The agreement between the leaders of the State Legislature and the Governor on a framework for this year's state budget included a commitment to put a $3.8 billion transportation bond referendum on the ballot this fall. If approved, the bond act would reportedly provide $1.5 billion to the Metropolitan Transportation Authority (MTA) for its capital needs, including $350 million to fund additional engineering and environmental studies for a full length Second Avenue subway.
It appears that the bond act will provide new funds to pay for projects beyond those identified in the MTA's still unapproved capital plan for 2000-2004. As originally proposed, the MTA's $17.5 billion plan-currently being renegotiated following initial rejection by the state's capital review panel-relied on $11.3 billion to be financed by issuing new MTA revenue bonds and refinancing old debt. Based on the very limited information available, the bond act does not address the plan's deficiencies:
- The linchpin of the capital plan financing is a debt restructuring that provides short-term budget relief at the cost of increased debt service in future years.
- The capital plan provides $2.9 billion for system expansion but virtually all of the money is for preliminary work rather than actual construction.
- The financing plan, particularly the debt restructuring, threatens MTA's future ability to complete its expansion projects or maintain its infrastructure in a state of good repair.
What's in the Capital Plan
The capital plan calls for spending $16.5 billion on the region's public transportation infrastructure over the next five years: roughly $11.5 billion for NYC Transit, and the remaining $5 billion for the Long Island Rail Road and Metro-North Railroad. (An additional $1 billion is allocated to MTA Bridges and Tunnels.) The mass transit funding is allocated primarily to maintaining and improving existing infrastructure ($13.6 billion). It also includes $2.9 billion for system expansion projects including a Second Avenue subway from 125th Street to 63rd Street, a rail link with LaGuardia Airport, and a Long Island Rail Road link with Grand Central Terminal.
Most of the system expansion money is for design and engineering work rather than actual construction. The bulk of the costs associated with these projects will need to be included in subsequent capital plans beginning in 2005. For example, the MTA estimates that a Second Avenue subway from 125th Street to 63rd Street will ultimately cost a total of $3.4 billion and would not be completed until 2015. A full-length Second Avenue subway will cost over $13 billion, according to the MTA's estimates. Even with the additional $350 million in proceeds from the proposed state bond act, the 2000-2004 plan would provide only $1.05 billion, less than 10 percent of the cost of the full-length subway.
Similarly, none of the other system expansion projects begun in the 2000-2004 plan will come close to completion over the next five years. The East Side Access project, which has $1.5 billion of its total $4.3 billion cost funded in this plan, is not scheduled for completion until at least 2009. The LaGuardia rail link will not be completed until well after 2004. The project's estimated cost of between $1.04 and $1.8 billion is considerably above the $645 million allocation in the 2000-2004 plan. Finally, the $75 million allocated for the Metro North-Penn Station, Lower Manhattan Access, and Number 7 subway line extension projects will only pay for preliminary planning and design studies. No construction work on these projects is contemplated until the post-2004 period.
How the Plan is Financed
The MTA proposed using debt finance to cover roughly two-thirds of the $17.5 billion cost of the capital program by issuing $8.3 billion in new revenue bonds and by restructuring its existing debt to generate $3 billion in additional resources for the plan. The remaining $6.2 billion was covered by governmental assistance and other income that the Authority had clearly identified and which would not require the issuance of debt backed by MTA revenues.
New Debt. The $8.3 billion in new revenue-backed debt accounts for 44 percent of the total plan, an increase from the 33 percent of the 1995-99 plan financed with debt. This growing reliance on debt financing could become a problem if debt service, which is the annual cost of paying off bonds with interest, begins to consume too large a portion of agency operating budgets and competes with necessary spending on maintenance and operations.
