New York City and the Metropolitan Transportation Authority (MTA) have created a stir in the tri-state area as the MTA moves ahead with a controversial tolling program intended to reduce traffic in Manhattan's central business district (CBD) and raise billions of dollars for the fiscally challenged MTA. New Jersey’s Governor opposes the proposal, calling it “poorly designed” and vowing to “protect New Jerseyans” working in the CBD from being unfairly burdened. New Jersey is suing the Federal Highway Administration (FHWA) to challenge the government’s approval of the CBD Tolling Program.
The need for additional revenue streams at the MTA is exacerbated by the weak ridership recovery following the pandemic, as ridership in the MTA’s subways remains 60% of pre-pandemic levels. Weak farebox collections create operating pressures and challenge the agency’s ability to finance its $55 billion capital plan. Investors in municipal bonds are following the situation closely as the MTA is a frequent borrower in the $4 trillion municipal bond market with over $21 billion of transportation revenue bonds outstanding.
The MTA is not the only borrower that will be affected by the CBD Tolling Program, and the impact on each entity’s creditworthiness is not all the same. The following sections explore the CBD Tolling Program and the potential impact on several NY area credits.
What is the CBD Tolling Program intended to achieve?
The CBD Tolling Program is designed to reduce congestion in the Manhattan CBD, the commercial center of the New York City metropolitan region. As home to 22.2 million residents and more than 10.7 million jobs, the New York City metro area is the largest metropolitan region in the U.S. Approximately 1.5 million of these jobs are located within the CBD-proper. As cited in the CBD Tolling Program Environmental Assessment, nearly 7.7 million people come into Manhattan daily, with 75% utilizing transit options and 24% accessing the island by car. The resulting congestion has contributed to reduced travel speeds (22% decrease within the CBD since 2010), translating to 102 hours of lost time per driver per year. The related economic loss is estimated to be $1,595 per driver per year.
At the same time, the CBD Tolling Program is intended to provide a lifeline to the MTA. The MTA is a state authority which operates an integrated public transportation system for the New York City region, including the city and seven suburban counties. In 2019, prior to the pandemic, MTA subways and buses carried 1.7 billion and 557 million passengers, respectively. However, in 2022, MTA subways and buses carried just 1 billion and 343 million passengers, respectively (Figure 1).
MTA Subway Passenger Volumes
MTA as of April 2023.
Like most U.S. mass transit systems, MTA operations are not self-supporting, and the agency relies on government subsidies to make up operating deficiencies. Thus, while outside approval of fares and tolls is not required, the timing and amount of toll increases may be affected by other state, local, and federal financial conditions and budgetary processes.
The MTA’s $55.3 billion capital plan (2020-24) represents a substantial increase over the $33 billion 2015-2019 capital plan. Major components of the core capital program include $37 billion for New York City Transit (67%) and $5.6 billion each for the LIRR and Metro North. Importantly, 27% of the necessary funding ($15 billion) for the capital plan is to be generated from the CBD Tolling Program.1
How will the Central Business District (CBD) Tolling Program work?
New York State passed legislation in 2019 authorizing a toll on motor vehicles entering Manhattan south of 61st Street, excluding the FDR Drive and West Side Highway, with a two-pronged goal of reducing traffic congestion and raising revenue to fund the MTA’s capital needs.
The authorizing legislation sets the boundaries for the congestion zone, stipulates that passenger cars may only be charged once per day for entering or remaining in the zone, and provides residents of the zone with incomes below $60,000 per year a tax credit equal to congestion charges paid. As the legislation specifies the system must generate sufficient revenue to support $15 billion of bonding for the MTA capital plan, the more toll exemptions and credits offered, the higher the toll rates must be to meet the revenue target. Revenue derived from the system will be directed to a lockbox fund, with 80% of the proceeds devoted to NYC subways, buses and Staten Island Rapid Transit, 10% to the Long Island Railroad and 10% to the MetroNorth Railroad.2
Several scenarios have been proposed to meet the state’s dual goals of reducing congestion and raising revenue. The impact on traffic patterns and transit utilization would vary depending on the ultimate configuration of the program, resulting in varying environmental costs and benefits. Of note, unlike cars, trucks cannot shift to transit to avoid paying the toll; and would therefore likely divert around the CBD, increasing truck traffic in the surrounding communities (South Bronx and Staten Island identified in the EA).
How will the CBD Tolling Program impact Regional Municipal Credit?
Implementation of the CBD Tolling Program will have far-reaching effects, and there inevitably will be winners and losers. The most direct beneficiary will be the MTA, as it will gain a significant funding source for its capital program. Indirect benefits include likely increased transit ridership and reduced congestion in the CBD, easing bus travel through the area.
We expect the following issuers will also be impacted, positively and/or negatively, by the introduction of congestion pricing:
Tolling access to the Manhattan CBD is a complex proposal and key decisions remain to be finalized, as evidenced by the numerous tolling schemes under consideration. Despite New Jersey’s attempt to block the CBD Tolling Program by suing the FHA, PGIM Fixed Income’s Municipal Credit Research Team believes the MTA is likely to ultimately prevail. The introduction of a congestion toll is a potential disruptor, with far-reaching effects on many borrowers in the municipal bond market. As always with municipal credit, political considerations will affect the outcome. The potential impacts we outline above are a starting point and will evolve as the borrowers react. For now, we expect the Triborough Bridge and Tunnel Authority, as well as New York State and City, to be positively impacted, while the Port Authority of NY and NJ could be adversely impacted due to the potential for lost toll revenue. We will continue to monitor the impacts of this historic proposal on the NYC region, with particular attention to the unintended consequences of these decisions.
2 New York State Department of Taxation and Finance.