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October 16, 2019 2:15 PM, EDT

New York Gov. Andrew Cuomo’s Thruway Toll Plan Shadows $2.7 Billion Bond Sale

Tappan Zee and Mario Cuomo bridgesIn this Sept. 7, 2018, file photo, a section of the old Tappan Zee Bridge (center) is framed by the new Gov. Mario M. Cuomo Bridge in Nyack, N.Y. (Mark Lennihan/AP)

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New York Gov. Andrew Cuomo’s still-unclear policy on future toll increases for the new Tappan Zee Bridge and the 570-mile New York State Thruway is casting uncertainty over the agency’s outlook as it returns to the municipal-bond market.

The Thruway Authority, which hasn’t raised tolls since 2010, has been able to ward off such hikes through 2020 through a $2 billion infusion of state aid. But the agency faces steeply escalating debt payments for the $4 billion bridge over the Hudson River and $2.2 billion in planned capital projects. The Thruway is selling $950 million of taxable bonds Oct. 16 and another $1.7 billion of tax-exempt securities Oct. 17 to refinance higher-cost debt and repay a federal loan for the span, now known as the Governor Mario M. Cuomo Bridge.

Andrew Cuomo

Andrew Cuomo by Peter Foley/Bloomberg

“We don’t know what the plan is,” on toll increases, said Myra Shankin, a Moody’s Investors Service analyst. “And because we don’t know what the plan is we can’t make projections on what kind of revenue they’re going to throw off.”

The Thruway will need to raise tolls by 2022 to meet requirements under its bond documents, creating a risk to bondholders if they’re not done in time, according to Moody’s. The agency projects it will need $53 million in additional revenue, or 7% of projected total revenue, in 2022, a hole that will rise to $149 million, or 18% of expected revenue, in 2024. Debt payments are forecast to increase 53% to $430.9 million in 2024.

The Thruway’s toll policy doesn’t pose risks to bondholders, said Freeman Klopott, a spokesman for New York’s Division of Budget.

“The state’s financial support along with the bridge project remaining on time and on budget has kept overall Thruway Authority costs down and provided time for a tolling plan to be developed,” Klopott said in an email.

While the agency has formed a Toll Advisory Panel to review rates and potential resident and commuter discount programs for the new bridge, it hasn’t made any proposals. The panel is made up of former state budget director Robert Megna, former Transportation Commissioner Joan McDonald and representatives from business and labor.

“If they do nothing [debt service] coverage is going to start dropping in 2022,” Moody’s Shankin said. “We don’t think the state is going to let that happen.”

In the meantime, the Thruway Authority is the latest municipal issuer to take advantage of declining U.S. Treasury rates to cut borrowing costs by issuing taxable debt. Starting in August, average weekly sales of taxable bonds by states and local governments jumped more than threefold to $1.8 billion, according to Loop Capital Markets. Thirty-year Treasury yields declined by more than 0.5 percentage point from late July through Oct. 8, though they have since edged up amid growing hopes that the U.S and China could negotiate a trade truce.

But rates are still low enough that municipalities can capture cheap borrowing costs by refinancing tax-exempt bonds with taxable debt, a step they have to take because President Donald Trump’s tax-cut law revoked the subsidies from some refinancings.

Low yields and small risk premiums in the corporate bond market are pushing investors to look for value among taxable munis, wrote Ivan Gulich, a senior vice president at Loop Capital. Highly rated taxable munis are particularly attractive for overseas investors facing negative yields in European government bonds.

“They’re very solid issuers and because they’re munis in the taxable market, pound for pound, credit rating for credit rating, they trade cheaper,” said Hugh McGuirk, managing director of municipal investments at T. Rowe Price Group Inc.

Moody’s rates the Thruway’s senior debt A1, its fifth-highest rating, and junior debt one level lower.

The Thruway has ample margin for future increases even if they’re politically unpopular. One-way cash tolls for passenger cars at the twin-span Mario M. Cuomo bridge is $5, with discounts for E-ZPass holders and commuters. By comparison, cash tolls at the George Washington Bridge between New Jersey and New York rose to $16 last month.

Overall, rates per mile for cars on the Thruway are the second lowest among 24 toll roads in the Northeast, mid-Atlantic and Midwest and 6th lowest for 5-axle trucks, according to an Oct. 7 traffic and revenue report for the Thruway by Stantec Consulting Services Inc.

The Mario M. Cuomo Bridge, mostly completed in Sept. 2018, generated $152 million in revenue in passenger and truck revenue in 2018.

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