Infrastructure Finance for the Public Good: How Asset Recycling Can Untangle the New York MTA’s $50 Billion Debt Load

By Lev E. Breydo April, 2024

Systematic infrastructure underinvestment – a $2.6 trillion ‘gap’ – and accelerating climate change have become facts of life in the United States. Though typically attributed to politics, this Article posits the circumstances as a market disequilibrium rooted in an interplay between unique dimensions of infrastructure and distinctive features of the U.S. approach. Legislative action, including the Infrastructure Investment and Jobs Act, is insufficient to overcome these long-standing challenges.

Based on a broad, global study of effective approaches to infrastructure finance, as well as a multi-disciplinary analysis of the economics, engineering and finance literature, this Article proposes addressing the U.S. infrastructure disequilibrium through asset recycling. Asset recycling is an innovative strategy, pioneered in Australia, premised on: (i) monetizing existing, government-owned infrastructure; and (ii) reinvesting the proceeds in development of new assets, which can be ‘recycled’ again, creating a virtuous cycle on a debt-neutral basis.

The Article illustrates this approach through a detailed, empirical case study of the New York MTA, the nation’s largest transit agency. The MTA has over $50 billion of debt, COVID-19-related losses exceeding $20 billion and bond covenants, as well as state law explicitly prohibiting bankruptcy. The analysis finds that monetizing solely the MTA’s bridge and tunnel assets (but not the subway) through a long-term concession could, conservatively, generate $33 to $53 billion – sufficient to repay the majority, if not entirety, of the MTA’s obligations, giving it the wherewithal to build the sustainable infrastructure that New York deserves.

Beyond the mechanics and empirics, the underlying principles – leveraging private capital, coupled with robust oversight – have far broader implications, as asset recycling is estimated to represent a $1.1 trillion opportunity. The Article concludes with a discussion of normative and policy considerations, as well as areas for future research, including multi-stakeholder governance frameworks for imperfect public goods, ESG-based contractual mechanisms and the interplay between infrastructure policy and climate change, with an emphasis on broad-based social and allocative equity.

Introduction

“If I…took you to LaGuardia Airport in New York, you must think I must be in some third world country,” President Joe Biden once observed upon entering the financial capital of the world’s largest economy.¹

According to a recent Council on Foreign Relations report, “U.S. infrastructure is both dangerously overstretched and lagging behind that of its economic competitors, particularly China.”² With a perplexing enthusiasm, the American Society of Civil Engineers determined that “[f]or the first time in 20 years, our infrastructure GPA is a C-, up from a D+,” with a $2.6 trillion ‘investment gap.’³ Recent legislative efforts, including the 2021 Infrastructure Investment and Jobs Act (“IIJA” or “2021 Infrastructure Act”) and subsequent legislation, offer a starting point but are unlikely sufficient to comprehensively address the problems.⁴

Policy is conceptualized broadly but experienced locally. Roads, public transit, water and electricity have an extraordinary impact on our quality of life. However, we don’t think much about those things unless they stop working.

The socio-economic importance of infrastructure, and the United States’ chronic underinvestment and neglect toward it, have been thoroughly documented in the economics and engineering literature as well as the media.⁵ However, these issues have been surprisingly under-researched in the legal scholarship.

This Article aims to bridge that gap through a multi-disciplinary, empirical approach, coupled with a global perspective. It is organized in four parts.

Part I introduces the salient problem – the ‘market’ for infrastructure finance is persistently broken, impairing our economy, quality of life and ability to address climate change – and analyzes the underlying causes. The Article posits that the disequilibrium goes beyond politics, driven by a combination of infrastructure’s unique economic attributes, and exacerbated by distinctive features of the U.S. approach. Though the U.S. typically views itself as private sector-centric, it takes a meaningfully different approach with respect to infrastructure – emphasizing a government-provision model with a federalist delegation of responsibility to the state level, where the majority of infrastructure spending occurs.⁶

In contrast, other countries have over time incorporated more private sector involvement, adopting ‘hybrid’ models to drive better outcomes – and illustrating the range of options. Based on that holistic, global framework, Part I previews the core proposal: asset recycling.

