Government agencies and their private partners borrow money for all types of transportation projects, from fixing up subway stations and modernizing seaports to building new bridges and expanding airports. In the face of shifting travel patterns, rising costs, and higher interest rates, transportation agencies and local governments are grappling with a crucial question: Can they continue to borrow billions of dollars for airport, transit, highway, and port improvements?

To answer this question, Eno hosted a February 7 webinar titled, “Transportation Debt: How Much is Too Much?” with four transportation finance experts:

• Caitlin Devitt – Senior Infrastructure Reporter, Bond Buyer
• Baye Larsen – Vice President – Senior Credit Officer, Moody’s Investors Service
• Scott Monroe – Senior Director, Fitch Ratings
• Scott Trommer – Senior Vice President, WSP Advisory Services

The four panelists are confident that transportation agencies can continue to sustain and increase their debt, but they do share a somewhat cautious optimism about the transit industry.

Scott Trommer started off the discussion by talking about transportation finance in general. He said annual expenditures across all modes totals nearly $400 billion, but that is only about half of the nation’s needs. Federal funds are critical to highway and transit agencies while airports, ports and toll roads rely more heavily on revenues from user fees. Despite the passage of the Infrastructure Investment and Jobs Act, many transportation agencies are struggling to meet their needs, in part because of higher labor and materials prices.

Agencies borrow money by issuing bonds, and then rely on taxes and user fees to pay back the principal and interest. In total, U.S. transportation agencies have approximately $512 in outstanding debt ($245 billion for highways, $111 billion for airports, $75 billion for toll roads, and $81 billion for public transit.) When projects involve public private partnerships, the private firms often issue debt as well.

Scott Monroe emphasized how economic conditions affect the cost of transportation projects, the demand for transportation services, and the ability of transportation agencies to continue financing their debt.

Monroe shared some good news. The economists at his firm are no longer expecting a recession, but rather fairly moderate growth which should result in a slight uptick in transportation volumes. Inflation is expected to continue falling which will relieve the recent rapid increases in operating, maintenance, and construction costs. Lower inflation will also give the Federal Reserve room to lower interest rates, allowing transportation agencies to undertake more capital projects.

Monroe said he is “not too concerned” about debt in airport, toll road, and the port sectors because their debt is tied to higher revenues. For instance, an increasing number of airline passengers leads to higher parking and concession revenues for the airports. However, he noted, the transit sector is facing a much more challenging environment than the other transportation sectors.

Baye Larsen revealed that Moody’s “outlook for transit agencies is negative” because transit ridership is still down more than 30 percent in most metropolitan areas. Fortunately, she said, “it’s not as big an impact as most people would expect” because on average, only about 15% of transit operating revenues come from fares (with several notable exceptions, such as New York and Chicago, where passengers pay a much higher percentage of expenses.)

Larsen is concerned about a more indirect effect relating to the transit industry. She explained how ridership “serves as a proxy for its importance to city and local economic areas.” If there are fewer riders, and its government partners see transit as less essential to the local economy, then transit agencies will receive fewer tax dollars to support their services and fund capital projects.

Larsen disclosed how she and other analysts rate transportation agency bonds. Among other factors, they look at an agency’s competitiveness, financial strength, management practices, and its existing debt level. Not only do analysts review publicly available materials, but they also regularly talk directly to transit agency officials. After assessing the willingness and ability of agencies to pay its debt, Moody’s give bonds one of 16 different grades (Aaa rating is the highest).

These ratings are similar to the credit scores (between 300-850) that credit bureaus, such as Equifax, assign to individuals. Those scores affect both the ability for borrowers to obtain loans and the interest rates they will pay. For transportation agency debt, the ratings influence the type and number of investors who will bid on bonds.

Caitlin Devitt talked about the people who invest in bonds and what they are looking for. Institutions (including banks and insurance companies) purchase bonds alongside individual investors facilitated by brokers and mutual fund firms.

One of the first questions investors ask is, “what revenues will be used to pay back the principal and interest?” Devitt said investors prefer revenue sources that are permanent and recurring, as well as stable, predictable and insulated from volatility. She explained that transportation debt operates at the intersection of politics and finance, and investors prefer bonds issued by agencies who have the independence to raise fares and tolls without going to lawmakers.

In the last few years, debt issuance by transportation agencies has been relatively low, but most participants think it will pick up again because of airport expansion, local match for federal grants, and large megaprojects such as the Gateway and the Brent Spence Bridge.

Referring to the much dreaded fiscal cliff that some transit agencies are facing, Devitt said investors are not that concerned about agencies defaulting on their bonds because transit agencies typically rely upon taxes, rather than fares, as the source of payments.

She said investors have been looking closely at New York for three reasons. First, the state’s decision last year to increase payroll taxes devoted to the Metropolitan Transportation Authority (MTA) may be a model for other transit agencies. Second, the MTA dominates the transportation debt market. In fact, its $48 billion in debt is greater than most U.S. states. Third, if and when New York’s congestion pricing goes into effect, the revenues will be used as a source for new bonds. Other cities, Devitt said, including Los Angeles, Seattle, Boston are watching that closely.

When asked how transit agencies can improve their ratings, Trommer answered, “investors consider whether transit agencies are managing their costs and dealing with lower than expected ridership.” He said that agencies need to evaluate their services and cost structure to deal with the new post-Covid environment. At the same time, they need to work with their partners to secure new funding to help bridge the gap. Larsen pointed out that transit agencies have the option of issuing bonds that will be repaid by taxes rather than fares revenue. That would lead to a higher rating because taxes are usually more stable with better growth profiles than transit fares.

In recent years, no transportation agency has defaulted on its debt and none of the panelists expect that to occur in the foreseeable future. But Devitt did warn that if an agency were to default, it would have negative repercussions for other agencies all across the country.