SEPTA’s smart new debt

PHILADELPHIA TRANSIT riders can finally join their counterparts in other major cities and turn their tokens and paper tickets in for more modern electronic cards. Last week, SEPTA announced it would borrow $175 million to modernize the agency’s fare-collection system.

The move comes on the heels of an announcement that the agency will borrow $252 million to buy 120 new train cars and renovate the Wayne Junction interchange. Together, the funding for these three projects represents the largest amount of debt undertaken in SEPTA history.

Should we panic? After all, SEPTA has spent much of its life trying to escape fiscal crises – and only sometimes succeeding in avoiding meltdown. For example, after years of battling to get funding in Harrisburg, the Legislature finally passed Act 44, a plan to provide SEPTA – and other mass transit around the state, plus roads and bridges – with long-term funding. Much of that funding would come from tolling I-80.

But last spring, the federal government rejected the state’s petition to put tolls on the highway. Hence, SEPTA’s decision to borrow the money for improvements.

Despite the size of the loan, we approve. SEPTA’s plans make financial sense.

First, it is spending the money on much-needed improvements to the system, which is like taking a second mortgage to fund improvements that will increase the value of a home. We would be concerned if SEPTA were borrowing money for short-term operating expenses, like paying salaries for bus drivers.

Investing in big projects – especially the upgrade to fare collection – is the right way for SEPTA to spend borrowed dollars.

In addition to spending wisely, SEPTA has also managed to get a good deal on the $175 million for the fare system. The agency got the low interest rate of 1.75 percent from the Philadelphia Industrial Development Corp. That saves money for SEPTA, since the interest rate determines the amount of required annual debt-service payments. An added bonus: PIDC also pushes job creation as a condition of its loans and estimates the project will create 3,500 positions. That could indirectly help SEPTA by creating more riders and also more revenue for city government, which provides SEPTA with some funding.

Another reason not to worry: SEPTA has a relatively low debt-to-expense ratio when compared to other transit agencies across the country. For example, the MBTA in Boston has one of the highest ratios at 23.9 percent. Chicago and New York City have ratios of 15.7 percent and 13.2 percent, respectively. SEPTA’s debt ratio when compared to expenses is just 2.8 percent. That means SEPTA can afford to borrow, since relatively little is being eaten up to pay back previous borrowing.

If SEPTA riders want to see a public transit agency in trouble, they can look across the state to Pittsburgh. The Port Authority of Allegheny County, which runs the system, recently announced plans to reduce service by 15 percent at the end of March. That’s scaled back from the original plan to cut by 35 percent, which was prevented only by $45 million in emergency funding from the state.

Of course, smart borrowing can’t address all of SEPTA’s potential problems. The state is facing a budget deficit of $4 billion and Gov. Corbett has pledged to fill it without raising taxes. That’s a recipe for big cuts and we have no illusions that mass transit will be spared. All the more reason SEPTA should be lauded for moving to adjust to the new reality. 

Editorial article originally posted on Philly.com by Ben Waxman