Future for MTA Credit Isn’t Bright
A major Wall Street bond rating agency for the first time has issued a negative outlook for the Metropolitan Transportation Authority’s future credit rating because of concern that the recent suspension of three rail projects reflects continuing financial and management difficulties.
Another rating agency, Fitch IBCA Inc., lowered its credit outlook for the MTA from negative to alert because of concerns about the feasibility of the agency’s subway and light-rail programs and what it called “management instability” in recent years.
The twin signals came less than a week before the MTA will seek to refinance almost $220 million in bonds secured by its share of the sales tax.
The negative outlook was issued by Moody’s Investors Service despite the arrival six months ago of a corporate turnaround specialist, Julian Burke, to run the MTA, and underscores his difficulties in regaining the confidence of powerful institutions from Wall Street to Washington.
Moody’s did not downgrade its actual rating on the transit agency’s bonds, but did lower the MTA’s credit outlook from stable to negative this week. Moreover, in what financial experts regard as a strong signal that a downgrade is possible, Moody’s expressed concern about the MTA’s ability to produce a realistic rail construction program.
“We want to see a cogent, well-articulated plan,” said Adam Whiteman, Moody’s senior vice president in New York.
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The rating agency also cited conflicting political agendas, contentious relationships with federal transit officials, a lack of consensus on the MTA board and structural deficits in the agency’s budget as key factors in the negative outlook. Whiteman expressed concern about what his firm regards as the MTA’s failure to deliver on an implicit contract with the county’s voters, who approved a 1% sales tax to build and operate a mass transit system.
The sales tax, which generates more than $800 million a year, is the financial lifeblood of the MTA and investors have counted on it as a guarantee that the agency’s bonds will be repaid.
Whiteman said California voters are getting more skittish about the use of sales taxes for agencies that “might not have done the best job” spending their money. This adds an “extra level of uncertainty” to the credit picture, he said.
MTA’s chief executive Burke told board members that he did not understand Moody’s action because last month’s suspension of subway extensions to the Eastside and Mid-City and a light-rail line from Union Station to Pasadena were signs that the agency is trying to get its finances in order.
“I’m a little bit confused about a signal of downgrading,” Burke said.
Wall Street’s concerns caught board members by surprise because Burke failed to mention it during a lengthy, otherwise positive report on his efforts, including a continuing reexamination of how the MTA can restart one or more of the stalled rail projects. Burke and his staff addressed the credit outlook only after he was asked about it by county Supervisor and MTA board member Zev Yaroslavsky.
“It doesn’t appear to be justified,” MTA deputy chief executive Allan Lipsky said.
Yaroslavsky called the negative outlook “alarming.”
“We’re very disappointed,” said MTA finance chief Terry Matsumoto. “Certainly it’s not a positive. It’s not going to help us.”
However, Matsumoto said he doesn’t believe that the negative outlook will have a significant impact on the interest rate that the MTA will pay on the bonds to be sold next week.
Like many government agencies, corporations and homeowners, the MTA has been refinancing some of its outstanding debt lately to take advantage of lower interest rates.
The other major rating agency, Standard & Poor’s, did not change the outlook for the MTA’s credit rating. Director Kurt Forsgren in San Francisco said he did not believe that a change was warranted because of the fundamental strength of the sales tax as a source of revenue to repay bondholders.
Standard & Poors assigned an A+ rating to the bonds that the MTA intends to sell next week. Although assigning an A rating to next week’s bonds, Fitch IBCA expressed concern about “the lack of stable management” stemming from the appointment of four chief executives in the past three years. The firm also noted that Burke, the current CEO, is serving on an interim basis.
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MTA “has a history of both operational and construction problems in the past due in part to a lack of adequate oversight, which have negatively affected financial operations and public relations,” the Fitch agency said.
Moody’s also observed that “management instability” at the MTA continues to be a credit concern. “Management changes have been reflected in the shifting in focus of the authority’s goals, objectives and in the overall execution” of MTA’s construction program.
Wall Street’s expressions of concern came during a board meeting that demonstrated the difficulties facing Burke in trying to rescue the agency from its spending excesses and miscalculations.
Burke had recommended that the agency drop plans for a subway station entrance to Kaiser Permanente’s Los Angeles Medical Center at Sunset Boulevard and Vermont Avenue.
Another entrance to the subway extension due to open early next year is directly across the street. And Burke said the agency cannot afford the project--whose estimated cost has grown in four years from $6 million to $13 million--in the face of cost overruns on the Hollywood leg of the Metro Rail project.
But after lobbying by Kaiser, the board gave the station a 30-day reprieve in the hopes that the giant health maintenance organization will help close the $7-million funding gap. “We’re willing to explore all options,” a Kaiser Permanente spokesman said, adding that the firm has already spent $1 million of its own money on the project.
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City Councilwoman Jackie Goldberg told the MTA board that even though the Kaiser entrance would be across the street from another portal, the busy corner can be difficult to navigate, especially for someone who is ill.
Still, Burke made headway on other fronts.
The board gave final approval to the conversion of trouble-plagued methanol and ethanol buses to diesel fuel. The step is designed to help the agency meet a federal court order to relieve overcrowding on buses.
Directors also dropped plans for crossover tracks between the subway tunnels under the Santa Monica Mountains--an action designed to help the agency complete the subway to North Hollywood on time and within budget and convince Washington of the MTA’s competence to manage federally funded projects.
Like the concerns from Wall Street, a General Accounting Office report to Congress obtained this week calls attention to the MTA’s financial uncertainty. The report notes that federal funding for the $6.1-billion subway depends heavily on a so-called recovery plan demanded by U.S. officials. Burke said he expects to present the plan--the agency’s third--to the MTA board in April.
