MTA Borrowing Puts the Agency $7 Billion in Debt


The Metropolitan Transportation Authority has built much more than a troubled subway. It has dug a $7-billion financial hole that has crippled the nation’s second-largest bus system and left Los Angeles County taxpayers to foot the bill for the next 30 years.

The MTA and the agencies that preceded it have financed construction of a rail system, including the shortest and most expensive subway in American history, by engaging in a nearly nonstop frenzy of borrowing that began in the mid-1980s.

A mountain of debt, which when interest and fees are taken into account totals $7.01 billion, has been piled up to build the Metro Rail subway and two light rail lines, to pay contractors for cost overruns, and to erect the agency’s unprecedentedly extravagant headquarters.

The sum has grown so large that debt service alone will devour more than 30% of the MTA’s nearly $1.2-billion operating budget in the next year. Payments on the outstanding debt--almost $360 million a year--have become the agency’s biggest single operating expense, more than the salaries of all the MTA’s employees.


And the share of the agency’s operating expenses devoted to repaying its debt will remain huge for decades to come, hampering the MTA’s ability to address the transportation needs of the nation’s most populous county.

Already, the MTA board has borrowed against a critical share of anticipated receipts from its portion of the county’s penny-on-the-dollar transit sales tax until 2029.

With Washington and Sacramento increasingly wary of investing federal and state funds in more rail projects, the MTA board is struggling to find the money needed to finish building the last segment of an almost $5-billion subway line from downtown Los Angeles through Hollywood to the San Fernando Valley.

This shortage of money has forced a halt to extensions of the Metro Red Line subway to the Eastside and Mid-City and sidetracked construction of a light rail line from Union Station to Pasadena.


The vast majority of the money borrowed by the MTA and one of its predecessors, the Los Angeles County Transportation Commission, has gone to rail projects, which had political support from a powerful alliance of business and labor, as well as local and elected officials.

All but $50 million of $2.4 billion in sales tax bonds issued by the MTA has been spent on rail projects currently utilized by less than 9% of the people who rely on the agency for public transit.

That money helped build the subway and construct two light rail lines: the Blue Line from Long Beach to Los Angeles and the Green Line, which runs from Norwalk to El Segundo, but fails to reach Los Angeles International Airport.

Sales tax bonds provided the funds to plan other rail lines and to acquire railroad rights-of-way that laid the groundwork for the Metrolink system of commuter trains.

The decrepit, overcrowded bus system, which provides critical transportation for more than nine of every 10 MTA customers, has received virtually nothing from the agency’s frenzied borrowing.

It is this neglect of the backbone of mass transit in Los Angeles that prompted a civil rights lawsuit and a 1996 federal court consent decree requiring the MTA to improve bus service. But complying with that decree has been made extraordinarily difficult by the necessity of making payments on MTA’s outstanding debt.

“That’s one of the realities that makes this a difficult job,” Julian Burke, the MTA’s chief executive, said in a recent interview. “If you are asking me whether or not we would be able to do more to meet the transportation needs of this county if we didn’t have any debt to serve, the answer is yes. But that’s not reality.”

Maybe the MTA should not have pledged as much future income as it did, he said.


But at this point, the MTA has only two choices. “Pay for it or refinance it,” Burke said.

Investors Come First

Far from Los Angeles, in the canyons of Wall Street, bus riders take a back seat to bondholders--for the investors who buy the MTA’s bonds are guaranteed they will be paid before any buses or trains roll.

In this world of high finance, billions of dollars are raised to construct public works projects, including mass transit systems. To borrow, public agencies make a legal pledge that they will repay investors with interest over time.

Investment bankers, brokerage houses, rating agencies, bond fund managers and individual investors look for a source of revenue to repay the debt. In the MTA’s case they found that source in the county’s voter-approved sales tax for mass transit, a financial powerhouse that generated more than $820 million in the 1997 fiscal year.

With that kind of money involved, the MTA proved irresistible to contractors and businesses of all types, including Wall Street firms that, over the years, have offered a steady stream of advice to agency officials on how to finance or refinance the foray into rail transit.

Much of the advice on bond issues and refinancing arrangements came from investment bankers and bond underwriters, who stood to earn substantial fees if their suggestions were accepted by the agency’s staff and approved by its board. “At the MTA, many of the ideas were generated by the investment banking community,” said a public finance expert, who did not wish to be identified.

