Please see "Global Mass Transit Ratings And Outlooks: Current List And Recent Rating Actions," published Sept. 28, 2023, on RatingsDirect. This list includes ratings of transit issuers for debt backed by priority-lien revenues such as sales taxes as well as ratings for debt backed by operating revenues or a general obligation pledge of the transit operator.

We maintain our negative sector view for U.S. public mass transit operators because many large agencies face headwinds from persistent lower ridership and the expected void left by the spend down of $71.7 billion in pandemic-related federal aid. Ridership declines began several years before the pandemic and collapsed beginning in March 2020. However, lower ridership is now attributable to remote work patterns and, to a lesser extent, the reluctance of passengers to return to mass transit because of reliability, service levels, or safety concerns. The effects of lower ridership also trickle down to smaller revenue sources such as advertising, concessions, and parking. As a result, we continue to view some issuers--particularly large, urban transit providers with a historical reliance on farebox revenues--as more exposed to near-term credit risk compared with those that receive substantial tax support. (See "U.S. Transportation Infrastructure Transit Sector Update And Medians: Long-Term Funding Decisions Loom For Many Mass Transit Operators," Sept. 8, 2022; and "Outlook For U.S. Not-For-Profit Transportation Infrastructure: COVID In The Rearview Mirror, Yet Transit Stuck In Second Gear," Jan. 11, 2023.)

Tax and political support have been key to this developing credit story. So far in 2023, some transit systems have received interim and longer-term financial support from lawmakers and regional stakeholders. We raised 11 ratings on eight issuers, reflecting the growth of dedicated taxes supporting transit as well as the fundamental underlying strength of their tax bases. In fact, we assigned a 'AAA' rating to a new transit issuer based on the strength of its operations supported by sales taxes, which comprise the majority of its operating revenues, plus the financial flexibility from a dedicated property tax levy, if needed, to meet debt service requirements. However, for most other transit agencies, identifying a sustainable tax and revenue model to meet operating and long-term capital needs remains an ongoing topic of debate, setting up key decisions in the coming months that will pit service levels against available resources for 2024 and beyond.

Chart 1 highlights the year-to-date upward bias in rating actions taken from Jan. 1-Sept. 15, 2023, including positive actions (upgrades and positive outlooks) compared with new ratings and negative actions (downgrades and negative outlooks).

Chart 1

Chart 2

The Transit Industry's Fiscal Cliff

A May 2023 American Public Transit Association (APTA) member survey (122 responses) revealed that 50% of large transit agencies will begin a period of operating fund deficits in fiscal 2025--rising to 71% by 2028--with annual shortfalls of 10%-30%. The larger transit agencies are defined as those with operating budgets of more than $200 million (chart 3). In addition to operating and nonoperating revenue declines, transit operators face growing expenses driven by higher labor, fuel, and materials costs as well as rising annual capital expenditures (capex).

Chart 3

Transit's business model for moving suburban commuters in and out of the city center five days a week--and the revenues derived from that ridership base--may have ended permanently or at least for the foreseeable future. Across the U.S., data from all transit agencies through September 2023 show ridership has recovered to approximately 75% of pre-pandemic levels according to data from the APTA (chart 4, comparing August 2023 with August 2019), but there are wide variances between regions and between modes of transit. Heavy commuter rail systems continue to experience weakness due to remote working trends while bus and subway ridership have generally performed better.

Chart 4

In the APTA survey, transit agencies cited a variety of options to close the operating fund gap, including seeking more state or regional funding, new dedicated revenues or other sources, as well as fare increases. Although cost reductions, service cuts, and shifting capital funds to operating funds are options, most transit operators indicated they are least likely to pursue workforce reductions. This aligns with what transit management teams have outlined in discussions with us. While aligning service levels with demand patterns is essential, we see only marginal gains in efforts to stimulate ridership. And in many instances, some transit agencies are currently at the mercy of large downtown employers and their decisions regarding remote work options for their employees. We've observed that depressed ridership also has a knock-on effect for cities and the economies of city centers, particularly as it relates to the retail and commercial real estate sectors. (See "Could Empty Offices Lead To Empty Coffers For U.S. Cities," June 22, 2023.)

Regional Challenges Beget Regional Solutions

Most transit operators face the same issues: depleted or soon-to-be-depleted federal assistance, slowly improving but still reduced fare revenue, cost increases spurred by inflation and collective bargaining agreements for an understaffed workforce, growing annual capital spending requirements for maintenance, fare evasion, perceived safety issues, annual capex spending for new train or bus sets, updated fare collection equipment, and (for many) large-scale expansion needs. Also, the current state of transit has focused debate on whether charging users for what many consider a public good is sound public policy, and how to support broader transportation and environmental objectives.

Chart 5

Chart 6

Although the difficulties are clear, permanent solutions to impending operating funding gaps have so far proved elusive for many transit agencies. They have proposed measures over which they have more control, such as implementing fare increases and expense reductions, developing new revenue sources, seeking cross-support from other transportation modes (including toll revenues), modifying services to meet current and evolving ridership patterns, and redirecting capital spending to operations.

