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DECEMBER 19, 2011

U.S. PUBLIC FINANCE

SPECIAL COMMENT

MTAs Operations Could be Strained by Reduction of New York State Payroll Mobility Tax
Summary
1 2 3 4

Table of Contents: SUMMARY PAYROLL MOBILITY TAX IMPLEMENTED IN 2009 TO STABILIZE MTA OPERATIONS PMT REDUCTION INCREASES MTA VULNERABILITY TO STATE BUDGET-CUTTING ACTIONS CONCLUSION

The MTA expects to lose about $212 million in payroll taxes in calendar year 2012 and approximately $310 million annually thereafter due to a tax reform package enacted by the state last week. While the state plans to compensate the MTA for the lost revenue from the payroll tax reduction, specifics are not yet available. However, the compensatory revenues would be subject to appropriation and are uncertain as the state still has to close a $1.7 billion fiscal 2013 budget gap. The states vote to reduce a substantial new revenue stream implemented only two years ago signals a shift in government support for the MTA. It comes at a time when the MTA plans to increase its borrowing to maintain and expand the largest transit system in the country. The increased leveraging of the MTAs existing and future resources reflects the lack of new sources of capital funding, a shortfall that the payroll mobility tax (PMT) was intended to help fix. With limited revenue raising options of its own beyond planned fare and toll increases, the MTA is already keenly focused on reducing operating expenses to address projected budget gaps. Now, a dedicated revenue source is being reduced and the replacement funds could be vulnerable to state budget cuts. Future credit assessments will focus on the details of the states backstop. The MTAs financial operations are already tight, and failure to restore the lost revenue may put negative pressure on the MTAs transportation revenue bonds (TRBs), rated A2 with a stable outlook.

Analyst Contacts:
NEW YORK 1.212.553.1653

Nicole Johnson 1.212.553.4573 Senior Vice President nicole.johnson@moodys.com Baye Larsen 1.212.553.0818 Vice President-Senior Analyst baye.larsen@moodys.com Emily Raimes 1.212.553.7203 Vice President-Senior Analyst/Manager emily.raimes@moodys.com Robert A. Kurtter 1.212.553.4453 Managing Director-Public Finance robert.kurtter@moodys.com

U.S. PUBLIC FINANCE

Payroll Mobility Tax Implemented in 2009 to Stabilize MTA Operations


The PMT is a 0.34% tax (34 cents per $100) on payroll expenses of most employers (both public and private) and the self-employed in the MTA transportation district, consisting of New York City and seven surrounding counties (Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester). In 2009, the state legislature approved the PMT and certain motor vehicle-related supplemental taxes and fees to provide recurring resources to enable the MTA to close the large budget gaps that it forecasted for 2010 and succeeding years. The projected shortfalls stemmed from the recessions negative impact on a variety of MTA dedicated tax revenues and on system utilization; sizeable fixed costs for labor expenses; growth in uncontrollable expenses such as pension fund contributions to offset investments losses; and escalating debt service costs due to borrowing for capital projects. Before the PMT was approved, the MTA planned severe service reductions and substantial fare hikes in order to balance its budget. PMT collections underperformed the states initial estimates at its inception, with fiscal 2010 revenues about 12% lower than projected. Since then, forecasts which are based on actual collection experience have been met and approximately $1.4 billion in PMT revenues are expected in 2011 (see Figure 1). The tax has been an important new resource for the MTA, expected to total 13% of revenues available for TRB debt service in 2011 (see Figure 2). The PMT is not pledged to the TRBs but is used by the MTA to pay debt service and operating costs. The additional resources provided by the PMT along with a successful, continuing budget reduction program and planned biennial fare and toll increases have thus far helped the MTA weather the economic weakness that continues to negatively affect its revenues and system use.
FIGURE 1

Payroll Mobility Tax Stabilized at Lower Level


Nov 09 2,000 1,800 Feb 10 Nov 11

Payroll Mobility Tax ($ millions)

