RTA Debt Aversion and Service Board Capital Needs

It is safe to say that whether you are a homeowner or a public agency, all things being equal the less debt you have the better. But all things are not equal. When the cost of underinvestment in capital assets in form of higher maintenance costs, operating inefficiencies and customer dissatisfaction outweighs the cost of the debt necessary to bring those assets into a state of good repair then issuing more debt makes good sense.

It is a given that certain parts of the region's public transit system are showing the costly effects of such underinvestment. The slow zones on the CTA rail lines are one dramatic example. A less dramatic but quite costly example of underinvestment is the fact that many CTA buses have missed their mid-life rehab, burdening the CTA with more mechanical breakdowns and higher maintenance costs.

Has the RTA been too conservative with respect to leveraging its cash flow to raise more capital money by issuing more debt? The RTA's 2007 Budget Book indicates (pg. 40 of 146) that the RTA is spending just 8% of its total annual funding on debt service.

The RTA Act mandates that the RTA's sales tax revenue must be at least 2.5 times as large as its debt service requirements (2007 Budget Book at pg. 70 of 146). In 2005, 2.5 time the RTA's debt service was $448,840 while the RTA's sales tax revenue was $700,395. This means that the RTA had $251,555,000 available but unused for debt service in 2005. By way of comparison, RTA's actual debt service requirement in 2005 was $179,536,000.

In other words, the RTA potentially has available a quarter of a billion dollars each year to service additional debt. If we assume that $1 of debt service can cover $10 of debt, the the RTA could in theory raise an additional $2.5 billion in capital for the service boards by leveraging its existing sales tax revenue to the maximum extent allowed.

I stress that this is in theory. There are at least three obstacles in the way of the RTA fully leveraging its sales tax revenue to raise more capital:

First, the RTA Act limits the amount of debt that the RTA can have outstanding. Presumably, the General Assembly would be happy to raise this debt limit if it was informed that the RTA would look to its own resources, rather than an increased State subsidy, to service the newly issued debt.

Second, the RTA has been forced to use most of its discretionary funds to make up the sales tax revenue shortfall the CTA faces under the statutory formula for allocating sales tax dollars to the service boards. The RTA would be robbing Peter (CTA operating funds) to pay Paul (RTA bondholders) in order to raise capital funds that presumably would be shared among the three service boards. The CTA would probably prefer slow zones and long-in-tooth buses to having its operating funding be diverted to provide capital funding for all three service boards.

Third, the RTA generally has not been inclined to view the shortage of capital for certain segments of the region's public transit system, namely the CTA, as a priority issue so long as Metra's capital needs were met. By giving Metra a preferential share of capital funding year after year the RTA could both keep its favored service board in good shape and limit the overall demand for its capital funding. This approach allowed the suburban interests that controlled and likely still control the RTA Board to be able to deliver top-notch commuter rail to their constituents and appear to be fiscally prudent.

In sum, with some creativity and a willingness to assume more risk the RTA might be able to leverage an infusion of operating dollars to obtain more capital. It would do so by using the additional money to free up its discretionary sales tax money to back more bonds. The new operating dollars would replace the discretionary money that now goes to the CTA. Whether the RTA has the will to move beyond its arbitrary distribution formula for capital funds to a needs-based allocation process is another matter.