The Financial Crisis Hits Public Transportation

1. The Financial Crisis Hits Public Transportation June 2, 2009

2. Project Scope and Schedule • Analysis of financial market conditions - Constant Revisions Needed! • Interviews with financial market participants – i-banks, rating agencies • Report for broad distribution – June 2009 • Follow-up with industry suppliers

3. Current Market Conditions • Muni bond rates have risen generally relative to Treasuries • Non-”AAA - AA” rated issues are paying a much higher risk premium • Institutions were net sellers, now record inflows to muni funds! • Issue sizes were small, now large issues possible for strong credits • Shorter-term maturities, now long term end of curve more attractive • Strong interest in Build America Bonds – taxable munis • Interest rate volatility is extreme – yield curve changing rapidly • Bond insurance is not as meaningful or generally available

4. Transit Industry Effects – Debt Market • Only affects larger agencies; smaller have little or no debt • Bifurcation of market: established credit (A and above) have access while lower credits may have challenges going to the market – most transit agencies are highly rated due to “gross revenue pledge” • Few debt issuances by transit agencies other than NYMTA in the last few months • Focus on restructuring any remaining variable rate debt • Short-term commercial paper markets were expensive in the last few months but beginning to stabilize

5. Muni market has re-priced risk Historic Municipal Market Data* Credit Spreads • 2 years ago average credit spread between 30 yr AAA and BBB = 30 bp • By Spring 2009, spreads ballooned to nearly 250 bps • Narrow difference still exists between AAA and AA • Lower credits face large premiums *MMD = Benchmark tax exempt rates

6. Decoupling of taxable and tax exempt debt • 30-yr munis traditionally sold at 85% of Treasuries • During fourth quarter of 2008, this relationship escalated to almost 200% • Currently, the relationship had eased to approximately 110% and is continuing to narrow – Treasuries = MMD last week Muni bonds now cost more than taxable Treasury bonds due to “flight to quality”

7. Bank Funding as an Alternative is Problematic • After spikes, global public intervention reduced LIBOR • However, reduced competition in the bank market results in credit spreads (risk premiums) 2-3X greater than historical levels and stricter covenants • Commercial bank financing is not tax-exempt and there is minimal appetite for lending beyond 10 years • LIBOR and Treasury rates have moved higher, and TIFIA along with them Treasury and LIBOR Rates

8. Some Positives…. • Federal loans became very cheap (i.e. TIFIA) relative to municipal bond financing, but rates are steadily increasing in addition to limited capacity. • The economic stimulus bill has provisions which help the muni market: • Exempts tax-exempt bonds from individual and corporate AMT, thereby reducing issuer’s borrowing costs. The exemption applies to bonds issued in 2009 and 2010 and refunding of bonds issued in the last five years. • Changes tax law to encourage financial institutions to become buyers of muni bonds  (increasing institutional demand) • Changes the definition of “small issuer” of securities from $10 million to $30 million annually, which lowers the borrowing costs for additional issuers and expands the markets for their bonds • Introduced Buy America Bonds (BABs): Taxable debt with federal subsidy which makes it cost competitive with tax-exempt debt

9. Agency Interviews • The 15 public agencies interviewed serve more than 50% of all U.S. transit ridership. • Interviewees included: • four of the top five agencies for heavy rail ridership; • three of the top four for commuter rail ridership; • five of the top eight for light rail ridership; • six of the top eight for bus ridership; as well as five agencies with ridership of under 30,000 per weekday. 15 agencies interviewed including 6 smaller, bus-only agencies • Federal Transit Administration, investment banks and rating agency analysts provided further perspectives on the evolving capital market situation Agency Sample

