Widespread public fear of traveling and especially using public transportation paired with the shelter-in-place mandate in most metropolitan cities are two key detriments for transportation agencies around the United States.
In the first stimulus round of funding, the federal government allocated around $25 billion for transit agencies in the United States, which kept them afloat for the time being. However, with a prolonged shutdown and no clear solution in sight, many agencies are contemplating different ways to cut costs, including service cuts. Furthermore, transportation agencies are also requesting additional federal help to sustain their operations until their ridership levels start rising to normal levels.
In this article, we will take a closer look at the impact of COVID-19 on various transportation agencies and what to expect in the near future.
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Revenue of Transit Agencies
All transit agencies, whether they operate buses, light trains or commuter trains, heavily rely on two main sources of revenues to run their operations: Fare revenues generated from riders and/or sales tax revenues generated through consumer spending. Both of these revenue sources have been badly slashed due to COVID-19. Jeffery Tumlin, who leads the San Francisco’s transit network, stated that “Unless the economy comes ripping right back, and there’s a vaccine, and social distancing is eliminated, we fall off the financial cliff in 2023,” Mr. Tumlin said. “That would result in such severe service cuts that it puts us on what is called the transit death spiral.”
Many of the transportation agencies generate the majority of their ridership revenues from daily commuters who go in to work in or near metropolitan cities. With the COVID-19 shutdown, these commuters have either been laid-off from their jobs or their companies have requested their employees to work remotely – these two things have served a serious blow to the daily ridership numbers for many transportation agencies.
Furthermore, many commuter rail and/or trains run in or near large metropolitan areas, which tend to have both a higher population density and higher COVID-19 cases, or a fear of easy spread. Hence, the local and state governments are likely to continue the shutdown longer. Due to this, many agencies are reporting a 60-90% drop in their daily ridership – which also means a 60-90% reduction in revenues.
The other form of revenue that many bus and train agencies rely on is sales tax – which has also been severely affected by reduced consumer spending. As more people are staying home, either due to unemployment or shelter-in-place orders, and more businesses have shut down their operations, the sales tax revenues have been slashed for all types of local and state governments. Where other City and County governments can still rely on other diversified revenue sources like property tax, this is not an option for transportation agencies, as both their revenues have been severely impacted.
Furthermore, for some public transit agencies, the future picture could be even more complex when it comes to sales tax revenues coming from multiple jurisdictions. For example: A train authority that services ten different jurisdictions in a metropolitan area, which means that the funding source includes a revenue pledge that’s proportional to all ten jurisdictions. In some cases, you might see a sales tax pledge that extends to multiple jurisdictions and revenues that are managed by a central transit agency, which runs the operations of the public transit system. In that case, you may have some larger jurisdictions that have been hurt more badly, and they also may have been the larger contributor to the sales tax revenues.
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Federal Help Until Ridership and Consumer Sentiment Grows
As aforementioned, the second round of federal help will likely keep transit agencies – especially ones facing serious liquidity crunches – afloat for the next 5-8 months with the hope that things will start to look up for both ridership and sales tax revenues.
The New York Times writer, Pranshu Verma, highlights the need for federal funding by stating “Transit leaders across the country are imploring congressional leaders to provide up to $36 billion in additional assistance. They want to ensure subways, buses and rail systems across the country can weather a sustained decline in revenue and be ready as the economy and school system reopen.” “Our transit systems collectively move millions of students throughout the school year and are responsible for getting millions more people to work every day,” a coalition of 26 transit leaders wrote to Senate leaders on Tuesday, continuing with the following statement, “Without additional federal assistance, many of our agencies will be forced to make difficult decisions that will negatively impact the lives of essential workers and the returning workforce.”
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The Bottom Line
From local governments to transportation agencies, everyone is bracing for the worst outcome when it comes to the future uncertainties due to COVID-19. The rating agencies are also working overtime to ensure that they are adequately informing investors by either downgrading different agencies and/or changing their outlooks.
Either way, many think that the COVID-19 vaccine is the only clear solution to bring everything back to normal and have transit ridership return to its earlier levels.
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Disclaimer: The opinions and statements expressed in this article are for informational purposes only and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgement of the author(s) at the time of publication and are subject to change without notice. Information has been derived from sources deemed to be reliable, the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professionals and advisers prior to making any investment decisions.