Asset recycling is an innovative strategy, pioneered in Australia, premised on a two-phase process: (i) transitioning existing, mature infrastructure assets to a public-private-partnership (but not a privatization); and (ii) using the proceeds to finance new projects. As a result, the government develops more infrastructure on a debt-neutral basis. The potential value creation is estimated to exceed $1.1 trillion.⁷ In contrast, the IIJA will fill only 18.2% to 22.4% of the infrastructure ‘investment gap.’⁸

Parts II and III contextualize and quantify these issues through a comprehensive, multi-disciplinary case study of the New York Metropolitan Transportation Authority (“MTA”), leveraging the legal, financial, economic and engineering literatures.⁹ Part II focuses on the MTA and its challenges; Part III details application of asset recycling.

The MTA was selected, in part, because the scale and acuity of its challenges – a debt load exceeding $50 billion, a long-delayed $51.5 billion climate investment program, and “no bankruptcy” bond covenants – crystalize the necessity of innovative solutions. At the same time, the MTA, in many ways, also represents a microcosm of issues plaguing infrastructure policy nationwide, including transit systems from Boston to Chicago and San Francisco burdened by eerily similar woes,¹⁰ an “increasingly unreliable” electric grid ¹¹ and failing water systems from Michigan to Mississippi.¹² Particularly for public transit, the aftereffects of the Covid-19 pandemic have rendered dull, long-standing pain into a far more acute ailment, closer to a broken arm.

Part III empirically illustrates why a tailored asset recycling strategy presents a highly attractive avenue for addressing the MTA’s predicaments. Based on a thorough financial analysis as well as extensive market research, the Article estimates that a concession (distinct from a sale) for just the MTA’s bridge and tunnel assets could, conservatively, generate between $33 and $53 billion (and potentially up to $62 billion) in proceeds, sufficient to repay a majority, if not the entirety, of the MTA’s debt – giving it the wherewithal to invest for the future.¹³

Part III concludes by detailing the integrative value creation from asset recycling, as well as distinctions between the proposed approach and ‘privatization,’ as the term is commonly understood. Though the empirics are MTA-specific, given similar challenges facing infrastructure nationwide, the proposal has applications and implications well beyond New York.

Part IV explores normative dimensions and policy considerations. First, it outlines key factors for implementing asset recycling, including asset selection, governance and contractual structure, with provisions tied to environmental, social and governance (“ESG”) metrics. Second, it discusses governance frameworks for imperfect public goods, such as infrastructure, finding corporate-centric approaches imprecise, and recommending application of broader multi-stakeholder models. Finally, it discusses the interplay of infrastructure and climate change, emphasizing that allocative equity and socio-economic justice must be at the heart of infrastructure policy.

I. Infrastructure Finance, Ownership & Control

Understanding the challenges facing U.S. infrastructure generally, and the MTA specifically, requires some background on how these types of assets are financed, operated and governed.

Infrastructure financing and ownership structures exhibit significant variation across jurisdictions worldwide.¹⁴ Some nations, like Australia and Japan, are relatively open to private sector involvement and investment in infrastructure. Others, particularly in Europe, take something of a middle ground. The U.S., in contrast, emphasizes public sector ownership and financing of infrastructure. However, the U.S. approach has varied over time, with the private sector previously playing a larger role – and more recently there have been growing examples of U.S. private sector involvement.¹⁵

The diversity of approaches illustrates a salient point: there is no ‘right’ answer,’ and more than one option.

This part of the Article sets the stage for the broader discussion. First, it introduces the salient problem – a persistent breakdown in the ‘market’ for infrastructure finance – and describes the why, focusing on distinctive aspects of the U.S. public sector-centric model. Then, it contextualizes the policy proposals through analysis of global approaches, finding increasing prevalence of ‘hybrid models.’ Finally, the discussion previews the asset recycling proposal and contrasts the associated policy dimensions with the 2021 Infrastructure Act.¹⁶

A. Background & Economic Foundations

The ‘market’ for infrastructure exhibits persistent disequilibria, impairing our economy, quality of life and ability to address climate change. Some of the challenges are inherent to infrastructure; others, as discussed below, are arguably exacerbated by America’s approach.