The MTA’s list of borrowings reflects many of those fee-generating ideas. There are fixed rate bonds; variable rate bonds; bonds for a developer’s project at downtown’s Grand Central Market; a yen-denominated cross-border lease deal used to acquire the first light rail vehicles; special assessment districts around downtown subway stations; and borrowing to pay worker’s compensation claims and to finance the agency’s astonishingly grand headquarters.


An examination by The Times has found that much of the MTA’s extensive borrowing has been structured in a way that dramatically increases the cost to local taxpayers.

Like a home buyer who cannot afford a house without creative financing, the MTA often has engaged in complex borrowing schemes that delay the inevitable day of reckoning--at a huge price.

Former MTA Chief Financial Officer Ronny J. Goldsmith said the agency seemed to engage in “debt for debt’s sake and refinancing for refinancing’s sake. The long-term consequences were somebody else’s problem.”

For years, the MTA increased the amount of bond issues to raise cash for initial debt payments. It has rolled over short-term debt, compounding interest on interest, without making a dent in the original principal.

By paying only interest and no principal on some of its debt for as long as 10 years after the bonds were sold, the MTA keeps its payments relatively low in the beginning, only to see them swell dramatically later.

Mining the Transit Sales Tax

In the lexicon of Wall Street, many of these bond issues are “back-end loaded” with hundreds of millions of dollars in principal due over a short period of time in the later years. In the world of corporate finance, these payments are known as “bullets” because they are so large that they can prove deadly to a business.

The fuel for this borrowing comes directly from the transit sales tax, a levy that falls with disproportionate force on low-income workers, who spend a greater share of their paychecks on items subject to sales tax.

In ballot campaigns a decade apart, Los Angeles County voters were promised better bus service, a rail system and transit improvements in exchange for approving two half-cent increases in the county’s sales tax.

The first of the measures, Proposition A, won a solid victory in the fall of 1980. The promise to roll back bus fares for three years from 65 cents to 50 cents, assist local bus operators and build a rail rapid transit system proved popular with 54% of the voters.

A decade later, the county’s voters barely approved Proposition C, another half-cent sales tax, to continue with rail development, subsidize bus operations, build carpool lanes and provide other highway-related transit improvements.

The transit sales tax became the financial lifeblood of the Transportation Commission and later the MTA. So large and seemingly solid was this revenue source that the bond rating agencies happily put their stamp of approval on the borrowing against future receipts. Investors coveted the security of knowing that they had first claim on the sales tax receipts and would be paid before the MTA. For them, there was the added benefit that income from interest paid on the bonds is exempt from state and federal income taxes.

So the commission and later the MTA continued borrowing against future sales tax receipts to raise the local funds needed to proceed with construction of a rail system.

In order for the transit agencies to secure the best possible bond rating, an orchestrated effort to woo Wall Street was undertaken.

In April 1991, Leslie V. Porter, then-deputy executive director of the Transportation Commission and later treasurer of the MTA, asked another official for help in arranging VIP helicopter tours to show representatives of Wall Street rating agencies the routes of planned rail lines.

“We will have four hours with each rating agency staff to introduce our rail program and demonstrate the competence of our planning, design, construction and financing. They will be responsible for rating our June bond issue of approximately $500 million,” Porter wrote in a memo to his superiors.

Porter noted the importance of the credit rating that would be assigned to the bonds and the potential effect on the interest rate the commission would have to pay. “It is crucial that they leave with a positive impression of our rail program,” he wrote.

Bond Issue Goes Forward

In August 1992, commission Executive Director Neil Peterson along with Porter urged the commission’s board members to select underwriters and bond counsel for an upcoming sales tax bond issue.

“The commission’s approved 30-year capital plan anticipates the construction and expansion of both rail and bus in excess of an amount that can be paid for on a pay-as-you-go basis,” they wrote. The memo made the case for leveraging by pledging future sales tax receipts.

“This bond issuance needs to go forward in order to achieve the commission’s scheduled opening dates for various services, lines and segments,” they said.

The bond issue proceeded with the full knowledge and blessing of elected officials--including the mayor of Los Angeles and the county supervisors--who sat on the commission board. The same would be true after the Transportation Commission and the Southern California Rapid Transit District merged into the new MTA in April 1993.

Since then, bond issues often have been approved by the MTA board virtually without public debate. Among the public officials who have served during this period are two mayors of Los Angeles--Tom Bradley and Richard Riordan--all of the county supervisors and their predecessors Kenneth Hahn, Pete Schabarum, Ed Edelman and Deane Dana and City Councilmen Richard Alatorre and Hal Bernson.

