How Big Banks Are Raising Your MBTA Fare: The Interest Rate Swap Edition

As readers might know, Massachusetts’ public transit, the MBTA, has massive budget problems. The primary reason is that the Big Dig debt was piled onto the MBTA, with the false assumption that a portion of the sales tax and fares would be able to cover the debt payments:

Debt service is key. In 2000, Massachusetts forced the MBTA to limit its budget to only fares, one-fifth of the sales tax, and some fees from areas served by the MBTA. This has never been adequate from the beginning, since costs rose faster than expected, and sales tax revenues were lower than expected. If the state were to reassume half of the debt payments, that covers $141 million; if the state assumed all of the debt (which, pre-2000, is what it did), that would yield $291.9 million.

Instead, the Legislature and the governor decided on a one year fix that resulted in a 23% fare increase (and much higher increases for the service that assists the disabled), and which still might result in a $51 million shortfall.

By way of Tom Ferguson, we come across a report, “Riding the Gravy Train” (pdf), that points out where $25 million of that debt comes from–interest rate swaps. Basically, there are two types of loans the MBTA could have taken out: fixed-interest (one constant rate) and variable-rate. Like mortgages, variable rate loans often start low, but there’s the chance that, if rates shoot up, the MBTA would be paying a lot more interest. So banks offered a deal: they would swap the variable interest loans for a fixed rate. Of course, if interest rates crater, then the MBTA is paying more than it should (boldface mine):

As part of the banking industry bailout in the fall of 2008, the federal government aggressively drove down interest rates to near zero to spur economic recovery and help the banks get back on their feet. This let banks borrow money from the federal government practically for free. These record low interest rates have had an unintended consequence that has proven very costly for taxpayers. Because the banks’ variable-rate payments on swap deals are linked to prevailing interest rates in the market, their swap payments have plummeted to near zero. However, governments and transit agencies are still locked into substantially higher fixed rates and cannot refinance into lower rates unless they pay the banks hefty termination penalties. As a result, taxpayers are typically stuck paying 3% to 6% interest on these deals, but they get back less than 0.5% from the banks. The banks get to pocket the difference as profit, which adds up to billions of dollars each year.

The banks are profiteering off the low bailout rates. The federal government slashed rates to get the economy going again by encouraging banks to lend to homeowners, small businesses, cities, states, and public agencies. Instead of passing the savings onto the taxpayers who bailed them out, the banks are taking advantage of our generosity by gouging us on these toxic deals.

And here’s the effect on service for Boston (boldface mine):

The Massachusetts Bay Transportation Authority (MBTA, or the T) operates the nation’s fifth largest regional transit system, serving 175 cities and towns in Massachusetts26 that cover about 70 percent of the state’s population. The T provides over 370 million trips per year, including more than 2 million trips on the RIDE—the paratransit service for riders with disabilities. Fifty-five percent of all work trips into Boston rely on the T.

The T may be the fifth-largest system in the U.S., but according to its Fare and Service Change Information Booklet, it has “the highest debt burden of any U.S. transit agency.” Just about every dollar the T collects in fares goes to pay down the debt. This crushing debt burden has helped contribute to a FY 2013 deficit of $160 million. In order to plug the hole in the budget this year, the T approved an average fare increase of 23%. Riders with disabilities and seniors, however, face draconian and disproportionate hikes of up to 150% and 87.5%, respectively. The T expects these hikes to lead to a reduction of more than 242,000 trips on the RIDE. That’s nearly a quarter-million trips that riders with disabilities won’t be taking to get to the doctor, the pharmacist and the supermarket.

Wall Street banks have swooped in to take advantage of a financially desperate transit agency—and its riders—by roping the T into risky interest rate swap deals. The T is losing about $26 million a year on five toxic swaps still outstanding with Deutsche Bank, JPMorgan Chase and UBS. Over the next two decades the T will lose another $254 million on these swaps. Meanwhile, the T expects to save $12.6 million—about half what it’s paying to the banks each year—by hiking fares on riders with disabilities up to 150%.36 In other words, just half of the T’s payments on these toxic swap deals would be enough to reverse these fare hikes.

Of course, there’s also MBTA idiocy that predates the crisis and goes back to the Cellucci, Swift, and Romney administrations:

Swaps are not a new problem for the T. In 2008 the Massachusetts Auditor found that, from July 2000 through December 2005 alone, the T had actually increased its debt service costs by $55 million through a number of harmful swap deals. In other words, the T was losing money on these deals even before the economic crisis hit. Since then the T has lost hundreds of millions more.

Because Republicans ‘run government like a business.’ Or is it for business? But I digress.

Anyway, you didn’t really beleive that ‘shared sacrifice’ crap, did you? If we had busted the big banks, we could have done something about this–and Boston is only about five percent of the total gouging–national problem. At the very least, relief to states and municipalities should have been a condition of aid to the banks. But that would have required a de facto Rockefeller Republican administration and a craven Congress to take on its donors.

So the rest of us are left picking up the pieces. Awesome.

By the way, every summer, in a effort to whitewash its image, JPMorgan hosts a charity road race which raises less money for the needy than they extract through card fees from those receiving assistance* Might be a good opportunity to raise this issue. Just saying.

*And if the city is losing money on this through lost business or police overtime, it should either refuse to help them or bill them for the cost.

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2 Responses to How Big Banks Are Raising Your MBTA Fare: The Interest Rate Swap Edition

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