1. Taxonomy

Though a commonly used term, the definition of “infrastructure” is surprisingly complex and seemingly amorphous.¹⁷ Taxonomically, in simplest terms, it can be grouped into two categories: (i) ‘traditional’ (‘hard’ or ‘economic’) infrastructure and (ii) non-traditional (‘soft’ or ‘social’) infrastructure.¹⁸ This distinction arguably explains much of the politicized debate around the recent Infrastructure Investment and Jobs Act.¹⁹

Figure 1. Infrastructure Taxonomy

For our purposes, we can think of infrastructure as “shared means to many ends” which do not directly produce goods or services, but provide the “underlying framework” or “foundation,” facilitating processes that do.²⁰ Because this Article largely focuses on economic infrastructure, and transportation specifically – with case study-specific elements denoted in Figure 1²¹ – for the sake of relative simplicity, it will at times use the term ‘infrastructure’ to reference just those elements of the broader taxonomy.

2. An Imperfect Public Good with Externalities

Contemporary legal frameworks can (albeit, sometimes unintentionally) trend towards viewing public goods and private goods as a binary choice,²² roughly corresponding to the respective public and private law frameworks.²³ Accordingly, infrastructure is frequently termed a “public good,”²⁴ the traditional economic definition of which requires that it be:²⁵ (1) ‘non-rivalrous’²⁶ and (2) ‘non-excludable.’²⁷

Yet, in reality, infrastructure²⁸ is closest to an imperfect (or impure) public good: one that satisfies the two conditions only to a certain extent, or only some of the time.²⁹ For instance, a lighthouse or road without tolls or traffic can functionally resemble a public good. Yet, that same road can also feel closer to a private good through the rivalrous impact of rush-hour traffic and exclusionary effect of tolls. The imperfect public good construct informs much of the incongruence, and, at times, inconsistency, in how society and policy makers view infrastructure.³⁰ Conceptualizing infrastructure as an imperfect – rather than ‘pure’ – public good supports deep government involvement but does not create a normative disconnect in respect of private sector participation or multi-stakeholder models.

Infrastructure also exhibits “externalities,” defined as second order effects on individuals not party to a transaction.³¹ Specifically, infrastructure can generate positive externalities through increased efficiency and other economic effects, and, critically for our purposes, reduce negative externalities. For instance, driving produces negative externalities through pollution, noise and congestion – indeed, the transportation sector accounts for 36% of U.S. emissions.³² Public transit – with some of the lowest carbon emissions per kilometer traveled – can provide an externality-minimizing substitute, essential for emissions goals, thus enhancing the aggregate welfare.³³

3. Market Disequilibrium

Infrastructure is essential for both economic activity and quality of life. Yet, the ‘market’ for it exhibits pervasive disequilibria.

Economists have attributed America’s brisk post-World War II growth in part to robust infrastructure investment.³⁴ A large-scale ‘meta study’ of 3,000 papers found an average cumulative ‘multiplier effect’ of one-point-five times,³⁵ while other research indicates a three-times multiplier for transportation investment.³⁶ Other studies have found that traffic congestion costs the U.S. up to $120 billion per year, while airport delays add up to over $35 billion annually.³⁷

Despite the well-understood importance of infrastructure, markets, both public and private, have a hard time providing a societally optimal supply of foundational shared resources. The aforementioned U.S. ‘infrastructure funding gap’ – estimated between $2.6 and $3.8 trillion – is, in essence, a market disequilibrium.³⁸ At present, U.S. infrastructure spending as a percentage of GDP is the second lowest amongst the G20, ahead of only Mexico, resulting in by far the largest investment gap amongst G7 nations.³⁹

