SFMTA Considers Issuing Bonds to Finance Capital Projects

Staff at the San Francisco Municipal Transportation Agency (SFMTA) and its consultants presented the SFMTA Board of Directors yesterday with a rough sketch outlining the steps needed to get a municipal bond rating and consider issuing bond debt to pay for capital projects. They emphasized the opportunity to issue debt to pay for projects in a very competitive construction environment, but highlighted the implications of such debt on future operating expenses.

Only a handful of agencies in San Francisco have the power to issue debt and Controller Ben Rosenfield stressed to importance of wielding it judiciously at the SFMTA board meeting. "It's a very powerful tool you can use to meet many of the pressing needs the agency has, but it comes with long-term implications for both the MTA and the city that all of us need to take very seriously and weigh very heavily," said Rosenfield.

He also noted the decision to bond capital projects at the SFMTA would have an impact on other agencies in San Francisco, including the Public Utilities Commission, the Port and the San Francisco Airport. "We all need to be cognizant of actions that each of us is taking because they require us to maintain relationships in many cases with the same banks, underwriters, the same institutions where the action of one agency reflects on the city and county as a whole, not just on the MTA," he said.

Peter Ross of Ross Financial, one of the consultants hired by the SFMTA to usher them through the process, told the SFMTA board he thought some of the bad publicity around a so-called municipal bond bubble was overblown. He said in the end, very few municipal bonds had defaulted, nor did he think many more would.

Though it is premature to guess the credit rating investment grade the agency might get from major rating companies like Moody's or Fitch, Ross believed the SFMTA would get a good rating based on its profile. He said the agency's numerous revenue streams, particularly parking, would be significant, but he argued Muni's "essentiality" to San Francisco would be one of the defining factors.

"The city largely depends on transportation," said Ross. "It's what moves working people from their homes to their place of office. It's the most direct municipal service that many people experience on a regular basis and you can't not provide that."

Ross also pointed to the city's Transit First policy and said he believed the rating agencies would consider that a plus. "You're looking at the essentiality of the service and Muni is certainly essential. It underpins many many transportation ratings and that's one of the biggest things Muni has going for it," he said.

SFMTA CEO Nat Ford said he welcomed the opportunity to bond for "mission critical projects" and believed the agency could strategically identify investments in capital that would save money over the long run by leveraging federal investment and reducing maintenance costs. Asked to list projects he would consider for debt financing, he said completion of the Central Subway, light rail vehicle rehabilitation, and bus replacement.

"Accelerating these capital projects saves you operating dollars. If you've got a newer fleet, if you've got newer vehicles, it's less maintenance costs, in some cases it's fuel efficiency," said Ford. "That's why sometimes it's better for you to issue a bond, advance some of that capital money now to do improvements that save you operating dollars over the cost of that asset."

Though voters gave the agency the power to issue bonds with the passage of Proposition A in 2007, the SFMTA had yet to move forward with the process to become a debt issuer. The agency does have over $50 million in debt on several parking structures, projects initiated by the former Department of Parking and Traffic and largely paid for with parking revenue. Most of that debt will be fully repaid by 2020, with one project loan term expiring in 2030.

Ford argued that voters had twice affirmed the importance of using assets like parking revenues to improve Muni service with passage of Proposition E in 1999 to merge the DPT with Muni and further in 2007 with the passage of Proposition A. "Basically the voters are saying this agency and its financial vitality are critical," he said, noting the significant role parking revenues will have in allowing the agency to issue debt. "There is a lot of support for the agency going forward. It goes into the leadership team, the governance structure of the board. It's a credit check of some sort in terms of confidence for our ability to repay very substantial bond issuance and debt."

Andrew Sullivan, a spokesperson for Rescue Muni who lobbied for Proposition A and the SFMTA's ability to issue debt, said he hoped the agency would take advantage of low construction costs to expedite numerous projects, though he felt the agency shouldn't just look at vehicle maintenance and the current Central Subway funding gap.

"In an era where construction costs are variable, if they can do a construction or maintenance project up front," that is huge asset, he said. He warned, however, of other agencies around the country that went into debt based on revenues they assumed were stable, only to find out those funds were decimated because of the recession. "They need to make sure the source of revenue they bond against is really stable."

Sullivan's priority list was markedly different from Ford's, and he said the agency should focus on projects that will "pay off soon and will still be in good repair when the debt is retired."

Sullivan argued debt issuance to pay for the mid-life rebuild of the SFMTA's LRVs may not be the best option because the vehicles will need to be replaced by the time the debt is retired. He hoped the agency would elevate the Van Ness and Geary bus rapid transit projects to the top of the list, followed by renovation of existing subways and tracks. If the agency were going to use debt for the Central Subway, he said it should go to a North Beach extension. San Francisco has put enough local money into the existing Central Subway plan, he argued, and said the balance should be leveraged federal grants.

The authority to issue debt will ultimately rest with the SFMTA Board. Chair Tom Nolan expressed optimism, noting the agency's slightly improved farebox recovery numbers over the past few years and the significant leverage parking revenues gave them. Nolan said he had experience on the SamTrans and Caltrain boards with debt issuance and felt the opportunity for the SFMTA was significant.

Though he said he would wait for the process to play itself out before picking projects, he said the Transit Effectiveness Project proposals should be a priority.

"I think it's an exciting opportunity for us to really move some things ahead," he said.