7/27/2019 Chairman Bonding Memo.pdf

1/4

1

175 W. Jackson Blvd,

Suite 1650

Chicago, IL 60604

312-913-3200

rtachicago.org

To: RTA Board of Directors, President/Chairmen of Cook, DuPage, Kane, Lake, McHenry and Will

Counties and the Mayor of Chicago

From: John Gates, Chairman of the Regional Transportation Authority Board

Date: October 28, 2013

Re: Centralized and Expanded Bonding Authority

Centralized and Expanded Bonding AuthorityIn continuing to discuss legislative changes that can be implemented to improve the functioning

of the RTA and the Service Boards, this memo will focus on the regions borrowing and will outline the

RTAs need for additional short-term and long-term borrowing authority. Additionally, the memo will

discuss the regions capital needs and the importance of the RTA as the centralized bond issuer for

each of the Service Boards. State and federal capital dollars are drying up, leaving the RTAs bonding

authority as the only method capable of generating large amounts of capital funding. Without this

meaningful investment, our system will continue to deteriorate to the detriment of all transit riders.

The RTA Should be Given Centralized Bonding Authority

a) Current Situation: The RTA and each of the Service Boards have borrowing authority underIllinois law. Metra was given the authority to issue $1 billion in bonds in 2008. Metra has

chosen not to issue any bonds despite the fact that it has more than $9.7 billion in capital

needs. Pace has just recently been authorized to issue $100 million in bonds for a few specific

projects, but they still have capital needs in excess of $2.2 billion. The CTA has unlimited

bonding authority under the Metropolitan Transit Act, although the RTA has put some limits on

the CTAs ability to issue debt secured by the CTAs allocation of federal formula funds. Even

with CTAs active bonding practice they still have a state of good repair need in excess of $19.1

billion.

b) The Problem: The Service Boards separate bonding authority has been costly, wasteful and, inthe case of Pace and Metra, non-existent. The Service Boards are not in a position to individually

borrow money for capital projects in the most cost-effective and consistent manner. Despite

the fact that the CTA has utilized its bonding authority in the past, it is no longer fiscally

7/27/2019 Chairman Bonding Memo.pdf

2/4

2

advantageous for it to do so. The CTAs debt is currently at $6.0 billion including $1.7 billion of

Capital Leases. This large outstanding debt has forced the CTA to defer principal payments

which has resulted in substantially increased interest payments. This back loaded structure

results in CTA not making principal payments in some cases for upwards of 16 years. CTAs

practice of deferring principal payments significantly increases the amount of interest compared

to level debt service. There are several other problems with the CTA continuing to issue debt

including that:

a. The CTA bondholders hold a junior lien to that of the RTA;b. The CTA only extends a limited pledge to its bondholders meaning there is no guarantee

that the repayment of bonds will take priority over everything else such as continuing to

provide services;

c. The CTA does not have a reserve fund requirement and its most recent bond issuancehad no reserve fund;

d. The CTA has paid more on average over the past ten years for professional servicesassociated with its bond issuances than the RTA; and

e. On October 25, 2013, Moody's downgraded the CTA sales tax revenue bonds to A1 -negative from Aa3. CTAs rating is lower than RTAs Aa3 - stable.

In fact, for every billion dollars of bonds issued in the past 10 years, the CTA has spent nearly $2

million more on professional services than has the RTA. This is partly attributable to the fact

that while the RTA only has one or two financial advisors associated with each of its bond deals,

the CTA often has numerous financial advising firms working on each of its issuances, at times

the CTA has had as many as 13 firms working on one bond issuance.

c) The Solution: The RTA should be the central bonding agency for all of the Service Boards. All ofthe Service Boards have substantial capital needs and yet only the RTA is positioned to borrow

in a regional and financially prudent manner. The RTA is rated AA by all three major rating

agencies and has been recognized as one of the most responsible borrowing transportation

entities in the nation. The RTA has the authority to borrow up to $800 million and currently has

$658 million in bonds outstanding.

Allowing the RTA to issue bonds will allow the Service Boards to focus on their primary

responsibility - providing safe, efficient and reliable transportation services to the regions

taxpayers. One of the RTAs responsibilities is to ensure that the entire regions financial needs

are being met. This makes the RTA the ideal central bonding agency. RTA bonds are secured by

an assignment of a lien on the sales tax imposed by the RTA. Sales tax receipts are sent directly

to a trustee who only makes the funds available to the RTA after all debt service payments have

7/27/2019 Chairman Bonding Memo.pdf

3/4

3

been made meaning that all RTA bond holders hold a senior lien that cannot be jeopardized by

other needs.

