We revised our sector view to stable from negative for U.S. public mass transit operators, due to stabilizing credit fundamentals from dedicated tax revenue growth often outpacing fare revenue decreases, recovering-but-still-weaker ridership, and operators' ability to adjust service levels and expenses to restore fiscal structural operating fund balance.

Tax and political support have been key to this developing credit story--either due to revenue growth or from interim and longer-term financial commitments from lawmakers and regional stakeholders. Of note, since October 2023, there were five upgrades and an outlook revision to positive compared with one negative outlook during the same period. These favorable rating trends for the sector reflect growth in dedicated taxes supporting transit and the fundamental strength of the tax bases. (See tables 1-3 for current rating information.)

However, S&P Global Ratings' outlook is negative on three transit agencies, including Bay Area Rapid Transit (A+/Negative), San Francisco Municipal Transportation Agency (A+/Negative), and Washington Metropolitan Area Transit Authority (WMATA; AA-/Negative). Notably, these are all large, urban transit providers with a historical reliance on fare revenue that project sizable outyear operating fund deficits once remaining stimulus aid is depleted. For these issuers, an inability to enhance existing recurring revenue sources, establish new recurring ones, and adjust operations and capital spending as needed could result in further credit deterioration, particularly given that we expect lower ridership for the sector will persist.

Adapting To A Probable New Normal

The pandemic and its effects on how and where we work have reshaped the mass transit sector. First, there was a precipitous drop in ridership (peak decreases averaged about 80% nationally at the onset of the pandemic) before easing restrictions and vaccine progress resulted in ridership recovering to an average of about 62% in 2022.

Fast forward to 2024, and U.S. ridership is still materially lower at 74% of pre-pandemic levels and we expect it will remain weaker with wide variances between regions and between modes of transit (see chart 1). Transit's business model for moving suburban commuters into and out of the city center five days a week--and the revenue derived from that ridership base--has shifted due to remote working trends and may be more limited to about three-four days a week based on recent demand trends.

Some heavy commuter rail systems continue to experience weakness due to remote working trends, while bus and subway ridership have generally performed better. Consequently, in recent years, mass transit enterprises have adapted service-level operations to meet new passenger demand and rider preferences, which has helped restore fiscal balance. An increase in non-fare revenue sources and eliminating or reduced frequent user rates for some users have mitigated impacts from growing fare evasion. However, the primary generator has been significant tax revenue growth, which in many cases mitigated the effects of falling fare revenue and operating expense increases.

Chart 1

However, mass transit operators benefiting from significant dedicated tax revenue to fund operations (sales, property, excise, or income taxes) exhibited relative credit stability throughout the pandemic, with bolstered tax revenue in some cases more than offsetting farebox revenue declines and operating expense increases (see chart 2).

Chart 2

Our Ridership Recovery Estimate

Our current baseline activity estimates in chart 3 show public transit recapturing about 75% of pre-pandemic activity in 2024, 80% by 2025, and up to 85% by 2026, or about 5% annual growth as the sector recovers from a still-depressed base. Our 2024 activity estimate for transit is consistent with our previous estimates, which assume national ridership will not recover to near pre-pandemic levels for many years, relying more on slowly developing demographic trends rather than a full restoration of return-to-office policies and other factors. For additional information, see "U.S. Transportation Infrastructure 2024 Activity Estimates Indicate A Return To Pre-Pandemic Levels And Growth, With Transit Ridership Still Recovering", published March 21, 2024. We do not anticipate a return to pre-pandemic farebox recovery ratios in the near future (see chart 4).

Chart 3

Chart 4

A Significant Funding Gap Looms For Some Operators

Most transit operators face similar issues: depleted or soon-to-be-depleted federal assistance, slowly-improving-but-still-reduced fare revenue, cost increases spurred by inflation and collective bargaining agreements for an understaffed workforce, growing annual capital spending requirements for maintenance, fare evasion, perceived safety issues, annual capital spending for new train or bus sets, updated fare collection equipment, and (for many) large-scale expansion needs. Also, the current state of transit has focused debate on whether charging users for what many consider a public good is sound public policy, and how to support broader transportation and environmental objectives. With fare revenues covering less of the fixed cost base, several large transit systems face operating fund revenue gaps that will require a variety of actions to achieve a sustainable balance (see table 4).

Although the challenges are clear, permanent solutions to impending operating funding gaps have so far proved elusive for many transit agencies. They have proposed measures over which they have more control, such as implementing fare increases and reducing expenses, developing new revenue sources, seeking cross-support from other multi-jurisdictional planning agencies (such as the Metropolitan Transportation Commission in San Francisco or the Regional Transportation Authority in Chicago), modifying services to meet current and evolving ridership patterns, and redirecting capital spending to operations.

