Refunding the MTA's Debt
The Importance of Getting it Right
The Metropolitan Transportation Authority (MTA) has $32 billion in longterm debt outstanding – more than 41 states and more than $14,000 for each worker commuting daily into New York’s central business district. That is an impressively large sum, but public authority debt is not inherently a bad thing. The borrowed money paid for needed capital improvements that made the region’s mass transit facilities function more effectively and that have long-term useful lives that justify paying for them with long-term borrowing.
Nonetheless, debt has become a problem for the MTA because its revenues are not keeping pace with its debt obligations. The interest and principal due on the bonds paying for capital improvements, known as debt service, is $2.1 billion in 2012; that consumes nearly one-third of the revenue the MTA receives from fares and tolls and 17 percent of its total revenues including tax subsidies. Ten years ago the sum was $955 million and its share of fare and toll revenue was under one-quarter. This problem will get worse. By 2015 the debt service cost will be $2.6 billion and still one-third of fare and toll revenue despite planned fare and toll increases.
Moreover, the MTA is likely to have to borrow more, and probably a lot more, for the foreseeable future. The MTA’s current five-year capital plan spans the 2010-14 period. The first two years of that plan called for $9.1 billion in spending, of which $6.0 billion is financed with borrowing. The $13 billion to be spent in the next three years will require another $6.7 billion in new borrowing. By 2015 the MTA will have $39 billion in outstanding debt. Even more ominously, the MTA now has no plan for how to pay for its multi-billion dollar capital needs after 2014. It is highly likely that added borrowing will be necessary for many years to come.
Fortunately, falling interest rates – now at historically low levels – can somewhat mitigate the MTA’s problem. To their credit, MTA leaders are considering a large-scale refunding of outstanding debt, about $7 billion worth. Other strategies deployed include cutting back on capital spending and forms of new borrowing, including a loan from the federal government that defers debt service costs. For the longer run additional revenues will be needed to support capital investments, but a timely, appropriately structured refunding of current debt can be a positive step.
Refunding is done right when it saves money and spreads debt service costs fairly over time; it is misused when it juggles the timing of debt service costs in a manner that lowers outlays in the short-term but increases the burden for managers and riders in later years, or when it generates reductions in short-term debt service by extending the terms of the debt beyond an appropriate period, putting unfair costs on riders and taxpayers in the more distant future. New Yorkers’ grandchildren should not be paying for today’s subway rides, but an inappropriate refunding could have that consequence.