Additionally, the RTA has a revenue test that limits debt service to 40% of the average annual

sales tax over the previous 24 months. This requirement is more stringent than the CTAsrequirement which limits debt service to 50% of all funding during the highest 12 contiguous

months of the prior 18 months. By ordinance, the RTA is required to fund a reserve for all

bonds. This reserve fund is where funds are placed to be applied to debt service in case

pledged revenues are insufficient to satisfy the debt service requirements. Money is set aside

in order to instill even greater confidence that the RTA will be able to repay its lenders and this

usually leads to a more favorable interest rate. As noted above, the CTA does not have a similar

reserve requirement.

Increase the Long-Term Finance Capabilities of the RTA

a) Current Situation: The RTA is authorized to issue up to $800 million in bonds and is responsiblefor paying all of the debt service on these bonds with no financial assistance from the State.

b) The Problem: The regions current existing capital needs are more than double the funding thatis currently available from state and federal sources. As a result of the latest asset condition

report findings in 2012, it was determined that the region faces a $31 billion infrastructure

deficit over the next 10 years. In recent years federal and state capital funding have been

insufficient to meet the infrastructure improvement needs of the region. State and federal

capital dollars are dying up, therefore the only method capable of generating large amounts of

capital funding is the RTAs bonding authority. Without this meaningful investment our system

will continue to deteriorate to the detriment of the rider.

Under current law, the RTA can borrow up to $800 million. That amount has not been

increased since 1999 (when it was increased from $500 million) and has been increased by just

$300 million in over 30 years.

c) The Solution: To address the lack of capital dollars available to the Service Boards, the long-term capital financing authority of the RTA should be increased to $5 billion. While the RTA

would not utilize all of the newly granted borrowing authority immediately, it would haveflexibility to borrow at the right time based on market conditions and need. As Illinois seeks a

long-term federal solution to our State of Good Repair needs, the RTA cannot sit idle but rather

must act on the challenges that we face today. We have to be creative with what we have and

show progress on our commitment to the state of our system.

7/27/2019 Chairman Bonding Memo.pdf

4/4

4

The RTAs Short-term Bonding Authority Should Be Extended in Order to Cover Late State Payments

a) Current Situation: The RTA Act authorizes the RTA to issue up to $100 million in short-termdebt. These so called working cash notes can only be issued in anticipation of tax receipts or

other RTA revenue in order to provide money for the RTA or the Service Boards to coveranticipated cash flow deficit. These notes may not be issued for longer than 24 months at a

time. This $100 million limit has been extended several times in the past few years to $400

million to allow the RTA to borrow money to cover the delay in state payments due to the RTA.

Each time this borrowing limit has been extended to $400 million, it has only been extended for

two years at a time. This has resulted in the RTA requesting from the General Assembly that

this amount be extended on three separate occasions.

b) The Problem: In recent years, due to the condition of the States economy, state payments tothe RTA have been consistently delayed. While the extension in borrowing authority is

necessary to keep the Service Boards fully operational, the two year sunset provides a

challenge for the RTA to issue the short-term debt in the most cost-effective manner. The RTA

does not wish to issue any more short-term debt than it must in order to adequately cover the

States late payments. However, because the borrowing authority extension sunsets every two

years, the RTA is limited as to when it can issue this debt. Specifically, in order to ensure that it

is borrowing money in the most cost-effective manner, it is necessary that the RTA have the

option to issue short-term fixed rate notes or commercial paper. In order to issue commercial

paper, the RTA needs to obtain a letter of credit from a financial institution backing the

issuance. However, a letter of credit will only be issued for as long as the RTA has the authority

to borrow money. If the RTAs authority to borrow money ends every two years when the

extension sunsets, the letter of credit will not be extended past that date. Consequently, as the

sunset date approaches every two years, the RTA must guarantee that it will continue to have

the authority to borrow the money (i.e. the General Assembly must extend the borrowing

authority) otherwise it will be unable to issue commercial paper. Without this guarantee, the

RTA would be forced to issue fixed rate notes, with no option of issuing commercial paper,

which may not be the most cost-effective way to borrow.

c) The Solution: The General Assembly should grant the RTA the ability to issue short-term debtup to $400 million on a permanent basis. This will allow the RTA to issue these short-term

notes, when it is necessary, to cover late State payments and will ensure that the RTA is

obtaining the best possible borrowing rate. Allowing the RTA to issue working cash notes does

not cost the State any additional money and allows the Service Boards to continue to operate

without requiring services to be cut.