Current Supervisor Zev Yaroslavsky participated as both a city and county official, as have representatives of smaller cities, such as Glendale Mayor Larry Zarian. The borrowing they and their colleagues approved financed the all-things-for-all-people operating philosophy that led the MTA to promise taxpayers things it never could deliver.

Late in his elective career, Schabarum raised questions about the agency’s borrowing, as has Yaroslavsky since his election to the Board of Supervisors.

But their reservations received scant attention. Press coverage of the MTA, including that of The Times, focused almost exclusively on construction mishaps, cost overruns and worker safety.

As a result, the MTA’s debt load as a share of its operating cost is significantly higher than other American transit agencies that operate both bus and new rail systems, like Atlanta’s.

Yaroslavsky said Saturday he had been advised that his initiative to prevent sales tax money from being used for new subway projects had qualified for the county’s November ballot.

Gateway to Trouble

In the midst of the worst economic recession to hit Los Angeles since the Great Depression, the directors of the new MTA voted in June 1993 to build themselves a new headquarters, the Gateway Center.

It was a time when vacancy rates in downtown office buildings were soaring, rents were falling and the city center’s finest high-rises were sold for less than they cost to build.

Against this backdrop, agency consultants concluded that building a new headquarters was more financially advantageous in the long run than continuing to rent office space for the two agencies that became the MTA.

The resulting high-rise project next to Union Station was the brainchild of the old Rapid Transit District board, whose officers wanted desperately to move out of their shabby downtown building, not far from skid row.

Early in the long process of settling on a site, the RTD contracted with a major national law firm, Jones, Day, Reavis & Pogue, to assist in negotiations for the property. One of the firm’s politically well-connected lawyers, Yvonne Brathwaite Burke, then a former county supervisor and ex-congresswoman, worked with the RTD on the project.

In June 1990, Burke faxed to John Bollinger, who would become president of the Union Station Gateway project, a “Guide to Public Debt Financing in California.”

On the cover sheet, she called attention to “an excellent discussion of certificates of participation,” a long-term financing technique that had been used extensively by Los Angeles County. A certificate of participation is a kind of mortgage on public property that pledges government revenues to repay a debt.

The county, for example, raised money by mortgaging County-USC Medical Center, promising to use money from its own health budget to repay the obligation.

The transit agency employed this same circular technique by securing certificates with pledges against a portion of the fares to be paid by future bus riders.

Four years later, even after construction had begun, the agency still had not decided how to provide permanent financing for the Gateway project. It continued to use short-term borrowing and internal sources of cash, such as its worker’s compensation reserve account, to pay for the work.

Issuing sales tax bonds to pay for the building would have taken funds from the subway and light rail projects, something the ambitious rail development plan didn’t allow.

So, instead, the MTA’s finance chief, Terry Matsumoto, along with the agency’s financial advisor and bond counsel, recommended another source to pledge as security for Gateway Center bonds: the fare box revenues from the collapsing bus system.

“From the plan’s perspective, this is a NEW RESOURCE,” Matsumoto wrote in an August 1994 memo to Franklin E. White, then the MTA’s chief executive.

White was uncomfortable taking the fare box funds, which are supposed to support the bus system, to pay for the headquarters. Matsumoto acknowledged this uneasiness in his memo. “You were concerned about the POLITICAL impact of the recommended financing plan that pledges FAREBOX as security,” he said.

Only once before had this been done, when the RTD borrowed $160 million for 20 years to pay worker’s compensation claims. The money, which was to have been invested, instead was spent in four years, Matsumoto said. And the MTA also raided the RTD’s worker’s compensation cash reserves to cover operating deficits.

Ultimately, it was agreed that an additional $169.5 million in bonds would be issued by the MTA to provide permanent financing for the building. They were backed largely by a pledge of future fare box revenues.

The 1995 bonds had a curious feature. Instead of fixed interest rates over the 30-year life of the bonds, they contained a complex interest rate swap with a floating rate that was reset every seven days.

The idea had originated with an investment banking firm, Grigsby Brandford & Co. of San Francisco, which later served as one of the underwriters selling the bonds.

Grigsby Brandford, which grew to be the largest African American investment banking firm in the nation, had been an underwriter of the county Transportation Commission’s sales tax bond issues for many years.

MTA Treasurer Leslie Porter’s name even appears as a reference in one of the proposals the firm submitted to the MTA seeking business.

But the uncertainties of the original bond issue proved too much, even for the MTA’s financial high-wire act. So the Gateway Center was refinanced at fixed interest rates in 1996. New bonds in the amount of $185.7 million were issued. This time there would be no principal payment for 10 years, meaning the MTA will make no principal payments on its headquarters from 1995 until 2006.

