Fitch Ratings has assigned an ‘A’ rating to the Metropolitan Transportation Authority (MTA), New York’s approximately $200 million transportation revenue bonds, series 2017A (Climate Bond Certified) and an ‘F1’ to the MTA’s transportation revenue bond anticipation notes (BANs), series 2017A in an amount up to $700 million.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The ‘A’ rating reflects the gross lien on a diverse stream of pledged revenues including fare revenues, surplus revenues from the Triborough Bridge and Tunnel Authority and operating subsidies from state and local governmental entities in the form of certain dedicated taxes, regional taxes and other fees. The rating also incorporates the essentiality of the MTA’s transit network to the economy of the New York region, and the demonstrated ability of the MTA to produce near-term solutions for its operating and capital needs. The rating also reflects the need to generate sufficient cash to adequately cover operations of the system despite high debt service coverage ratios (DSCRs).

Strategic Importance: The MTA transportation network is essential to the economy of the New York region, with New York City Transit carrying an average of 8.14 million daily subway and bus riders and Metro-North Railroad and Long Island Rail Road (LIRR) carrying another 588,000 daily commuter rail passengers. While an independent authority, the MTA has received significant support from the state of New York in the form of additional tax sources aimed at closing projected operating budget gaps and addressing capital needs.

Highly Constrained Financial Operations: Despite high DSCRs from gross pledged revenues, the MTA’s financial position is constrained given its extremely large operating profile and high fixed costs, including significant retiree pension benefits. In addition, some of the MTA’s operating subsidies are vulnerable to economic conditions. While the MTA is required to provide a balanced current year budget, some tools available to meet a balanced budget such as service reductions and fare increases are politically unpopular.

Solid Security Pledge: The bonds are secured by a gross lien on a diverse stream of pledged operating revenues consisting of transit and commuter fares and excess bridge tolls and non-operating revenues consisting of various regional taxes.

Extremely Large Capital Needs: The MTA’s 2015 - 2019 $26.6 billion capital program (Transit and Commuter Programs; $29.5 billion including MTA Bridges and Tunnels) was approved on Oct. 28, 2015 by the MTA board and was approved by the Capital Program Review Board’s (CPRB) on May 23, 2016. The program is fully funded with commitments from the MTA, Federal Sources, the State of New York and New York City. Sources for the program include $5.9 billion in MTA bonds and $3 billion from PAYGO, asset sales/leases and other MTA sources. Federal funds account for $6.9 billion while New York State has committed to provide $8.3 billion, and New York City has committed to provide $2.5 billion.

Growing Annual Debt Burden: The MTA’s capacity to continue to leverage resources to fund expansion projects while meeting renewal and replacement needs may be limited in the future if projected financial performance or additional operating subsidies do not come to fruition.

Peer Comparison: Given the size and breadth of the MTA’s network of transportation assets, there is no direct comparison for the MTA.

RATING SENSITIVITIES

Negative:

Operating Efficiencies: Inability to achieve future projected operating efficiencies and implement other key elements of the cost reduction initiatives and/or maintain an ongoing state of good repair and other elements of the capital program;

Additional MTA Bonds for Capital: Significant cost overruns or delays in the capital program’s mega-projects that lead to additional borrowing or deferral of core capital projects;

Lower Operating Subsidies: Receipts in dedicated tax subsidies that are measurably below forecast levels which could pressure the MTA’s financial flexibility.

Positive:

Material Increase in Financial Flexibility: Ability to meet near-term operating expense assumptions and efficiencies and increasing overall financial flexibility.

SUMMARY OF CREDIT

The MTA expects to issue approximately $200 million of series 2017A transportation revenue bonds (climate bond certified) to retire the transportation BANs, subseries 2016A-2 maturing on Feb. 1, 2017 and issue up to $700 million in transportation revenue BANs to provide interim financing of transit and commuter projects.

The MTA’s November Financial Plan (MTA 2017 Final Proposed - 2017-2020) includes the capital and operating investments proposed in the July Finance Plan. Overall, the effect is marginally positive in the near term with slightly larger projected cash balances in FY 2016, and similar cash balances projected for FY 2017-2019 as the July Financial plan. A sizeable negative cash balance of $319 million is projected for FY 2020, compared to the $371 million from the February Financial Plan.

The 2017-2020 Financial Plan is predicated on a number of assumptions including projected fare and toll increases in 2017 and 2019, cost savings initiatives, savings targets, projected debt service savings and other investments in customer service, maintenance and operations, service and service support and safety and security initiatives through the 2020 horizon aimed at significant cost savings. The MTA faces a number of challenges to implementing all of the proposals in the financial plan as well as external factors that could potentially impact the MTA’s revenues and expense profile, such as expiring labor contracts, ongoing costs associated with workers’ compensation, claims and other health care as well as risk to open-road tolling initiatives, general economic conditions and potentially higher interest rates. To the extent that some of the initiatives are not achieved, forecasted results may not be achieved.

On Jan. 1, 2017, Phase 1 of the Second Avenue Subway opened for service and marked New York City’s largest subway expansion in 50 years. Included in the MTA’s 2015-19 Capital Program is $1.035 billion for Phase II, covering a portion of design and environmental, construction management, preliminary construction/utilities, real estate and reserves. Phase II is expected to extend the line to 125th street from 96th Street (current northern terminus). When complete, the 8.5-mile (full-length subway line including Phase III and IV) will provide riders with service from Manhattan’s East Side, from 125th Street in Harlem to Hanover Square in Lower Manhattan including 16 new stations serving neighborhoods along the East Side of Manhattan alleviating the heavily congested Lexington Ave 4/5/6 lines. As with prior MTA capital programs including expansion projects, additional funding from federal, state and city partners will likely be necessary to complete the additional phases of the 2nd Ave Subway given the significant capital costs involved.