revenues and intergovernmental subsidies; sales
taxes and other nontransit-related revenues actually
secure most bonds issued for transit purposes.Demand
Evaluation of demand for a start-up facility is diffi-
cult and centers largely on determining the plausibili-
ty of traffic and engineering studies. Generally,
Standard & Poor’s would have difficulty rating a
start-up mass transit facility bond or other transit-
like rail project in the investment-grade categories if
the system had no operating history and was backed
solely by farebox revenues. Localities that have only
limited public transportation service need a major
marketing effort to persuade commuters to forego
driving. Many people who vote positively for transit
projects have no intention of using them regularly;
they are seen as a method of getting other people off
the highways. New transit systems rarely achieve
their projected ridership. Nevertheless, if a system
can reduce travel time significantly at reasonable cost
in a safe environment, it will attract some motorists.
Ridership can be enhanced by establishing link-
age with suburban transit systems; around the
country “Park and Ride” programs, where
motorists can park at the exterior terminuses of a
system and complete their commute by rail or bus,
have been highly successful.
For established systems, the historical demand
and the relative competitiveness of alternative travel
modes are reviewed. Virtually every metropolitan
area with an established network also has a regional
transportation commission responsible for coordi-
nating the planning and development of all methods
of transit. Since members of the commission are
appointed by governors or other elected officials,
their past policies and practices provide a valuable
measure of how public policy has been used to
attract commuters to a transit system. With an
established system, there is an evaluation of histori-
cal ridership patterns and departures from these pat-
terns following fare increases and during economic
downturns. These trends are a rough measure of the
value of transit for users and their willingness to pay
increasing amounts for the service.Operations
Because mass transit systems are capital intensive
and generally have deficit operations, these systems
rely heavily on governmental support. This is com-
pounded by the fact that fare increases generally
evoke strong negative reactions from users, there-
fore revenue flexibility is often limited. As a result,
most transit systems rely on government subsidies
or the pledge of tax revenues in addition to farebox
revenues. Standard & Poor’s reviews the history of
these additional revenue sources and the stability ofthis revenue stream. In particular, Standard &
Poor’s looks to the ability of management to close
any projected operating deficits through its ability
to raise revenues either through fare increases or
increased other revenues or through operational
cutbacks. The ability of management to contain
costs and increase labor productivity is especially
critical because wages and benefits account for well
over half of total operating costs in this labor-inten-
sive industry.
For older more established systems, operating
deficits can also mean that maintenance programs
have been neglected or there is significant deferred
maintenance. As a result, Standard & Poor’s exam-
ines the mean distance between failures in each year
so as to determine the overall state of repair for the
system. Standard & Poor’s is especially attentive to
maintenance procedures, since no system can
attract new ridership or retain existing users if the
equipment is subject to frequent breakdowns.
In examining capital improvements and exten-
sions, the feasibility of the project, usually as deter-
mined by an independent engineering firm, and the
logic of the assumptions supporting the conclusions
are studied. The project also is evaluated within the
context of the regional transportation commission’s
overall planning and the adequacy of pledged rev-
enues to cover debt service on the debt to be issued,
as well as any parity debt that is outstanding.Legal Provisions
Given the weak financial condition of transit sys-
tems, legal provisions are important to an invest-
ment-grade rating. Where the pledged security is a
gross lien on farebox revenues, Standard & Poor’s
looks to both historical coverage of debt service
obligations and covenants related to additional
indebtedness in order to provide bondholder pro-
tection from revenue declines that could not be mit-
igated by reducing operating expenses. In practice,
most operators view farebox revenues as a supple-
mental source to provide leverage and do not look
to maximize this type of debt. Rate covenants may
not provide credit strength to the extent most oper-
ators exhibit a general lack of revenue flexibility.
Standard & Poor’s evaluates the practical aspects
of such a rate covenant against what is frequently a
highly charged political atmosphere and litigation
that delay or change proposed fare increases. Some
issuers of transit revenue bonds try to compensate
for what is seen as a weakness in the rate covenant
by supplying an exceptionally high multiple in the
additional bonds test. Those tests that include only
historical revenues are significantly stronger than
any test allowing projected revenues. A fully funded
debt service reserve helps provide liquidity in times
of cash flow stress.■Transportation150 Standard & Poor’s Public Finance Criteria 2007