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New York MTA Kicks Off First-Ever Payroll-Tax Bond Deal

New York’s Metropolitan Transportation Authority began marketing its first-ever bond sale backed by a payroll tax and lowered the initial yield on debt maturing in 30 years to 1.84%, according to preliminary pricing information.

The MTA, the operator of the nation’s largest public-transit system, is issuing the debt backed by that tax to provide extra security to investors after subway and bus ridership plunged after the pandemic. The preliminary yield is 28 basis points over the AAA benchmark.

The $1.2 billion offering includes $995.6 million of tax-exempt bonds and $248 million of taxable debt, according to preliminary pricing. The MTA first offered a 1.9% yield on the 2051 bond and then cut it to a tentative 1.84% yield during repricing.

Because the payroll tax is a more stable source of revenue, the new bonds carry AA+ credit ratings from S&P Global Ratings and Fitch Ratings. That’s six steps higher than S&P’s BBB+ grade and five levels above Fitch’s A- rating on MTA’s transportation revenue bonds, which are backed by fares and tolls.

The payroll-tax bond sale comes as the MTA is facing potential deficits in 2024 even as it’s set to receive a combined $14.5 billion of federal aid to cover lost revenue during the pandemic.

The MTA owes $48.6 billion of outstanding debt, according to its website. Principal and interest costs are projected to take up 23% of the agency’s revenue in 2024, up from an average 16% during the past decade, according to a report on the MTA from state Comptroller Thomas DiNapoli.

In addition to the growing debt burden, the transit agency is expecting revenue to return to pre-pandemic levels after 2024. If it doesn’t rebound, the “very high” debt levels may result in service cuts, higher than planned fare hikes and also put the MTA’s capital plan at risk, according to the report.

The agency may have to cut its capital program by $2.9 billion if revenue doesn’t return to pre-pandemic levels and if the MTA doesn’t get more financial support or cut costs, according to the report.

“In a scenario with low ridership and no new capital assistance, the MTA may also be forced to reprioritize its capital program, thus pushing much-needed repairs and modernizations further into the future,” according to the report from DiNapoli. “A reduction in the program would risk undoing progress in making the MTA safe, accessible and reliable.”

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