Advisors and underwriters have until next week to submit their qualifications to work on Chicago Transit Authority financings as the agency embarks on a major train line extension and hunts for solutions to a looming fiscal cliff.
The CTA asks broker-dealers to describe financing ideas to “address the CTA’s operating or capital funding needs in the most economically efficient manner possible, including the benefits, quality of security, and related credit issues regarding a particular approach.”
The CTA is accepting letter of interest and qualification submissions from financial advisory/municipal advisory firms and underwriters to work with the agency on an as-needed basis over the next 48 months or until new pools are established. The deadline is Jan. 17th.
The CTA also asks for any “novel revenue or funding ideas that could enhance the authority’s financial position, operations, and/or capital program” and strategies for expanding its “investor base, including growing its Environmental, Social, and Governance and Sustainability buyers,” according to the request.
“The financial advisory role will provide services related to the structuring, pricing, marketing, selling, and underwriting of bond deals. Review the CTA’s operating and capital programs, and in conjunction with other parties, make recommendations for addressing operating and capital program funding needs,” the FA notice says.
Advice on ratings, regulatory subjects, debt and swap and public-private partnership policies, assistance in drafting legislation, and alternative structures are all part of the duties.
The FA and underwriting pool refresh comes as the CTA and its fiscal parent, the Regional Transportation Authority of Northeastern Illinois, eye new funding streams, climate change and safety in a draft five-year strategic road map as they seek to rebuild ridership levels and manage the fiscal reckoning that looms after federal COVID-19 relief is exhausted in 2025.
The RTA, which provides fiscal oversight of CTA, Metra commuter rail, and Pace suburban bus service, in December approved a $3.58 billion budget that relied on federal dollars to close budget gaps.
Spending in the RTA budget is up 6%, reflecting nationwide trends in inflation and a labor shortage. The service boards are raising pay and bonuses to attract and retain workers.
Of the RTA’s $3.5 billion share of federal pandemic relief from various aid packages, the CTA’s take is $2.2 billion with $987 million drawn down through 2022 and plans to exhaust most of the remaining $1.2 billion between 2023 and 2025.
Once depleted, the service boards face a collective $730 million budget gap heading into 2026 according to 10-year financial planning estimates reviewed by agency officials who worked with Chicago Metropolitan Agency for Planning.
The CTA closed a 2023 budget gap of $390 million with federal aid, opting to hold service and fares steady and maintain discounts on passes launched in 2021.
The CTA’s 2023 budget projects ridership will rise by 9% to 240.7 rides this year. That’s 58% of pre-COVID levels in 2019.
“Appropriate staffing levels and sufficient funding will be key to resolving operational issues, continuing investment in equity, and providing our customers with the best travel experience possible,” CTA President Dorval R. Carter Jr. said in budget documents.
The CTA accounts for $2.4 billion of the projects listed in the RTA’s five-year $4.7 billion capital program that relies on a mix of federal funds, cash, and borrowing. CTA debt service of $1 billion brings the overall capital program up to $5.7 billion.
The CTA intends $326 million of sales tax backed borrowing to support the plan including $172 million of borrowing this year when the CTA intends to spend $789 million.
Moody’s Investors Service upgraded the CTA’s $2.1 billion of senior lien sales tax bonds to A1 with a stable outlook from A2 in July after the rating agency upgraded the state government. S&P Global Ratings rates the CTA sales tax second lien A-plus and the senior lien AA, both with stable outlooks. Kroll Bond Rating Agency rates the CTA’s senior lien sales tax credit AA and the second lien AA-minus and stable.
The CTA’s massive $3.6 billion Red Line Extension train project is in line for $340 million under the five-year plan.
The project received a notable boost in the Chicago City Council’s recent approval of Mayor Lori Lightfoot’s proposal to establish a transit tax increment financing to raise $959 million for the project. That funding is central to leveraging federal matching funds and additional grant allocations available in the Infrastructure Investment and Jobs Act President Biden signed last year.
The CTA plans to leverage the city’s commitment to apply for $2.2 billion in Federal Transit Administration New Starts funding and will seek additional grants available under other federal allocations such as the Congestion Mitigation and Air Quality Improvement Program, and Transportation Infrastructure Finance and Innovation Act loans. The CTA is expected to borrow against the future TIF revenue, according to city officials.
The RTA and its local transit agencies are eyeing changes to their funding model as part of a long-term strategic plan that seeks to address crime, accessibility, climate change and funding in “Transit is the Answer,” which is in draft form. The RTA board will vote on the final plan at its Feb. 16 board meeting.
Possible action transit officials will pursue include seeking to reduce the state’s requirement that 50% of the region’s transit system be funded through system generated revenue. The RTA aims to move toward a funding model less reliant on fares and doesn’t want to be penalized. The state did suspend that requirement through 2023 due to the pandemic’s impacts but it’s unclear whether the state would extend the temporary in 2024.
Potential revenue streams considered as fixes include an increase in the existing RTA sales tax levied on Cook County and neighboring counties, an increase in the state motor fuel tax, implementation of congestion pricing on highways into Chicago, and expanding the RTA sales tax to services that are now exempt.
Other ideas include implantation of a vehicle miles traveled tax on the number of miles driven in a vehicle to replace 5% of state motor fuel taxes lost by fuel efficiency, expanding the real estate transfer tax now imposed on city transactions to include the suburbs serviced by the RTA, raising vehicle registration fees, and increasing Illinois State Toll Highway Authority tolls to benefit transit.
Most of the options face roadblocks because they need other governmental bodies like the state and city to act.
“In 2023, the RTA and service boards will take a serious look at the future, both the challenges we face and improvements necessary to strengthen the system,” RTA Executive Director Leanne Redden said in a statement.
The CTA’s looming fiscal woes echo those of other major transit systems that have relied on federal aid to prop up budgets stung by a deep ridership plunge and slow recovery with many downtown workers still working remotely or in hybrid situations.
Standard & Poor’s Global Ratings warned this week of persistent struggles. While analysts expect U.S. air travel, measured by passengers, to return to pre-pandemic levels this year, that’s not the case for transit, the rating agency said in a report published Monday.
“Evolving remote or hybrid work practices, the growth of online shopping, and other factors will continue to drag on the recovery in public transit ridership to pre-pandemic levels compared with other U.S. transportation infrastructure asset classes,” wrote S&P credit analyst Joe Pezzimenti.
Current baseline activity estimates show public transit recapturing about 70% of pre-pandemic activity by the end of 2023 and only about 85% by the end of 2026, the S&P report said.
Moody’s Investors Service late last year revised its outlook for the mass transit sector to negative from stable “as transit systems confront a soft ridership recovery, impending federal aid cliff, inflation induced wage pressures, and uncertain tax revenue conditions in 2023.”
COVID-19 left a permanent mark, the rating agency said. “The pandemic has permanently changed ridership patterns and highlighted affordability and access considerations,” Moody’s said.
Ridership will continue to substantially lag pre-pandemic levels, depleted federal relief and the potential for a recessionary hit to tax collections that some transit agencies rely upon could drive budget gaps, Moody’s said.