A Matter of Life and Debt – Looking at the Future of MTA Bonds

By Prabhav Kamojjhala

“It (commuting) takes time out of your day and can feel like a hassle. New York is one of the world’s greatest cities and deserves significant improvements to its historic subway system.” Says Yukai Liu, a sophomore who used to commute from South Brooklyn. Yukai isn’t alone in his experiences. In a country where over 76% of people drive to work, New York City is an anomaly. A meagre 20% of New Yorkers use their cars, and almost 40% commute using the public subway system run by the Metropolitan Transport Authority (MTA). 

Despite the city’s strong reliance on the MTA however, its finances have been nebulous at best. With ridership on the system down to 70% of pre-pandemic levels, the MTA is staring down the barrel of a $19 billion deficit over the next four year. While traditional wisdom would suggest that issuing more bonds may appear to be a good way to ease the burden of this growing deficit – the situation this time around may not be as clear cut. 

So how did we get here? A healthy mix of bad luck and worse policy. Albany believed that the money they were putting into the MTA had better places to be. Since the early 90’s and 2000s, successive mayors and governors have cumulatively diverted about $1.5 billion in funding away from the MTA. The organization’s ability to manage the money that has stayed however has also come under scrutiny. A report by an auditor found that fewer than 1% of all contractors received an unsatisfactory rating by the MTA. Even the construction of the much needed second avenue subway came at one of the highest costs per mile of track.

As funding started pouring out of the nation’s largest transit authority, the bond market became an increasingly reliable source of funding. The unfortunate externality of this solution, however, was a bill of over 105 million dollars in bond issuance fees – emaciating the already financially anemic transit authority. Farebox revenue had thus served as a source of much needed cash, helping stave off financial insolvency. Typically, a little over half of the organization’s capital budget comes from farebox revenue. Prior to the pandemic – the plan of funding debt with revenue appeared to be working. Ridership was on the rise, on time performance was improving and the MTA was eyeing an ambitious $51.5 Bn capital plan. The strategy of using debt to improve services and paying it off with revenue improvements appeared to be a viable way to keep the MTA running. 

The current scenario however has largely shattered this rosy-eyed vision of the future. With ridership not expected to return to pre-pandemic levels until 2023, the future of revenue driven financing is grim. With the assumption that additional federal funding is unlikely, the MTA has now gone to the drawing board with measures that truly reflect the severity of their woes – a plan of 8000 layoffs and a 40% reduction in subway services are some of the measures currently being considered by the MTA to salvage financial solvency. 

When revenues aren’t an option in the short term, a debt splurge would be the ideal short-term solution. Although not quite the “splurge” that would offset short term woes, the MTA has borrowed $450 million through the Federal Reserve Municipal Liquidity Facility and hopes to further explore this option. That being said, the capital markets seem to have a shrinking interest for the MTA’s debt. Fitch recently downgraded outstanding debt to an A-, with future downgrades likely. The burden of the precarious practices of decades past has fallen squarely onto Pat Foye’s shoulders.

If we want to understand what the future might look like, we need to go to fundamentals. Service and maintenance reductions should be the last thing the organization considers. The logic is simple – the worse the service, the fewer people will use it, the worse the financial strife becomes. Fare increases would have the issue of being quite regressive in serving the very low to middle income New Yorkers that depend on the MTA for most transport needs while also disincentivizing usage. Politically (and ethically) it would not be ideal for the same city that lived on the sacrifices of its essential workers (who are overwhelmingly people of color) to turn around and make their lives significantly harder. 

There’s no silver bullet to the issue. Just as Gerald Ford did in the ‘70s, the federal government is once again leaving New York City for dead. The MTA serves more people than the state of Connecticut holds in its borders and such with high ridership comes an extensive but expensive system. While it may be a bit harder for politicians from largely rural states like Kentucky to comprehend – the future of the MTA lies in investing in its infrastructure. The city comptroller estimates that the 5-10 minutes of delays that usually bug New Yorkers cost the state at least 170.2 million dollars a year. Defunding and divesting from the system is only going to make these issues worse and have significant implications for the national economy. 

The plan instead needs to focus on the long game. To keep people interested in pouring money into the MTA through bonds, the state needs to prioritize building confidence in investors. For starters, there must be greater autonomy for New York City to oversee the MTA’s operations as opposed to its current structure where officials from Albany tend to have a much larger say than they ought to. In terms of where the money should be spent, now is not the time to cut back on maintenance and capital investment. Even if it means more infrequent service, it is paramount that the ailing signaling systems and tracks of the subway be repaired and redone to better meet the needs of commuters. The solution to keeping capital markets interested in the MTA is not to gut the organization – it’s to double down on its commitment to the people of New York.