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Fixed income

U.S. mass transit is still recovering from Covid

Municipal Credit Research Team
Experienced sector specialists represent one of the industry’s largest credit research teams dedicated to municipal investing.
city train in elevated railway

Mass transit systems have struggled to come back from pandemic lows, but investors are largely protected against operating risks because bonds issued by most systems are backed by a broader source of dedicated taxes. Ridership fell precipitously during Covid, and shifting remote working trends have slowed the sector’s recovery. Fare box revenues won’t sufficiently replace federal stimulus funding, and many states will be forced to reexamine how they pay for their transit systems.



Credit Report

Fewer riders hinder public mass transit funding

Mass transit systems have struggled to come back from pandemic lows, but investors are largely protected against operating risks because bonds issued by most systems are backed by broader dedicated taxes rather than farebox revenues.

Ridership fell precipitously during Covid, and shifting remote working trends have slowed the sector’s recovery. American Rescue Plan Act (ARPA) funding saved many systems from fiscal stress and service cuts. But federal stimulus funding is running out, and many states will be forced to reexamine how they pay for their transit systems.

Ridership is only projected to recover 80% to 85% of pre-Covid levels by 2025. That means fare box revenues won’t sufficiently replace federal funding, particularly for systems that depend more heavily on commuters. Budget gaps are estimated to range between 15% and 35%.

Historically, most transit systems have been funded by a combination of tax revenues, subsidies and fares, although additional state and local tax revenues will be necessary to avoid future service cuts.

Metropolitan Transit Authority (MTA), New York

The Metropolitan Transit Authority (MTA) is the largest combined transit and commuter network in the United States, providing an essential service to more than 15 million people across a 5,000 square-mile area surrounding New York City, Long Island, southern New York State and Connecticut. Given the immense population density in and around New York City, public transportation remains vital to one of the world’s largest economic centers. Total ridership in 2022 was just 60% of 2019. MTA estimates ridership will only reach 80% of pre-pandemic levels by 2027.

Despite depressed post-pandemic farebox revenues, both annual non-operating taxes (about 37% of revenues) and state and local subsidies (18% of revenues) increased over the last two years. MTA issues bonds under numerous security structures backed by different revenue pledges. Coverage remains strong under all indentures. Bonds backed by various dedicated taxes and toll revenues continued to perform well throughout the pandemic and remain highly rated.

Mass transit ridership is only projected to recover 80% to 85% of pre-Covid levels by 2025.

Pledged revenues for transportation revenue bonds covered maximum annual debt service (MADS) by a strong 6.7x in fiscal year (FY) 2022. Payroll mobility tax (PMT) receipts backing certain bonds are projected to remain flat in FY23, after increasing about 5.0% last year, and cover MADS by 3.6x. Pledged revenues from the state’s dedicated tax fund increased 25% and 19% in FY22 and FY23, respectively, and covered MADS for those bonds by a very strong 7.3x in FY23. MTA Bridges and Tunnels toll revenue surpassed pre-pandemic levels for the last two years, covering MADS by 2.2x based on FY22 revenues.

As recently as May 2023, MTA’s 5-year forecast depicted large annual operating deficits due in large part to sluggish ridership projections. Notably, decisive action by the governor and legislature to increase the payroll mobility tax rate as part of the state’s FY24 budget is expected to yield an additional $1.1 billion per year. This new revenue combined with MTA operating savings and fare and toll rate increases of 4.0% and 5.5%, respectively, have helped eliminate previously projected deficits.

The state’s budget also directs licensing fees from three downstate casinos (estimated at $500 million) to aid the MTA beginning in 2026; however, this money has yet to be approved and awarded. MTA’s updated July 2023 Financial Plan includes the resumption of regular biennial fare and toll increases in January 2025 and March 2027, which are projected to increase revenues by 4%. All these changes shift MTA’s revenue breakdown to rely more on dedicated taxes beginning in FY24.

San Francisco Bay Area Rapid Transit District (BART), California

The remote-work movement in tech-centric San Francisco caused a sharp drop in public transit ridership compared to historical levels. As of June 2023, ridership had only recovered to 46% of pre-pandemic levels. The Bay Area Rapid Transit District (BART) has received more than $1.6 billion in federal aid to offset revenue shortfalls and fill budget gaps from FY22 through FY25. Favorably, the state of California’s recent FY24 budget included an additional $1.1 billion in funding for BART and other transit agencies, helping to prevent deep service cuts.

