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The Explainer: What To Know About The MTA’s New Congestion Pricing-Backed Debt

You asked for it, you got it: a 2,000-word explainer on municipal bond sales.

Graphic: Viktor Shrum|

This man needs some bonds.

On Tuesday, the MTA took out a big loan backed by congestion pricing revenues, another monumental step in making the traffic toll a regular part of all of our lives. Congestion pricing supporters have been pushing the MTA to begin selling bonds backed by the traffic toll from the moment the first car drove south of 60th Street on Jan. 5, under the theory that once congestion pricing revenue was being used to sell bonds, the unbreakable link between debt holders and bond sellers would mean no one, not even Donald Trump, could tank the toll.

The theory isn't wrong, but it's also about to undergo an incredibly strong stress test. The ins and outs of municipal debt instruments can lead you down rabbit holes, but fortunately in addition to being a self-taught self-declared expert on federal environmental law and administrative procedure law, I am also a municipal bond expert happy to help walk you through it. (Actually, I talked to experts and here's how they answered my questions.)

So the MTA just sold a bunch of bonds on Tuesday that were backed by congestion pricing, so congestion pricing will be here forever now, right?

It's a little more complicated than that.

God it always is. OK, so what really happened then?

So on Tuesday, the MTA sold $500 million worth of Bond Anticipation Notes, also called BANs, which are not long-term bonds. BANs are a short-term debt instrument you can use to take out a big loan in advance of your eventual plan to take out an even larger long-term bond backed by money you expect to come your way in the near future, which you can use to pay for whatever it is you're borrowing money for. But you also need to pay back your initial BAN with the bond you just took out.

"Think about it like a credit card," said Ana Champeny, a vice president for research at the Citizens Budget Commission. "If you're carrying a $5,000 balance on your credit card, and you're getting hit with interest charges of $200 a month, but you're only paying $100, your balance is growing every time, and then you're having to pay interest on interest on interest."

In this instance, Champeny said that using a BAN to get some quick cash was preferable to the MTA tapping into its operating budget-backed debt which as we've gone over before is pretty tapped out.

Now, the MTA told its lenders it intends to pay them back using congestion pricing revenues.

Aha!

But the MTA also had to add an extra level of security to the note, in the form of the traditional, reliable and well-known toll revenues from its existing bridges and tunnels. But it's not some kind of secret financial chicanery.

MTA Chief Financial Officer Kevin Willens explained during a recent Finance Committee meeting that the agency will collect congestion pricing revenue for about a year to give bond traders a sense of how much revenue congestion pricing brings in. In the meantime, the MTA is bringing in some fast money it can afford to pay back so it can jumpstart some of the projects in the 2020-2024 capital plan that congestion pricing will eventually pay for. There's sufficient bridge toll revenue to that.

"[The] $500 million in short-term notes [will] kickstart ... congestion pricing projects," said Willens. "It's in the short-term note format, Triborough Bridge and Tunnel Authority guarantees it with the other revenues. This clearly has been described to the markets as these are borrowings are going to be taken out with congestion pricing."

Why are they waiting a year? Why don't they just do it now and say, 'To hell with the consequences!'?

The MTA is extremely serious about its relationships with the municipal bond market and debt holders, because no one else is lining up to hand them tens of billions of dollars. Look at how freaked out former MTA Chairman Pat Foye got a few years ago when I asked if the agency would hold those bondholders hostage in an attempt to get a COVID financial rescue:

The MTA is also at the mercy of what its lenders say that MTA bonds are worth. And since congestion pricing is new, and since it's still surrounded by enemies, the people who loan the MTA money see risk. And when those people see risk, they feel better about it by slapping a higher interest rate on their loans.

“A BAN is less risky than a long-term bond to which you’re going to pledge congestion pricing revenue when the system’s only been running for a month. So the MTA is providing a backstop to investors who may not want to purchase debt only backed by congestion pricing revenues, which is very risky or could cost the MTA much more because of that higher risk,” said Champeny.

What's the risk here? We live in a nation of laws and repealing congestion pricing by presidential fiat would be illegal.

Ha ha.

Seriously.

OK fine, you can look around today and insist we live in a nation of laws. But people whose job it is to assess the risk in giving the MTA one or two billion dollars to be paid back with by congestion pricing do think about the way things are right now, not the way we want them to be.

"The potential threat of adverse federal government tinkering in the revenue stream makes this situation quite unusual," one bond rater not authorized to speak by his employer told Streetsblog. "Typically, when investors are buying bonds, they're making assumptions about the likelihood of the revenue continuing. In public sector projects and governmental borrowings, it's usually not a question. But the notion that a higher level of government could somehow intervene and derail the revenue stream is a very unusual set of circumstances, and if that is hanging out there, it might make it hard for people to get comfortable buying these bonds."

And like Champeny, that bond rater also agrees that if there are big blinking red lights around congestion pricing-backed debt right now, the only people willing to buy it would be the people who see money in the risk, which in turn means the MTA is spending more money on paying back debt as opposed to paying someone to drive you and your date home on a G train on Saturday night.