1,600 1,400 1,200 1,000 800 600 400 200 0 2010 2011 2012 2013 2014 2015

Source: MTA Financial Plans

DECEMBER 19, 2011

SPECIAL COMMENT: MTAS OPERATIONS COULD BE STRAINED BY REDUCTION OF NEW YORK STATE PAYROLL MOBILITY TAX

U.S. PUBLIC FINANCE

FIGURE 2

MTA Transportation Revenue Bonds Pledged Revenues 2011


Payroll Mobility Tax 13% Real estate related taxs [5] 4% MMTOA Receipts 12% Aid Trust Account Receipts 3%

Transit fares 35%

St/Local Op Subsidies [2] 12% Dedicated Tax Fund Excess [3] [4] TBTA surplus 2% 5%

Commuter fares 11% Other operating revs [1] 4%

[1] Includes other income from ads, certain concessions, and MTA Bus fares [2] Includes city subsidy for MTA Bus (3.4%) and Maintenance/Service Reimbursement (4.1%) [3] Includes portions of sales, petroleum, and transportation taxes. [4] After payment of debt service on dedicated tax fund bonds [5] Urban tax and excess mortgage recording taxes

PMT Reduction Increases MTA Vulnerability to State Budget-Cutting Actions


The tax reform act eliminates the PMT for employers with payrolls under $1.25 million, and reduces the rate to $0.11 per $100 for those with payrolls under $1.5 million and to $0.23 per $100 for employers with payrolls under $1.75 million. The measure includes a provision for the state to replace the MTAs lost revenue. Although the specifics of that mechanism have not been outlined, there are several potential risks: 1) The funds could be vulnerable to a reduction in appropriation amounts, particularly during times of state budget stress, as has occurred in recent years. 2) The actual size of the revenue loss is uncertain and could be higher once estimates of the affected base are finalized. 3) If the replacement money is a fixed amount, the MTA will not benefit from economic growth in the PMT assessment base (see Figure 3).

DECEMBER 19, 2011

SPECIAL COMMENT: MTAS OPERATIONS COULD BE STRAINED BY REDUCTION OF NEW YORK STATE PAYROLL MOBILITY TAX

U.S. PUBLIC FINANCE

FIGURE 3

MTA Revenue Loss May Grow Over Time Due to PMT Repeal
Nov 11 [1] 1,750 1,700 1,650 1,600 1,550 1,500 1,450 1,400 1,350 1,300 1,250 2011 2012 2013 2014 2015 Post repeal [1] [2]

[1] Base growth rates as reflected in MTA November 2011 Financial Plan [2] Includes PMT replacement by state - $212M in 2012 and $310M annually beginning in 2013

The MTA faces additional PMT-related risks as well. The constitutionality of the tax is being challenged by several counties, towns, villages, school districts, and private plaintiffs. The possible outcome and timing of those lawsuits is unknown. The loss of the entire revenue stream would create a significant financial challenge for the MTA. However, in September a summary judgment was granted to the MTA and the state defendants ordering dismissal of the lawsuits in three of the eight proceedings.

Conclusion
The PMT was implemented to stabilize the MTAs financial operations and provide adequate funds for the authoritys massive capital maintenance and expansion projects. The tax has been controversial since its inception and underperformed initial estimates before stabilizing at about $1.4 billion in 2011. Going forward, the MTA faces increased funding uncertainty since the $310 million in annual lost payroll taxes will be replaced by the state and subject to appropriation. The state has a history of reducing MTA appropriations when faced with its own budget challenges. Depending on the details of the states backstop revenue, the MTA may face additional financial strain that could put negative pressure on the MTAs transportation revenue bonds (TRBs), rated A2 with a stable outlook.

DECEMBER 19, 2011

PMT ($ in millions)

SPECIAL COMMENT: MTAS OPERATIONS COULD BE STRAINED BY REDUCTION OF NEW YORK STATE PAYROLL MOBILITY TAX

U.S. PUBLIC FINANCE

Report Number: 138297

Author Nicole Johnson

Senior Production Associate Ginger Kipps

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DECEMBER 19, 2011

SPECIAL COMMENT: MTAS OPERATIONS COULD BE STRAINED BY REDUCTION OF NEW YORK STATE PAYROLL MOBILITY TAX

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