Illustrating the real-world implications, on January 28, a Pittsburgh bridge collapsed shortly before a scheduled speech by President Biden regarding the 2021 IIJA.⁴⁰ Beyond the headlines, society experiences the consequences of this market breakdown daily through transit delays, gridlocked traffic and power outages.⁴¹

As the full costs of climate change are internalized, the importance of infrastructure will only grow – as will the costs of our prevailing disequilibrium, and the failure to act.⁴²

B. U.S. Approach: Public Sector-Centered Model

Though the U.S. often views itself as highly centered around free markets and private assets, it follows a markedly different approach with respect to most infrastructure. Relative to other jurisdictions, the U.S. generally places a heavier emphasis on public sector infrastructure ownership and financing.⁴³ At the same time, largely as a function of dual-federalism, the U.S. delegates this responsibility to the state and local levels, with infrastructure assets typically financed through a combination of taxes and municipal bonds.

1. Normative Underpinnings

The ‘public good’ normative construct appears to underpin much of the U.S. approach to infrastructure.⁴⁴ Figure 3 below charts infrastructure finance against the level of private sector participation, creating a two-by-two matrix. The U.S. model in the bottom left quadrant, maps to public sector financing and control.⁴⁵

Figure 2. Matrix: Infrastructure Risk & Control Allocation

The top right quadrant maps to “privatization,” with certain private sector-owned infrastructure assets.⁴⁶ The bottom right quadrant reflects a common public perception regarding privatization: private gains, socialized costs.⁴⁷

The negative connotation around “privatization” is not undeserved; privatization often carries negative consequences. For instance, in 2008, Chicago ‘privatized’ certain parking assets, resulting in a significant loss to the city.⁴⁸ Privately-run prisons have been exceptionally problematic; the Justice Department found them “more violent” than government-run institutions and recommended a “phase out.”⁴⁹

However, the potential harms of ‘privatization’ – while quite real and significant – need not be inherent to private sector participation. Indeed, when coupled with comprehensive oversight, certain shared resources, such as telecommunications and electricity, can be ably provided by private operators.

2. Historical Context

Infrastructure ownership and financing structures in the U.S. have gone through multiple phases – briefly public, then private, and, for the last century, public again – underscoring that our contemporary conceptualization is not the only approach.

The history of U.S. infrastructure development displays something of a dissonance, underscored by “[t]wo sets of broad and at times conflicting ideas”⁵⁰ – an emphasis on maximizing “overall economic development and individual economic opportunity,”⁵¹ tempered by “broad fears of irresponsible accumulations of either political or economic power.” ⁵²

In simplified terms⁵³, U.S. infrastructure finance – particularly for transportation and public transit – has gone through essentially three phases.⁵⁴

The first, in the front half of the nineteenth century, saw extensive public sector investment in infrastructure assets.⁵⁵ Subsequently, depressions in 1837 and 1857 were followed by a sharp contraction in public sector capital deployment due to resource limitations.⁵⁶

The second phase, from the mid-nineteenth century until around the Depression era, was marked by significant private investment.⁵⁷ Over time, however, many of the enterprises found themselves in financial distress, oftentimes due to frictions with respect to rate-setting.

That pullback in private capital led to the third phase, in effect today, characterized by an emphasis on public authorities, rather than the private market, assuming responsibility for infrastructure, and particularly transit.⁵⁸

The MTA nicely illustrates this arc of U.S. infrastructure history. The system began as two privately owned, competing lines. Subsequently, in 1932, New York City began operating a third line, which was buttressed by significant government funding and credit.⁵⁹ A dispute regarding fare increases followed. By 1940, NYC orchestrated a merger of the three entities. Following a transition period of relatively independent operation, the entities become more closely integrated, ultimately leading to the present-day structure.⁶⁰

The questions then were not dissimilar to those discussed today. In 1941, one scholar observed:

The administrative problems that appear where government becomes an entrepreneur and manager had indeed been present since 1932 . . . But unification raises in full force difficult questions in the adaptation of governmental concepts and procedures to the conduct of economic undertakings.⁶¹

3. Federalism & Municipal Finance

Along with a public sector emphasis, a second distinctive dimension of U.S. infrastructure finance is the delegation of responsibility to the state and local levels, rather than the federal government.