One approach most operators want to avoid is dramatically reducing service levels (number of trains or buses, routes, or frequency) because it would likely prompt further ridership and fare revenue decreases, compounding fiscal problems. In addition, transit agencies generally believe their value proposition to lawmakers and the public is to serve more, not fewer riders. Mass transit providers are also often large employers and the political difficulty of meaningfully reducing headcount is significant. One outcome most observers agree is very unlikely is additional long-term federal operating support.

Realistically, to close forecast operating fund deficits, large transit agencies lacking significant tax support will need access to long-term, dedicated funding above what they currently receive to support anticipated service levels. Absent that, or a dramatic change in the return-to-work movement, modifications in transit schedules, fare increases, and expense reductions are unlikely to compensate for the loss of daily commuters and the revenue they generated to support operations.

Various State Funding Solutions

In certain instances, states have agreed to increase or provide new ongoing financial support for transit operators to meet operating funding gaps. We highlight below several examples where states are providing additional support to mass transit operators to aid in restoring fiscal balance. Our view of additional state support will evaluate whether new funding is one-time in nature or is considered recurring support that can bridge the operating funding gap in the longer term.

California:   The California State Transportation Agency approved more than $1.9 billion in Senate Bill 125 funds to support 22 public transportation agencies, which was the first round of funding included in the transit recovery package from its 2024 budget.

Maryland, Virginia, and D.C.:   WMATA sought regional jurisdictional support from the Commonwealth of Virginia, Maryland, and the District of Columbia, which committed to providing $463 million in additional operating funding in fiscal 2025.

Minnesota:   New sales tax and supplemental state appropriations will add substantial recurring revenue for the Minneapolis St. Paul Metropolitan Council. The new 0.75% transportation sales tax, of which the council receives 83%, is levied on retail transactions in each of the seven counties included in its service area. In fiscal 2024, the tax will generate an estimated $359 million and account for an estimated 25%-30% of total revenue. In addition, the council will receive an estimated $100 million in new supplemental state appropriations to balance its Metro Mobility fund. Those appropriations will begin July 1, 2025.

New Jersey:   The state implemented a tax hike on its largest corporations to fund public transportation. The new fee would impose an additional 2.5% tax on corporations with more than $10 million in profits in addition to the existing 9% corporate business tax rate. Proceeds will help fund NJ Transit to alleviate a nearly $1 billion funding gap.

New York:   New York State agreed in its enacted 2024 budget to raise the payroll mobility tax, increasing the amount of revenue the New York Metropolitan Transportation Authority (MTA) will receive each year by about $1.1 billion. The state also agreed to allocate casino license and gaming tax revenue to MTA, starting in 2026, which is projected to provide the authority with $500 million in 2026, $500 million in 2027, and $600 million in 2028. New York City agreed last year to extend and increase its commitment to covering paratransit expenses to June 30, 2030, from June 30, 2024, which is estimated to benefit MTA by about $165 million annually.

Pennsylvania:   Pennsylvania's fiscal 2025 budget included a one-time $80.5 million increase in funding for transit agencies across the state, including the Southeastern Pennsylvania Transportation Authority, and the state expects to revisit additional funding later in 2024.

Will Voter Support For Funding Mass Transit Continue?

A major question is whether local or regional taxpayers who increasingly do not use mass transit will continue to view it as an important public service worthy of tax support, particularly as some mass transit operators pursue ballot initiatives to potentially restore fiscal balance. Looking at election results, the answer might be "more likely than not" but public sentiment is fickle and, like transit itself, outcomes are highly localized.

Data from the American Public Transit Assn. indicate voters considered 170 ballot initiatives between January 2018 and December 2023, and approved 143, or 86%, for a total of about $96 billion in new revenue to support mass transit operations or capital needs (see chart 5). In some regions, transit enhancements are sold as part of a broader mobility plan to ease traffic congestion by adding express bus lanes. Other regions are deep into building out light-rail expansions approved by voters several years ago and funded with regional sales tax measures. Local and regional sales taxes often have an expiration date requiring voters to approve an extension to continue or expand projects.

This is the case for Maricopa County, Ariz.'s Proposition 400 half-cent sales tax, which expires Dec. 31, 2025, and returns to voters in November 2024 for a 20-year extension. The sales tax will provide an estimated $24 billion in funding for both surface roadways and mass transit in the Phoenix region. Beyond just capital investments, in November 2023, Kansas City voters overwhelmingly supported the extension of a 3/8-cent sales tax to fund the operations of the city's free bus service for another 10 years.

A future test of public support may come in fall 2026 when San Francisco Bay Area policymakers are considering a ballot initiative to support regional transit operators, many of which have experienced the worst declines in ridership with no quick rebound in sight. An 18-member transportation revenue measure select committee is meeting through October 2024 to identify what kind of tax measure to propose to the voters, what it would fund, and how it would be paid for. In our view, developing a consensus among stakeholders and devising a measure that receives voter support greater than the two-thirds approval threshold for such special taxes without challenge by tax increase opponents is a steep hill to climb.

Chart 5

Table 1

Table 2

Table 3

Table 4

Hansa Pasyavala contributed research for this article.