November 2009

Financial, Economic Crisis Tightened Funding, Credit for Public Transit

by Alex Roman, Managing Editor

Although it will take several years to adequately examine the impact the economic and financial crisis had on the public transit industry, the American Public Transportation Association (APTA) asked Jeffrey A. Parker & Associates Inc. (JPA) to conduct a study on its immediate impact.

"At the time the report was commissioned we were in the throes of the financial meltdown and AIG's demise was triggering technical default on a number of sale-leasebacks and other public-private transactions," explains Cliff Henke, member of APTA's Business Member Government Affairs Committee, who adds that Sharon Greene, both the chair and a private financial analysis expert, saw the situation as one in which the BMBG could help Congress understand the implications for transit.

Begun in the wake of the collapse of AIG and prior to the release of American Recovery and Reinvestment Act (ARRA) funds, the report, "Impacts of the Financial Crisis on the Transit Industry: Challenges and Opportunities," serves as a "snapshot in time" as of early 2009, according to Jeff Parker one of the writers of the report.

"It does give you a sense of the magnitude of the disruption that we faced about six, seven months ago," he says.

Researched credit market

To write the report, JPA researched rapidly-changing credit market conditions, identifying the concerns of private sector partners, and conducted interviews with senior management from large and small transit agencies, the Federal Transit Administration (FTA), investment banks and rating agency analysts to gather perspectives on the evolving capital market situation. The 15 public transit agencies serve more than 50 percent of all U.S. transit ridership and include San Francisco's Bay Area Rapid Transit District, the Los Angeles County Metropolitan Transportation Authority and New York's Metropolitan Transportation Authority.

Parker explains that because the market was in such a state of upheaval, it was difficult to discern trends or indicate what the future would hold. JPA had to change the results of its analysis and conclusions on an almost daily basis.

"We eventually had to freeze the report at a certain point in time and just say 'here's the way it was as of this date,'" he says.

One of the report's key observations was that the repeated financial shocks and ensuing economic recession, at that time, broadly impacted public transportation by shrinking funding sources and tightening credit, particularly in the bond market.

Because of those conditions, some public transit agencies delayed issuing significant amounts of debt or stopped engaging in complex financial transactions, thus limiting the impact of market disruption on their capital programs but constraining investment expenditures.

A number of transit agencies took advantage of the relatively cheap credit available in the pre-crisis years to create more capital investment money by applying "creative financing strategies," including complex tax-advantaged lease transactions (SILO/LILO) and/or debt products built on lower, short term interest rates and "sculpted" principal repayments that anticipated future revenue growth.

"It is virtually impossible to generalize about the public transit industry in the U.S.," says Parker. "There are enormous differences in size, complexity and in institutional arrangements. There is also tremendous variation in their sources of funding, organization and the geographical impact of the economic recession."

For those agencies that had used creative financing strategies, many were impacted by the fall of AIG, as well as other insurers, and the inability of alternative guarantors to step in to provide back-stops for LILO/SILO and variable rate transactions. Sudden gridlock in the credit markets created financial constraints that impacted agencies using these techniques, with effects that are still being unwound in some cases. Parker explains that these tools made sense at the time and were perceived as prudent risks until the "merry-go-round stopped."

Despite these events, as well as the erosion of dedicated tax revenues, transit agency credit ratings remained stable because of their use of a "gross revenue pledge," which takes the first revenue dollars off the top for debt service. This results in large debt service coverage and allowed transit agencies to maintain access to the bond market.

"The impact of downturns in revenue falls heavily on the operating budgets of agencies that have extensive amounts of debt outstanding," says Parker. "You will see some systems, such as the Massachusetts Bay Transportation Authority, that are facing some of the most serious downturns in dedicated tax revenues in recorded time and, yet, they still manage to maintain good credit ratings."

Parker adds that the impact of decreased dedicated tax revenues and gross revenue pledges impedes transit's ability to maintain services at current levels. Recession-related job losses also reduce ridership and farebox revenues, increasing subsidy requirements.


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