Tackling MBTA’s debt problem
Earlier decisions made bad situation worse
THE MBTA’S EFFORTS to spare Boston-area riders fare increases and service cuts by restructuring its debt service payments made a bad financial situation worse, according to a new report by the Massachusetts Taxpayers Foundation, a business watchdog group.
The winter storms of 2015 brought two related issues into sharp focus: the transit system’s debt of nearly $9 billion and deferred maintenance costs approaching $7 billion. The two numbers are related because keeping up with debt service has meant little money for maintenance and upkeep.
The failure of state lawmakers to come up with a plan to address the transit system’s IOUs— the highest debt burden in the country—forced MBTA officials to devise a risky way to its balance budgets by refinancing it. Those decisions meant that the MBTA has little left to invest in new equipment and a maintenance regime that might have staved off some, though not all, of the operations problems that followed record-breaking snowstorms and cold weather.
The foundation found some good news. Hefty debt service expenses of $425 million, roughly 22 percent of fiscal 2015 operating revenues, have grown more slowly than other expenses. In some past years, debt service has consumed more than 30 percent of the MBTA’s budget.
The foundation noted that MBTA managers knew that these financial decisions were “not optimal.” Indeed, in 2009, Jonathan Davis, the agency’s chief financial officer, warned:
“The Authority must reduce its reliance on debt financing and generate sufficient excess revenues each year to fund the capital program on a pay as you go basis…In today’s capital markets, restructuring debt to fix a structural deficit will come at an unaffordable cost and delay the inevitable…Disinvestment in the system’s infrastructure and modernization would result in a deterioration of service reliability, non-compliance with legal commitments, slower progress in making the system more accessible, and maybe most importantly, loss of ridership.”
Eileen McAnneny, the Massachusetts Taxpayers Foundation president, did not fault the MBTA’s decision to refinance debt to secure lower interest rates. But she said that restructuring debt hurt the agency.
“Restructuring of the debt lowers the costs in the near term and allows the T to better balance its budget,” she said. “But the price is you pay more overall, long term.” Moreover, McAnneny added, the high level of debt affects the MBTA’s ability to borrow money to deal with the maintenance backlog.
The debt question has received new urgency with the snow-related collapse of the T system, but confronting it head on could be difficult on Beacon Hill. There are two possible ways to lighten the MBTA’s current debt load. Massachusetts could absorb some of the MBTA’s debt, but state lawmakers in the past have been unwilling to do that since that decision would translate into cutbacks on debt spending elsewhere in state government. The other option, increasing the state’s overall debt burden, might make the Commonwealth’s bonds less attractive to investors.
Another option would be for the state to provide the MBTA with funding that would go directly to debt service payments. Under that mechanism, the MBTA would continue to make its own payments
Rafael Mares, a senior attorney at the Conservation Law Foundation, said he favors an approach that would relieve the T of some of the debt that the state had transferred to the agency in 2000. “The debt that currently exists, you would have to purchase it back in the market at premium, so that would make it more expensive,” Mares said. “It wouldn’t make sense to have the state to incur higher expenses than the T would incur.”
Under either scenario, “somebody has to pay,” according to Tim Murray, the former lieutenant governor who now heads the Worcester Regional Chamber of Commerce.
“If the MBTA is going to continue to carry that debt and pay it off somehow it’s got to be paid for, so we don’t fall further behind on investing on ordinary maintenance, infrastructure, and equipment,” Murray said.
During the Patrick administration, “reform before revenue” became the shorthand for the moves that prioritized restructuring of state transportation agencies and other efficiencies over MBTA debt relief and tax increases. The Legislature backed the creation of the Massachusetts Department of Transportation in 2009 and raised the gas tax three cents in 2013.
“If we had been successful in  instead of turning to this reform before revenue stuff, if we had been able to do both get the sufficient revenue and ring out the reforms, we’d be a lot further ahead in addressing these infrastructure and equipment issues,” Murray said.McAnneny, of the Taxpayers Foundation, said that discussions about new revenues to confront debt or any other MBTA issues are “premature.” She added: “We don’t even fully understand the scope of some of these problems. We need to have a better handle on that before we have the revenue conversation.”
The MBTA has $5.5 billion in debt from three sources: the transfer of debt associated with spending since 2000; the debt from prior projects and transferred to the MBTA after the start of forward funding in 2000, which directed a portion of sales tax revenues to the MBTA; and the costs associated with Big Dig transit mitigation projects that the MBTA is legally required to build.