BART has two bond programs outstanding: sales tax bonds and general obligation (GO) bonds. The sales tax bonds are secured by a voter-approved pledge of 75% of a half-cent sales tax collected within the district (San Francisco, Alameda and Contra Costa Counties). Pledged sales taxes covered annual debt service by 5.6x and MADS by 5.2x in FY22. Coverage of MADS is estimated to improve to 5.5x in FY23.

Investors benefit from strong security provisions. BART’s GO bonds are payable from unlimited property taxes levied upon all taxable property within three counties (Alameda, Contra Costa, and San Francisco). Assessed value in the tri-county region totals a substantial $953 billion for FY23. The state constitution restricts these property tax revenues to repayment of debt service and provides a statutory lien. Property tax revenues collected by the counties are automatically transferred to the bond trustee.

Neither of BART’s bond programs is payable from farebox revenues or net operating funds, insulating bondholders from operating pressure.

CTA bondholders are insulated from operating pressure, as no farebox revenues are pledged to the bonds.


Chicago Transit Authority (CTA), Illinois

Chicago Transit Authority (CTA) is the second largest transit system in the U.S. and one of only two providing 24/7 rail service. The system provides service to about 3.2 million people in the city of Chicago and 35 surrounding suburbs. Public transit in the Chicago region is critical for keeping the city’s economy functioning, even as post-pandemic ridership has waned due to shifting work patterns and safety concerns. Total ridership in 2022 was just 53% of 2019. Though improvement is expected for 2023, CTA estimates ridership will only reach two-thirds of pre-pandemic levels by 2025.

Most of CTA’s outstanding bonds are backed by sales taxes levied across six counties with a total population of over 9.5 million. Sales tax revenues backing the bonds have fully recovered and now exceed pre-pandemic levels. Projected revenues for FY23 are more than 25% higher than FY19 collections. Coverage of maximum debt service on all debt was estimated at 3.0x in FY22 and projected to improve to 3.3x in FY23.

Over $2.2 billion in federal funding allocated in various relief packages has been critical in offsetting system-generated revenue declines and helping bridge budget gaps. Federal aid has provided about 20% of annual operating resources, beginning in 2020, which are expected to be sufficient to cover operations through 2025. Once this funding runs out, the annual operating deficit is projected to approach 20% in 2026, absent expenditure or service cuts. Once federal funding is depleted in 2025, new funding will need to be identified. Bondholders are insulated from operating pressure, as no farebox revenues are pledged to the bonds.

Dallas Area Rapid Transit (DART), Texas 

The Dallas Area Rapid Transit system (DART) is a regional service provider of bus, light rail and commuter rail to an estimated population of 2.5 million across five counties. Ridership trends were negative prior to the pandemic, then exacerbated by Covid. Positively, DART saw a modest increase in usage in 2022, up 17% from the prior year. Though improved, ridership is still down over 30% from pre-pandemic levels.

The system and dedicated tax bonds are supported primarily by a 1% sales tax levied throughout the service area. A trustee intercept of sales tax revenues for debt service ensures debt service is paid before funds are available for operations. Sales taxes fared well through the pandemic, but new federal support shifted the system’s revenue mix. Prior to the pandemic, sales taxes accounted for more than 80% of revenues, but this is now closer to 66%. Coverage ratios remain good, with FY22 collections covering MADS by an estimated 3.3x.

In response to the pandemic, DART cut expenditures and halted projects, which led to a buildup of cash balances. DART also received nearly $660 million in federal relief aid from various funding packages. Most of the federal funding has been used to finance capital needs – including system expansion – rather than operations. Because federal funding was used to ease the burden of financing capital projects, DART is not expected to face major budgetary challenges over the next few years. Sales tax collections are projected to be more than sufficient to support both operations and debt service.


Florida’s Brightline train sees strong growth in ridership

Brightline is the first privately funded high-speed passenger rail built in America in more than a century. Brightline opened in 2018 and currently offers hourly service along a 67-mile corridor between Miami and West Palm Beach, with 5 train stations in downtown Miami, Aventura, Fort Lauderdale, Boca Raton and West Palm Beach.

