Earlier this month, a Citizens Budget Commission (CBC) brief reported that the MTA owes $2.1 billion in debt service in 2012, and that figure is expected to grow to $2.6 billion by 2015. Currently, almost a third of all MTA fare and toll revenue goes to debt service, and in 2015, even after planned fare and toll hikes, that proportion will remain the same. This means that riders will be paying more to shoulder the same segment of the MTA’s debt, which will be $39 billion by 2015.

As distressing as these figures are, the CBC notes that the MTA could lighten its burden by refinancing, since today’s interest rates are extremely low. Given the size of the agency’s debt, the savings could be significant, and Bloomberg has reported that refinancing is on the table for almost $7 billion of it. The CBC’s brief breaks down how the MTA might do so, and its principles are as follows:

• Refinancing, properly done, is not necessarily a bad thing. “Substituting a lower interest rate for a higher interest rate without changing the other major terms of a loan is a good way to save money,” says the report.

• Back-loading a refinancing deal—an arrangement in which a borrower makes small payments for a few years while signing up to make hefty payments on the tail end of the loan—is a bad idea for two reasons. First, in a back-loaded loan, the MTA would save less money than it could otherwise, since the loan’s principal remains unpaid for so long. Second, shifting the bulk of the MTA’s debt obligation to future New Yorkers is unfair: in effect, the taxpayers of the future would be subsidizing the taxpayers of 2012.

• “Stretching” a refinancing deal—a practice in which a borrower pays back a refinanced loan over a longer period of time than the original—is also a bad idea. First, although the annual repayment costs might look lower, “stretched” refinancing doesn’t maximize the savings offered by reduced interest rates, since the loan’s obligations drag out. Second, stretching can lead to circumstances in which the borrower continues to pay for things beyond their useful lives. If, for example, the MTA took out debt to be used on a track upgrade that must be replaced after 20 years, but a debt deal extends the repayment period to 40 years, future taxpayers will be on the hook for the benefits enjoyed by today’s New Yorkers.

To read the full report, click here.

Towards a Solution

While bonding will always be a funding option for the MTA’s crucial, large-scale projects, the agency can’t continue to borrow unsustainably. The best way to keep the agency’s debt service payments down is for Albany to find more funding for the MTA, maintain at-risk revenue streams like the payroll mobility tax, and ensure that transit systems receive the state money already earmarked for their support (which doesn’t always happen). Tri-State and other advocates have been pushing a transit “lockbox” bill to ensure that dedicated funds are used to support the MTA and New York’s 129 other transit systems.