on pledged revenues, the essentiality and performance of the transit services supported by pledged revenues, the importance of the authority's transit network to the economy of the New York region, and a track record of prudent financial management. Key credit risks include periodic financial challenges during economic downturns, political risk associated with the long-term need for growing levels of public subsidy and periodic rate increases, and a continuing reliance on debt to finance a significant portion of the MTA's enormous and unending capital needs.
Pledged revenues increased by 5.8% annually between 2001 and 2004 and grew another 10.1% in 2005. These gains reflect the combination of increasing demand, fare and toll increases, base line subsidy growth and additional funding sources provided by the state. The MTA conservatively projects that 2006 pledged revenues will be little changed from the prior year as assumed declines in real estate-related tax revenues offset fare revenue and other subsidy growth.
The gross lien on revenues allows debt service coverage to be very strong. Debt service coverage has been at least 13.9 times (x) since 2001. As the MTA issues additional bonds to finance its transit and commuter rail capital needs, debt service coverage is expected to fall but remain strong based on MTA's need to sustain operating subsidies, which are paid after debt service. Debt service coverage is estimated to be 11.2x in 2006 and is projected to be at least 7.4x through 2009. Nevertheless, the combined debt service and operating needs of the MTA thoroughly consume the authority's vast annual resources, as surpluses generated in one year are typically used to cover deficits in succeeding years, a common practice among transit systems.
The MTA ended 2005 with a $1.2 billion cash surplus and is expected to have a $625 million ending balance in 2006. While better than expected real estate tax collections so far this year may indicate the 2006 surplus could come in higher than estimated, the authority reports that fare revenues, operating expenses and certain subsidy sources are tracking slightly worse than budget. In addition, there remains some uncertainty in the MTA's expense profile until a settlement is reached with the Transport Workers Union. The MTA's financial plan projects a manageable $32 million deficit before gap closing actions and other measures for 2007. However, MTA estimates the gap to grow to $1.5 billion by 2009 due to increasing debt service costs, additional pension contributions and benefit expenses, and lower real estate tax revenues. Without additional subsidy support Fitch expects the MTA, similar to prior years, to close the projected deficit through a combination of fare and toll increases and service and non-service related expense reductions.
The MTA's $21.3 billion 2005-2009 capital program, with nearly 80% of resources going to maintain and upgrade the existing transit and commuter system, continues the authority's focus on state of good repair and normal replacement. Given the $4.4 billion allocated in the capital program for expansion projects, Fitch expects the MTA will need to prioritize and/or slow progress on these multi-billion-dollar initiatives. Similar to the 2000-2004 capital program, debt finances a significant portion of 2005-2009 capital project costs. However, new money bonds represent a lower 44% of the 2005-2009 capital program compared to 55% for the 2000-2004 capital program. While the additional subsidies provided by the state in 2005 benefit the MTA and are expected to be leveraged for the 2005-2009 capital program, the lower percentage of debt reflects the practical limits on the amount of new money bonds that the authority can issue given its already high debt burden.
The MTA is responsible for North America's largest transit network, serving 2.3 billion riders annually. The authority's network is essential to the economic well-being of the region, handling 80% of all daily trips to Manhattan's business district.