In contrast with other mass transit systems, Brightline’s ridership is strong, with passenger levels up 78% year-to-date through June compared to the first six months of 2022. Similarly, ticket revenues during the first half of 2023 are higher year-over-year by 96%, bolstered by increased ridership and higher fares. This healthy ramp-up activity has led to considerable price appreciation on Brightline’s project-revenue debt, with the 7.375% coupon bonds rallying over 14% through the end of July.

A recent Wall Street Journal article indicated that the emerging popularity of Brightline has spilled over into the South Florida real estate market. In Fort Lauderdale, for example, rental premiums near the train station are nearly 30% higher compared to the market average. Similarly, property values near the flagship train station in downtown Miami are up more than 80% during the past five years, compared to a median increase of less than 40% in other areas of Miami.

Construction on a 168-mile expansion to Orlando International Airport has been completed and train service is expected to begin sometime after Labor Day. Once train service to Orlando begins, Brightline will serve as a corridor between Southeast Florida and Central Florida, which today has a combined population of nearly 10 million people. The state of Florida is also one of the most active tourist markets in the world, and it is expected that the number of annual visitors will increase to 200 million by 2030. Thus, additional growth in Brightline ridership is anticipated, especially since severe traffic congestion continues to worsen in south Florida, increasing the appeal of convenient high-speed rail.

In contrast with other mass transit systems, Brightline’s ridership is strong.

Arizona drought limits new development 

Drought and climate change are straining water supply in Arizona. The supply of groundwater and surface water from the Colorado River is at risk. In response, the state has taken action to limit housing development and search for alternative sources of water. The state has determined there is not enough groundwater for all the new housing construction already approved in the Phoenix area.

To the relief of developers, the state will not revoke building permits already issued but will instead rely on new water conservation measures and alternative sources to provide the water necessary for these housing developments. However, any new construction yet to be approved may face additional hurdles.

Based on the state’s recent analysis of groundwater levels over the next 100 years, Arizona will no longer grant developers new building permits in the areas of Maricopa County that rely on well water. The city of Phoenix and nearby areas would also be denied permits for any homes that rely on groundwater beyond what the state has already approved. Any new proposed development must prove to the state that it has a 100-year supply of water.

This policy change is leading developers and state leaders to look at other water sources to support future development. One idea would cross U.S. and state borders. Arizona is considering investing in a new supply of water via desalination from California or Mexico. Given its location approximately 350 miles from California and 200 miles from the Mexico coast, the cost to extend a pipeline would be substantial and may come with diplomatic and environmental risks.

The state’s Water Infrastructure Authority (WIFA), created in 2022 to provide long-term water augmentation, could aid in the finance of a desalination plant or similar project with nearly $1 billion of funding. However, a current proposal to build a desalination plant and pipeline is estimated to cost $5 billion. IDE Technologies, one of the world’s largest desalination companies, said it would find private financing for the deal should the state decide to pursue constructing such a plant in Mexico.

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San Francisco Bay Area Rapid Transit District Annual Disclosure Report for FYE 30 Jun 2022, dated 23 Dec 2022
Bay Area Rapid Transit Monthly Ridership Report June and Trailing 12-months and February 2020
San Francisco Bay Area Rapid Transit District Sales Tax Revenue Bonds, 2019 Series A and 2019 Refunding Series B, Official Statement, 22 Oct 2019
San Francisco Bay Area Rapid Transit District General Obligation Bonds, (Election of 2016), 2022 Series D-1 and 2022 Series D-2, Official Statement, 11 May 2022 California State Budget 2023-24, Gavin Newson, Governor, State of California, 27 Jun 2023 Federal Transit Authority data – American Public Transportation Association, Public Transit Agencies Face Severe Fiscal Cliff, June 2023
American Public Transportation Association, Public Transportation Ridership Update, March 2023
Moody’s Investors Service, Standard and Poor’s, Fitch, Kroll
Chicago Transit Authority FY 2023 Budget
Chicago Transit Authority Annual Financial Information and Operating Data: 27 Jun 2023
DART 2022 ACFR and Disclosure for Fiscal Year End 30 Sep 2022
DART FY2023 Business Plan
DART Quarterly Disclosure Update for the six month period ending 31 Mar 2023
MTA Annual Disclosure Statement Update, 28 Jul 2023
MTA 2022 CAFR dated 31 Dec 2022
"The Biggest South Florida Housing Boom Is Near the Rail Stations,” The Wall Street Journal, 23 May 2023

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