Under the MTA's plan, the issuance of $8.3 billion in new debt would lead to a dramatic increase in the Authority's debt service, adding to the growing pressure on its operating budgets. IBO estimates that with the new capital plan in place, the MTA's debt service would increase from around $600 million in 1998 to over $1.1 billion by 2004. The 2004 figure includes debt service on $2.7 billion in bonds left over from the 1995-1999 plan that MTA plans to issue over the next four years. For NYC Transit alone, annual debt service would increase from around $300 million in 1999 to over $500 million in 2004.
The impact of the $8.3 billion of new debt would be even greater after 2004. Based on the MTA's published forecasts of future debt service, IBO estimates that only about $6 billion of the $8.3 billion will actually be issued by the end of 2004. Once the remaining bonds are issued (presumably during a 2005-2009 plan), MTA's annual debt service will grow by about $150 million.
Debt restructuring. A more troubling feature of the MTA's financing plan is the proposed debt restructuring. The restructuring provides short-term fiscal benefit by extending debt service payments far into the future, but damages the Authority's ability to finance future capital programs.
Based on the limited information that the MTA has released regarding its debt restructuring, IBO constructed a model to simulate its impact on the Authority's finances during the coming decades.
The MTA states that its proposed debt restructuring-which involves extending the average length of the Authority's debt and adding $2.1 billion in new debt-will result in "no increase in debt service." Extending the average life of debt would only decrease total debt service if it were accompanied by a sharp fall in interest rates. Since interest rates have actually been rising, we expect that the debt restructuring will in fact increase the total debt service paid on this old debt over the long-term. Therefore, we interpret "no increase in debt service" to mean that after restructuring, annual debt service for the pre-existing debt and the add-on will never exceed the levels originally projected for the pre-existing debt alone.
Under current repayment schedules, debt service for the MTA's $14.2 billion in pre-existing debt will be roughly $1 billion annually until around 2015, with payments declining rapidly thereafter. The MTA's financing plan leverages that scheduled decline in debt service to generate resources for both the 2000-2004 capital plan and the operating budget. The Authority expects to reduce its debt service costs by $1.2 billion in 2000-2004 through a financial transaction that combines refunding the outstanding debt with issuance of $2.1 billion in new debt, while pushing the repayment schedule farther into the future. In addition to the $1.2 billion of operating budget relief, this transaction provides a total of $3 billion for the capital program. This total consists of the $2.1 billion in new bonds, plus $900 million in reserve funds (bond proceeds that are being held as a guarantee of debt service payment) that will be freed up by the refunding.
The MTA will be able to issue the $2.1 billion in new bonds without increasing annual debt service in the near-term by structuring the payments on its $14.2 billion in refinanced debt plus the $2.1 billion add-on in such a way that the sum never exceeds the previously scheduled $1 billion per year. However, this requires pushing out debt service into the post-2015 period. As a result, instead of having declining payments after 2015 as originally scheduled, the MTA would face at least another decade of $1 billion annual payments on this debt.
This inappropriate shifting of costs to the future would capture a significant portion of post-2015 debt servicing capacity. As a result, the MTA's ability to issue the additional debt needed to pay for state of good repair and system expansion in future capital plans would be severely reduced.
In order for the region's public transportation systems to be maintained in a state a good repair, and for the expansion projects begun over the next few years to be completed, the MTA's future capital programs will have to contain at least the level of funding proposed for 2000-2004. Absent the refinancing of the pre-2000 debt, the rapid fall-off in the cost of paying off these old bonds after 2015 would provide the capacity to finance the new debt associated with future capital programs.
If the refinancing proceeds as planned, however, much of this capacity between 2015 and 2030 will be consumed by service on debt that was originally scheduled to be paid off prior to 2015. Unless there are dramatic increases in revenue from fares, direct subsidies, or tax supported subsidies; or cost savings from increased productivity, the MTA's ability to finance the necessary investments in the region's transportation infrastructure in 2015 and beyond will be severely constrained by decisions made today.
For more information, please call George Sweeting, Associate Director, at (212) 442-8642 or Alan Treffeisen, Senior Budget and Policy Analyst, at (212) 442-8614.