But that structure--coupled with the price for canceling the interest rate swap and the cost of the MTA’s short-term borrowing during construction--ultimately will drive the financing cost for the Gateway Center to $456.6 million by 2026. When land, site preparation and the cost of the building’s parking garage are added, the price tag for the MTA’s headquarters exceeds $480 million.

Paying for It

Today, the Gateway Center, with its stunning granite and marble lobby, artworks, lavish board room and superb views, is a symbol of the MTA.

The building has a fine accompaniment in a separate project, the adjoining bus plaza complete with its English paving stones, a cascading waterfall, landscaped arroyo and large decorative fish tank. The plaza provides a dramatic entry to the soaring East Portal gateway to Union Station and the subway below. It is the plaza and East Portal that received the $50 million in sales tax bonds not devoted exclusively to the rail program.

As he sat in his 25th-floor office, MTA chief executive Julian Burke was asked about the cost of paying for the Gateway Center.

“I certainly have some view that this building in retrospect certainly doesn’t look like it was a wise investment when it was made. There probably would have been better ways to do it than to have to carry now $185 million,” he said.

Burke bristled when asked to defend the decision, made by others, to invest so much in the agency’s headquarters. “What should I do about it? I don’t know I need to defend it,” Burke said. “How do I defend it? I just have to figure out how to pay for it.”

Like many in the investment banking industry, Calvin Grigsby cultivated connections with the politicians who vote to issue bonds. One of the ways he did so was through campaign contributions.

When Yvonne Brathwaite Burke launched another bid for the Los Angeles County Board of Supervisors, Grigsby gave $10,000 to her campaign in January 1992. He donated another $1,000 that year, and $5,000 in 1993.

The California Fair Political Practices Commission fined Grigsby $5,000 in 1996 for violating the state’s campaign finance law by laundering money to an Oakland mayoral candidate and failing to report $53,500 in 1993 campaign contributions, including the $5,000 to Burke.

But that was the least of Grigsby’s troubles. He resigned from his company and the firm broke up in 1996 after the Securities and Exchange Commission began a probe of his activities in Miami.

In January, Grigsby was indicted in Miami for bribery, money laundering and conspiracy after allegedly being videotaped offering a Miami-Dade County commissioner a $300,000 kickback for obtaining a piece of the county’s bond business. He pleaded not guilty to the charges and is awaiting trial.

This month, a second indictment was returned in Miami charging Grigsby with conspiracy, theft, misapplication of Miami-Dade County revenues and money laundering. He has also pleaded not guilty to those charges.

But before his legal problems brought down his firm, Grigsby Brandford & Co. had become a key underwriter of bond deals in Los Angeles. The firm was prominent at the MTA and the city, and its lead role in refinancing Convention Center bonds generated considerable controversy.

Bond underwriters and brokerage houses in the public finance arena have long been contributors to officeholders and candidates. The Securities and Exchange Commission cracked down on this “pay to play” system of obtaining municipal bond business in 1994. Rules were imposed to restrict individuals and bond firms from seeking bond business for two years if they gave more than $250 to a state or local official in a position to award such contracts.

Obscure Activities

However, other avenues of expressing corporate appreciation remain open. Goldman Sachs & Co., which was the senior underwriter on the 1995 Gateway Center bonds and a party along with a Grigsby company in the controversial interest rate swap, used one of them.

In an April 1995 memo, MTA Treasurer Porter described a $2,000 contribution from Goldman Sachs directed to the Transportation Foundation of Los Angeles, a nonprofit charity spun off from the MTA in 1996. The foundation, which has been promised $800,000 directly from the MTA, places college interns in transportation industry jobs and has close ties to Burke and her husband, William Burke, a well-connected businessman who runs, among other things, the Los Angeles Marathon.

“This practice,” Porter wrote, “follows a practice initiated by the [Los Angeles County Transportation Commission] whereby firms make a contribution to a local charity . . . in lieu of the traditional ‘bond closing dinner.’ ”

Like so much about the MTA and its finances, the precise activities of the Transportation Foundation remain obscure. When asked by The Times, the state’s registrar of charitable trusts, Larry Campbell, said he could not find any of the financial reports such foundations are legally required to file.