This delegation reflects America’s dual-federalist framework, a constitutional construct where individual states are themselves sovereign, with powers not granted to the federal government generally reserved for the state level.⁶² As part of this division of labor, the states are traditionally responsible for providing – and financing – a range of economic⁶³ and non-economic infrastructure, including police, education and healthcare.⁶⁴ At the same time, the states retain control over land use and property laws, both of which are critical for physical asset development.⁶⁵ Within the states, allocation of power is further sub-divided at various levels, with public corporations often used as financing vehicles for infrastructure and other capital spending.⁶⁶

As a consequence, the U.S., in effect, has two relatively distinct ‘sovereign’ debt markets – the $21 trillion treasuries market, which reflects federal borrowing, and the $4 trillion municipal bond market, which reflects state and municipal entities.⁶⁷ About two-thirds of infrastructure projects are funded through municipal bonds issued by state and local governments; infrastructure, in turn, represents the bulk of municipal debt.⁶⁸

The municipal market is composed of two main instruments: (1) “full faith and credit” general obligation bonds and (2) revenue bonds, used to finance infrastructure like the MTA.⁶⁹ Three features of revenue bonds are notable for our purposes.

First, the “revenue bond” structure exists because municipal entities generally cannot borrow on a ‘traditional’ secured basis,⁷⁰ due to difficulties of lien enforcement with respect to government property.⁷¹ Revenue bonds bypass this challenge by granting liens in a circumscribed revenue stream – typically infrastructure, but also dedicated taxes⁷² — which forms the co-called “Trust Estate,” rather than in the revenue-producing asset.⁷³ Revenue bonds’ cash flow function is essentially a waterfall. For instance, with respect to an infrastructure project, gross revenues from user fees might first be used to cover operating expenses, with remaining net revenue flowing to the trust estate, and then to bondholders, with any excess funds kept in reserve or used for other debt needs.⁷⁴

Second, revenue bonds can receive special statutory protections in bankruptcy, with well-documented legal difficulties in ‘impairing,’ or reducing, such obligations, complicating infrastructure financial distress.⁷⁵ For natural monopolies, the challenge is particularly pronounced, as it can effectively require rate increases beyond what their constituencies can afford.⁷⁶ Though recent decisions have pared back certain revenue bond protections, significant uncertainty remains.⁷⁷ This broad-based set of legal issues illustrates the fact that, while certain aspects of the MTA’s restructuring challenges described in Part II are distinctive, they are, fundamentally, manifestations of wider concerns regarding resolution of infrastructure financial distress – and requiring broad-based solutions.

Finally, municipal bonds are typically tax-exempt for residents of the issuing state, which encourages individuals to hold municipal bonds directly,⁷⁸ but can disincentivize investment by already-tax-exempt institutional investors, such as pension funds.⁷⁹

C. Global Perspective: Public-Private ‘Hybrid’ Models

Over time, many jurisdictions around the world have become more receptive to private sector participation in infrastructure, resulting in what this Article terms ‘hybrid’ models.⁸⁰ For purposes of discussion, at a simplified level, the approaches can be segmented between three main categories:

● United States. Heavy emphasis on public sector infrastructure ownership and finance.⁸¹

● Europe. Generally favoring hybrid models, including Public-Private Partnerships.⁸²

● Japan and Australia. Higher prevalence of privately-owned infrastructure assets. ⁸³

This sub-section presents an intellectual framework underlying the ‘hybrid’ model, and details specific approaches and considerations with respect to public-private-partnerships, and particularly concessions.⁸⁴ Then, it outlines asset recycling, which underlies the proposal in Part III, and discusses certain disappointing dimensions of the 2021 Infrastructure Act.