10. Transit Industry Effects - Operations • Demand continues to be high, first sparked by higher gas prices, but agencies have struggled to provide service while revenues have fallen – leading to “transit paradox” • Revenues falling short • Sales tax revenues below projections, significantly in some cases • Further revenue shortfalls in upcoming fiscal years from decreased state/local aid and lower property tax revenue as properties are reassessed – revenues from real estate-related transaction taxes far below forecasts in New York and Florida • Negative compounding effect where future tax revenue projections are based on consistent growth expectations that are not being realized • Gap in operation budgets being closed through service and administrative cuts, and fare increases • Extent of the problem is becoming more apparent every day: • Washington D.C. Metro is trying to close a $154 million deficit in the next budget • Chicago Transit Authority expects $155 million less in tax revenue in 2009 • MBTA is facing a $165 million budget deficit in 2010 • San Francisco MUNI is addressing a projected deficit of nearly $100 million through FY 2010 • NYMTA’s predicted deficit of $1.2 billion could increase by $650 million due to declining revenue

11. Transit Industry Effects – Capital Investments • If funding has already been allocated to projects and construction programmed in near-term, then projects are generally moving forward • Some agency budgets are so strapped that capital expansion and even state of good repair investments had already been deferred before economic crisis • Reduced leveraging may require additional funding or stretching out capital programs to offset effects of reduced access to “creative” debt structures • Stimulus likely to help with state of good repair deferrals due to nature of funding being provided • Challenge to pump lettings out through procurement and grants systems • Capital needs are very individualized to the character and level of development of each agency • Dallas Area Rapid Transit (DART) is focused on its $1.5 billion LRT expansion • Bay Area Rapid Transit (BART) is preparing for a $2 billion fleet replacement and OAC project revived with stimulus funds • Small bus systems are programming bus shelters

12. Supply Industry Effects • Heavy civil bids coming in lower (BART reports 30% below estimates) due to steel and fuel price breaks, and recession • Specialty work (rail, systems, tunneling) pricing stable or still increasing • Supply industry shrinking due to economic pressures and difficult contracting and performance environment • Central Florida Commuter Rail d/b bids for rail work and systems above estimates • NYMTA tunneling bids stable / increasing • Performance bonds more costly and difficult to obtain – liquidity in surety market forcing reduced programs and higher premiums • Working capital lending tight and more costly – financing work in progress is a universal challenge • Large spending increases from new emphasis on transit and high speed rail need broader supply industry and fresh procurement strategies to expedite lettings, cut red tape and overhead, and share risks – could be Achilles Heel of future transit investment

13. Transit Industry Effects - PPP • Public-private partnerships are challenged by higher debt and equity costs, “de-leveraging” by major market participants, and TIFIA capacity constraints • Focus on PPP will be as a project delivery method and not a funding source • Few examples to discuss during interviews: • FasTracks project in Denver progressing with some difficulty under FTA’s Penta-P program • LACMTA considering use of P3 on several “megaprojects” to be advanced under new sales tax measure • Agencies would like to access PPP model where appropriate but still not sure what to make of this approach

14. Transit Industry Effects – SILO/LILO • Not an equal concern; several agencies are very affected • Equity partners seem open to negotiate and unwind deals • Deals have been settled with payments lower than large termination requirements in contracts • Other have negotiated extensions of the deadline to replace credit enhancement providers • Agencies which are unable to find settlement are seeking U.S. Treasury to act as guarantor

15. Going Forward • More cash needed for investment • Using “Creative Finance” to plug capital program gaps not a great strategy today – downside risks have manifested and may not have been fully appreciated (LILO/SILO, Variable Rate, Swaptions, other exotica) • Net revenue calculations for internal debt policies and cash reserves will be important to “de-leverage” and preserve future operations during downturns • Real estate driven revenues may recover more slowly than sales taxes • Toll cross-subsidies heavily impacted by downturn in many regions • Doing business in an era of volatility • Capital planning will need to be more conservative • Future transit growth is a real possibility despite job losses and housing bust – environmental considerations and fuel resources may become a driver • Greater flexibility in selecting finance strategies – bonds, banks, TIFIA, RRIF, PPP and possibly a new infrastructure bank • Existing low costs for heavy civil construction may not last forever

16. Jeffrey Parker, President • 27 Hewing Field • Chilmark, MA 02535 • jp@japarker.com • 508.645.8095