One approach every provider wants to avoid is dramatically reducing service levels (number of trains or buses, routes, or frequency) because it would likely prompt further ridership and fare revenue declines, compounding fiscal problems. In addition, transit agencies generally believe their value proposition to lawmakers and the public is to serve more, not fewer riders. Mass transit providers are also often large employers and the political difficulty of meaningfully reducing headcount is significant. One outcome most observers agree is very unlikely is additional long-term federal operating support.

Realistically, to close forecast operating fund deficits, large transit agencies lacking significant tax support will need access to long-term, dedicated funding above what they currently receive to support anticipated service levels. Absent that, or a dramatic change in the return-to-work movement, modifications in transit schedules, fare increases, and expense reductions are unlikely to compensate for the loss of daily commuters and the revenue they generated to support transit enterprises.

As they navigate an uncertain future, we see transit agencies and their state and regional stakeholders taking different approaches, including the following.

Biting the bullet.   The Minneapolis-St. Paul Metropolitan Council (AAA/Stable), which operates the regional Metro Transit system requested and received dedicated sales tax funding from the state legislature in 2022, estimated at more than $110 million per year beginning July 1, 2025, subject to annual state appropriation. We believe the new recurring sales tax revenues subject to annual state appropriation will provide structural balance with strong all-in debt service coverage, mitigating weaker fare revenues and filling the operating budget gap while allowing for service expansions.

Similarly, the New York Metropolitan Transit Authority (MTA; BBB+/Stable) received the support of state and local lawmakers and saw an increase in the payroll mobility tax, providing roughly $1.1 billion in additional recurring revenues to the MTA annually. Combined with fare and toll increases, other revenue contributions from the City of New York, and an allocation of casino revenues (starting in 2026), and savings from implementing operational efficiencies, the MTA projects a balanced budget through 2027. Revenues from imposing congestion pricing in a portion of New York City's Manhattan borough, currently projected to occur in the second quarter of 2024, will be used to help the MTA pay for its capital program, not operations.

Half a loaf.   The San Francisco Bay Area Rapid Transit District (BART; A+/Negative) and other California transit operators, including San Francisco Municipal Transit Agency (SFMTA; A+/Negative), Los Angeles County Metropolitan Transportation Authority (LACMTA; various ratings from AAA/Stable to AA/Stable), expect to receive a combined $1.1 billion from state lawmakers for operating assistance that, along with measures such as retaining capital funding, should provide some near-term breathing room once the final allocations are made by the end of 2023. However, this assistance is only a stop-gap measure to keep the trains and buses running while a longer-term solution is identified for transit agencies lacking sufficient dedicated funding for operations. A regional ballot initiative in 2026 to support transit agencies in the Bay Area has been discussed; a proposal to increase tolls on bridges operated by the Bay Area Toll Authority has been withdrawn for now.

Waiting game.   Some other negatively affected transit operators have raised the alarm while tightening their belts and making the case to state and regional lawmakers for a permanent, dedicated funding stream. At the same time, many transit agencies are endeavoring to boost ridership and increasing service levels to stimulate demand. Examples include issuers such as Washington Metropolitan Area Transit Authority (WMATA; AA-/Negative), which has access to annual appropriations from regional, state, and local governments its system serves; and Chicago Transit Authority (CTA; A+/Stable), one of three regional transit agencies that receive a portion of a statewide sales tax. WMATA forecasts a systemic operating deficit beginning in fiscal 2025 and has detailed the significant service reductions necessary to close the gap, but there has been no action yet on permanent funding solutions. CTA has a slightly longer fiscal runway and expects to deploy about $400 million annually of remaining federal relief money from fiscal years 2023 to 2025 to structurally balance operations. While the CTA is working closely with the Illinois Regional Transportation Authority and the Chicago Metropolitan Agency for Planning (CMAP) to evaluate funding solutions, we expect a CMAP report, due Jan. 1, 2024, will set forth state legislative recommendations for a new way of funding CTA's operations at current service levels.

Will Voters Remain Supportive Of Mass Transit Tax Initiatives?

A major question is whether local or regional taxpayers who increasingly do not use mass transit will continue to view it as an important public service worthy of tax support, particularly as some mass transit operators pursue ballot initiatives to potentially restore fiscal balance. Looking at election results, the answer may be "more likely than not" but public sentiment is fickle and, like transit itself, outcomes are highly localized.

Data from the APTA indicate voters considered 162 ballot initiatives between January 2018 and year-to-date September 2023, and approved 137, or 85%, for a total of $89 billion in new revenue to support mass transit operations or capital needs (chart 7). In some regions, transit enhancements are sold as part of a broader mobility plan to ease traffic congestion by adding express bus lanes. Other regions are deep into building out light rail expansions approved by voters several years ago and funded with regional sales tax measures. Local and regional sales taxes often have an expiration date requiring voters to approve an extension to continue or expand projects.

This is the case for Maricopa County's Proposition 400 half-cent sales tax, which expires Dec. 31, 2025, and returns to voters in November 2024 for a 20-year extension. The $28 billion program would fund both surface roadway and mass transit in the Phoenix region; new light rail projects are excluded from the ballot initiative. Beyond just capital investments, in November 2023, Kansas City voters will consider extending a 3/8th-cent sales tax to fund the operations of the city's free bus service for another 10 years.

Chart 7