MTA’s Legacy of Debt

For more than a decade, the overcrowded bus system used by the vast majority of transit riders in Los Angeles has taken a back seat to construction of subway and rail lines. Instead of investing in the bus system, the Metropolitan Transportation Authority has borrowed $3.4 billion to build rail lines and erect a lavish high-rise headquarters. Paying off this burden of debt will cost county residents, businesses and visitors more than $7 billion over the next 30 years, most of it from the county’s penny-on-the-dollar transit sales tax.

MTA debt

Outstanding Debt: $3.42 billion

Interest: $3.47 billion

Fees: $0.12 billion

Total Debt: $7.01 billion


Who Rides What?

Rail riders: 8.95%

Bus riders: 92.05%


Breakdown of Funds From Sales Tax

Total (collected by state, FY97): $824.2 million

* Set aside for non-MTA (local) bus service: -$185.4 million

* Paid to investors holding MTA sales tax bonds (debt service): -$196.5 million

What MTA has left to provide transit service: $442.3 million

Researched by JEFFREY L. RABIN / Los Angeles Times


Gateway Center--Extravagant Headquarters

* The MTA built a lavish 27-story headquarters next to Union Station, along the 101 Freeway downtown.

* The first bonds to pay for the structure were issued in 1995. The building was refinanced a year later.

* The cost of the building will exceed $480 million by the time it is paid off.

* The price skyrockets because of the way the bond deals were structured. The MTA will pay only interest on the debt during the first 11 years.


Debt: Original borrowing

Year: 1995

Amount: $169.5 million


Debt: Refinancing

Year: 1996

Amount: $185.7 million


Debt: Total financing cost

Year: 2026

Amount: $456.6 million


Debt: Site purchase and preparation

Year: NA

Amount: $4.4 million


Debt: Parking garage

Year: NA

Amount: $20.4 million


Debt: Approximate cost

Year: 2026

Amount: $481.4 million

Researched by JEFFREY L. RABIN / Los Angeles Times


Metro Rail System

When the last leg of the Red Line subway opens between Hollywood and the San Fernando Valley, more than $6 billion will have been spent on Metro Rail lines in Los Angeles County. Serious financial problems at the MTA have forced a halt to expansion of the subway and light-rail network.

Red Line Subway

Line/Route: Union Station to Wilshire and Western

Date Opened: Opened in two stages: Jan. 1993, July 1996

Distance/Cost: 5.2 miles / $3.2 billion*


Line/Route: Vermont/Wilshire to Hollywood/Vine

Date Opened: Projected: May 1999

Distance/Cost: 4.6 miles / (included above)


Line/Route: Hollywood/Vine to North Hollywood

Date Opened: Projected: May 2000

Distance/Cost: 6.3 miles / $1.3 Billion


Light Rail Lines

Line/Route: Blue Line: Los Angeles to Long Beach

Date Opened: July 1990

Distance/Cost: 22 miles / $877 million


Line/Route: Green Line: Norwalk to El Segundo

Date Opened: August 1995

Distance/Cost: 20 miles / $712 million


Metro Rail Projects Suspended

Line/Route: Eastside Subway: Union Station to 1st and Lorena

Date Opened: Halted

Distance/Cost: 3.7 miles / $1.1 billion projected


Line/Route: Mid-City subway: Wilshire and Western to Pico and San Vicente

Date Opened: Halted

Distance/Cost: 2.3 miles / $683 million projected


Line/Route: Pasadena light rail: Union Station to Pasadena

Date Opened: Halted

Distance/Cost: 13.6 miles / $824 million projected

* Includes cost of segment to Hollywood/Vine.

Researched by JEFFREY L. RABIN / Los Angeles Times


The Debt Picture

The MTA has borrowed $3.4 billion to build subway and light rail lines, lease buses and rail cars, construct its headquarters, pay workers compensation claims, and back redevelopment projects.

Rail leases: $25.2 million

Grand Central Market: $31.1 million

Bus Bonds / Leases: $111.8 million

Worker’s Comp Debt: $140.5 million

Downtown Districts: $158.7 million

Gateway Center: $185.7 million

Short-term Borrowing: $423.5 million

Sales Tax Bonds: $2.335 billion


Debt Service

Payments on MTA’s outstanding debt will consume more than 30% of the agency’s operating budget in the next year and will stay close to that level for the foreseeable future.

In 1999, debt service will cost an estimated $359.5 million, or 30.7% of a nearly $1.2 billion operating budget.

In 2004, projected debt service will cost $392.1 million, or 29.3% of the total operating budget.

Source: MTA Restructuring Plan, Proposed Budget

Researched by JEFFREY L. RABIN / Los Angeles Times