DiNapoli: MTA Faces Worst Financial Crisis in its History
Real Estate In-Depth | October 2020
ALBANY—The Metropolitan Transportation Authority is facing the greatest crisis in its long history, with few viable options without federal funding to avoid cuts in service and staff, additional fare hikes and long-lasting damage that could impair regional transit for decades, according to New York State Comptroller Thomas P. DiNapoli’s annual report on the MTA’s finances released on Oct. 13.
“The MTA’s financial condition is dire,” DiNapoli said. “With ridership down, debt burden rising and no additional help likely from New York state or New York City, the MTA desperately needs an influx of federal funds or unheard of service cuts and workforce reductions will happen. Failure to fund the MTA now could disrupt maintenance and repairs and increase the MTA’s debt to suffocating levels that could take multiple generations to recover from. More than a reliable subway or commuter train ride is at stake. Washington needs to step up to help the MTA if our regional economy is going to fully recover.”
The COVID-19 pandemic struck when the MTA was already in difficult financial straits, with budget gaps it had projected in February to what are now at historic levels, as reported in its July Financial Plan: $3.4 billion in 2020, $6.3 billion in 2021, $3.8 billion in 2022, $2.8 billion in 2023 and $3.1 billion in 2024. The 2021 budget gap is more than half (53%) of the MTA’s annual projected revenue. The gaps in the following years rival those of the Great Recession.
Even after implementation of the MTA’s gap-closing program, which includes significant staffing reductions through attrition in its transformation plan, the gaps total more than $12 billion over the next four years.
Although ridership has begun to recover as parts of the economy reopen, fare and toll revenues for 2020 through 2023 are projected to be $10.3 billion lower than expected in the February Plan. While the MTA projects ridership—and the revenue it brings—will return to pre-pandemic levels by 2023, this is premised on some risky assumptions. It is modeled on patterns from the Great Recession, when the drop in ridership was significantly less and did not carry the same concerns about viral contagion in close quarters.
Other revenue, from dedicated taxes and subsidies, are forecast to be $5.5 billion lower for 2020 through 2023, before achieving full recovery.
As revenues plummeted in the early months of the pandemic, the MTA received $4 billion in federal assistance. And it has budgeted for $3.9 billion in additional support this year, but has not assumed more afterward.
The MTA has an outstanding request for $12 billion from the federal government to balance its budget through 2021, but it remains uncertain what, if anything, will be forthcoming. The U.S. House of Representatives passed the revised HEROES Act on Oct. 1, which would provide transit agencies with another $32 billion in operating assistance. As Congress negotiates another stimulus package, DiNapoli urged that additional transit assistance be included.
The MTA provides 38% of all public transit trips in the country and more than 50% of city workers use MTA during their commutes. Without additional federal support, MTA Chairman and CEO Pat Foye has warned it may have to reduce costs by cutting subway and bus service by 40% and commuter railroad service by 50%. Fares and toll increases may rise beyond the 4% hikes already planned for March 2021 and March 2023.
If there is no additional federal support, the MTA may have to turn to even more borrowing, which DiNapoli said should be a desperate choice of last resort. The state has given permission for the agency to issue $10 billion in debt to cover revenue shortfalls and pay for costs due to the pandemic, but doing so would come at a tremendous price to current and future system users, the State Comptroller noted.
Heavy debt burden is already swallowing up dwindling revenue. The current burden, which has averaged 16.1% of total revenue for the past decade, is projected to reach 25.7% in 2021 before declining to around 23% in 2022 through 2024. The portion of fare and toll revenue funding debt service would reach 78.9% in 2020 and 64.6% in 2021 before declining to 47.2% in 2022.
Outstanding long-term debt issued by the MTA more than tripled between 2000 and 2019, rising from $11.4 billion to $35.4 billion. The MTA expects debt outstanding to reach $50.4 billion by 2024, without any potential additional borrowing.
If the MTA borrowed $10 billion as allowed by the state, debt service could rise by $675 million annually starting in 2023, bringing it to more than a quarter of every dollar of revenue.
Borrowing may also continue to be more expensive for the MTA as rating agencies have downgraded its revenue bonds since the pandemic started and interest rates on its bonds rise. The drastic increase in debt service leaves significantly less revenue for other needs and could set the transit system back decades as dwindling capital investment in the system leads to a long-term decline.
Among its other findings, DiNapoli’s report noted that:
• The MTA’s transformation plan should be reported on at least quarterly through its gap-closing monitoring report. Delayed until 2021 due to the pandemic, it is now expected to save $430 million in 2021, growing to $475 million by 2023.
• The MTA’s gap-closing program planned to reduce overtime by more than $200 million annually starting in 2021, but the July Plan does not reflect this. It has not detailed how it will achieve this reduction.
• Also not reflected in the MTA’s July Plan are details on how it will achieve the $2.2 billion in cost reductions it has identified for 2020-2024.
• Debt service is projected to reach $4 billion by 2024, an increase of 55% since 2019.
• The MTA’s $54.8 billion capital plan for 2020-2024—along with the revenue it would generate for suppliers and the construction industry—remain at risk with the plan halted and capital funding being reallocated to cover operations.