1. ‘Hybrid’ Models Overview

‘Hybrid’ models incorporating public and private sector capital and participation are not new and have long existed in varying forms across different sectors, in the U.S. and abroad.⁸⁵ Conceptually, the ‘hybrid’ approach is perhaps closer aligned with the imperfect public good construct.⁸⁶

Figure 4 below visualizes this by building on an existing World Bank framework – which provides the horizontal axis, detailing a continuum of hybrid approaches – to incorporate the vertical axis of financing options with differing levels of private sector risk assumption.⁸⁷

The critical insight is the large area in the middle – corresponding to four common types of ‘hybrid’ structures (detailed below) utilized in other jurisdictions – which illustrates vast latent optionality:

Figure 3. Strategic Map: Infrastructure Ownership, Control & Financing

As before, the U.S. model maps to the bottom left portion, with government ownership and financing; the top right box reflects a structure closest to full privatization. The level of private sector participation increases as one moves from left to right along the x axis.

Conceptually, it is logical that for a particular asset, or asset types, the optimal ownership and capitalization structure can differ, and also evolve over time. In that respect, the division of labor and responsibility between public and private arguably has some parallels to (as well as critical distinctions from), the separation of ownership and control well-documented in the corporate context.⁸⁸

2. Public-Private Partnerships: Concessions

Of the four ‘hybrid’ structures, leases and concessions generally map closest to the prevailing American conception of ‘public-private partnerships,’ or ‘P3.’⁸⁹ Though terminology can vary, for our purposes, we can think of the definition of ‘public-private partnership’ as a “legally binding contract between a public sector entity and a private company . . . where the partners agree to share some portion of the risks and rewards inherent in an infrastructure project.” ⁹⁰

Concessions, a type of P3 (and, in turn, a subset of ‘hybrid’ models) are the primary focus of discussion, as they underlie the proposal discussed in Part III with respect to the MTA.⁹¹ The general concession transaction structure entails a private entity assuming the operation of a project, which is then typically funded through a usage-based model.⁹² Through the transaction, the public entity:

● Receives an up-front payment;⁹³

● Retains title and legal ownership of the asset;⁹⁴

● May retain some economics, based on the structure;⁹⁵

● No longer bears responsibility for operating and maintenance expenses (or demand risk) ⁹⁶; and

● Maintains comprehensive regulatory oversight and governance.⁹⁷

Concessions are distinct from ‘sales,’ as the government retains title and ownership, while allowing for significant contractual tailoring and economic oversight, well beyond what would be realistically feasible following a sale.⁹⁸

Fundamentally, concessions and P3s are about optimizing the allocation of the portfolio of risks associated with an infrastructure project.⁹⁹ Traditionally, in the U.S., those risks have been warehoused solely within the public sector. Reasoning from finance first principles, however, suggests that specific risks should be allocated to the particular parties best suited to bear them. For infrastructure, that re-allocation is core to P3 value creation.¹⁰⁰

Relative to the public sector, the private sector is typically better equipped to handle certain exposure, such as demand forecasting, financing structures and construction management, ¹⁰¹ but generally ill-suited for others, particularly with respect to harnessing positive externalities,¹⁰² addressing legal uncertainty or working through regulatory and jurisdictional frictions.¹⁰³

Because of this, the typical role for the private sector has been ‘greenfield,’ or new-build infrastructure.¹⁰⁴ The other core infrastructure project categories – ‘brownfield,’ referencing existing operating assets, or ‘rehabilitation,’ an intermediate category – are generally seen as preserve of the public sector, inapposite for private entities.¹⁰⁵ Some scholars explicitly consider P3s inapplicable to brownfield projects.¹⁰⁶

3. Asset Recycling

The traditional conception of P3s as only applicable to ‘greenfield’ projects historically rendered the decision framework for brownfield assets rather binary: (i) continued public sector ownership or (ii) full privatization.¹⁰⁷