Before you ask, this is also why Champeny said there's a risk in constantly backing congestion pricing borrowing with bridge and tunnel tolls.

"If you're backing it with TBTA dollars, any excess toll revenue that isn't needed to maintain the bridges and tunnels or pay debt service on bridge and tunnel tolls goes to the operating budget as a surplus. But if I have to take $500 million of TBTA dollars to pay back these bonds, that's $500 million that I can't move to the operating budget," she said.

And don't forget that there are other ways for the federal, or even state, government to interfere in congestion pricing. One of the bills from Reps. Josh Gottheimer or Nicole Malliotakis that strips federal funding from any state that implements cordon pricing could wind up in an omnibus spending law. A bunch of jokers in Albany are trying to kill the toll with a million exemptions and carveouts. The federal EPA or DOT can ruthlessly mess with the ability for New York State to move forward on projects that need approval from those agencies until the state agrees to kill or severely weaken the toll.

But! But! The bond covenants! Why is there a Photoshop of Janno Lieber's head on Robert Moses's body like Lieber is some kind of world-swallowing force of building backed by unbreakable contractual guarantees?

Because it's funny, duh (but also because Moses was a genius of using toll revenues to sell bonds). But yes, the bond covenants. It's true that when you sell bonds, you enter into unbreakable contracts with the buyers that require them to lend you money at an agreed-upon price and for you to pay them back on agreed-upon schedule.

The Constitution, whatever that's worth these days, specifically says a state can't pass laws "impairing the Obligation of Contracts." Taking a hammer to congestion pricing revenue after the MTA has entered into contracts that say "MTA Bridges and Tunnels intends to pay principal of and interest on the notes from amounts derived from the CBD Tolling Program (as defined herein)" would be pretty explicit interference with a contract.

And if, if, the MTA sold bonds and those bonds were literally only backed by congestion pricing revenue and nothing else, bondholders would have nothing they could sue the MTA for except for this suddenly non-existent revenue.

Unfortunately, people who buy bonds usually aren't that stupid, and so they probably wouldn't rush out to lend massive amounts of money in exchange for something that seems riskier than usual. Could New York State offer to backstop the bonds to add a little extra security and keep investors calm? The State Comptroller's office said that yes, New York can do that, but the move would require a law passed by the Assembly and state Senate and then signed by the governor. And since the federal government almost never backs other lenders' bonds, bondholders also wouldn't rush out to sue the federal government for interfering in their business when they can just sue the debt peons who owe them money no matter what (the MTA).

Would the law help the MTA in the event the agency sells bonds backed by congestion pricing, the federal government tries to put the kibosh on the toll and the MTA in turns sues the federal government over an obvious and stupid and clumsy interference in its contractual obligations? Maybe.

"There might be some legal issues where it would bolster the MTA's, or, by extension, New York State's legal defenses to create the financing before some interference by the federal government. And then they could say you can't do this because of the contracts clause in the state constitution as well as the federal constitution," the bond rater, who is not a lawyer, told Streetsblog.

So we're just screwed, again? Life is simply a constant cycle of suffering?

No calm down, I didn't say that. For one, in the same way that lawyers never agree on anything, municipal bond experts disagree on how eager people would be to buy congestion pricing debt. For instance, one such expert said that traders yearn for muni bonds, and that even in risky deals bondholders have ways of protecting themselves from losing everything they've lent.

"Municipal issuers often include something called 'extraordinary redemption' features that allow bondholders to collect their investment with some haircut if something ever happens to the revenue source," Paul Williams, the executive director of the Center for Public Enterprise. "The appetite for government bonds has been healthy for for many years, and I expect that it would be similar here."

You also need to keep in mind that congestion pricing's current political peril isn't set in stone. If people see and feel less gridlock, if they see the MTA buying zero emissions buses and installing elevators and it's paid for by congestion pricing, positive public sentiment could make it difficult to take the toll away. That is absolutely a piece of why the MTA issued short-term notes this week.

"For [the MTA], the more that they can solidify that this is here to stay, and it's a funding source and it is contributing to capital, the better I think they are positioned," said Champeny.

The MTA itself has been willing to play offense on this issue, rolling out data to show how much traffic has dropped inside the Manhattan cordon, holding press conferences to link electric buses to congestion pricing and sending Janno Lieber to yap it up on one of the worst shows on television. The initial batch of good news has even woken up Gov. Hochul, who took aim at Congressional Republicans opposed to the toll.

"You oppose this?" Hochul said last Friday. "Your constituents are getting to work sooner now, but you don't seem to care."

And the public itself seems to be noticing that congestion pricing can actually be good. Six in 10 New Yorkers don't want the president to unilaterally get rid of congestion pricing, and 37 percent of New Yorkers now support the toll compared to 32 percent who supported it before the toll began. So slowly but surely, congestion pricing can become normal and as it becomes normal selling bonds backed by the toll looks more and more normal to the market. So, you need to fight for congestion pricing, still.

I am tired of fighting and want this to be over.

Yeah well if that were true and you really wanted things to be easy, you wouldn't have read a 2,000-word explainer on municipal bond sales.

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