More recently, Australia pioneered a third approach: asset recycling.¹⁰⁸ Asset recycling, or “A/R,” is a term of art for the two-phase process of (i) transitioning developed, mature infrastructure assets to private investors through a P3; and (ii) re-investing the proceeds in new infrastructure. The transaction is debt-neutral for the government, and intended to create a virtuous cycle with the asset developed in the second phase subsequently also recycled.¹⁰⁹

The value creation could be vast. Professor Geoffrey Garrett, former dean of the Wharton School, estimates a potential asset recycling market size of $1.1 trillion, consistent with work by other researchers.¹¹⁰ As discussed in Part III, asset recycling can conservatively generate $33 to $53 billion in proceeds from a P3 concession for just the MTA’s bridge and tunnel assets.¹¹¹

a. Two-Phase Process

As Australia’s former treasurer Joe Hockey explained, asset recycling developed as a function of necessity, finding it to be an effective way of enhancing productivity without straining government coffers. ¹¹²

A nation’s infrastructure base can be conceptualized as two components: (i) the stock of brownfield or rehabilitation projects, with associated maintenance and operating expenses; and (ii) a flow of new greenfield assets, needed to support a growing economy while adjusting to exogenous shifts like climate change, and requiring up-front capital investment.¹¹³

The innovation of asset recycling is that it leverages the stock of assets to finance development of the flow, in the process also reducing carrying costs and ideally creating a virtuous cycle of continued reinvestment.¹¹⁴

Fundamentally, asset recycling is thus an extension of the P3 framework but applied to ‘brownfield’ or existing infrastructure assets. Mechanically, the two-phase asset recycling process operates as follows:

Monetization. The government monetizes revenue-generating public assets through P3, such as a long-term lease or concession.¹¹⁵
Reinvestment. Monetization proceeds are re-invested:
- Typically, in new assets to allow subsequent ‘recycling’; or
- Rehabilitation of existing infrastructure assets.¹¹⁶ Practical Law Finance supra note 105.

Subsequently, the ‘new’ assets can also be recycled, creating a virtuous cycle, on a debt-neutral basis, as new investment is financed through from monetization of assets rather than borrowing.

b. Examples: Australia, Indiana and Puerto Rico

The Australian Asset Recycling Initiative (“ARI”) – as well as certain limited early U.S. transactions – illustrate the model’s application and value proposition.¹¹⁷

Australia presents a particularly apt comparable because, like the U.S., it has a dual-federalist system, with states delegated significant powers. The ARI optimized around this through state-led project selection, coupled with a 15% federal incentive for states that monetized assets and began new projects within specific timelines.

The state of New South Wales (NSW) was most active in Australia’s program, generating over $25 billion in proceeds as of 2018.¹¹⁸ NSW structured certain transactions with retained economics, for instance selling only 50.4% lease interests in Ausgrid, the nation’s largest electricity distribution network, and Endeavour Energy, an electric generation operation.¹¹⁹ In all cases, the public sector largely maintained the pre-transaction regulatory structure, ensuring robust oversight.¹²⁰

At the same time, while relatively less common, a number of U.S. transactions have successful employed hybrid models, including asset recycling and P3s.

In 2006, the State of Indiana sold a 75-year concession to operate the 156-mile Indiana East-West Toll Road.¹²¹ Reflecting commercial best practices, Indiana utilized a robust investment bank-led marketing and auction process, leading to a $3.8 billion valuation,¹²² and negotiated extensive contractual protections, ranging from rate setting to trash removal.¹²³ Additionally, the state was disciplined in capital allocation, reinvesting the $3.8 billion proceeds into other transportation projects, allowing for a fully-funded 10-year transportation program.¹²⁴

More recently, the Port Authority of New York and New Jersey collaborated with private parties to modernize the LaGuardia (“LGA)¹²⁵ and JFK airports through P3s.¹²⁶ Indeed, airports are a common P3 vector with a number of transactions announced and ongoing in the U.S. and abroad.¹²⁷

The LGA P3 transaction involved development of a revamped Terminal B, as well as certain associated improvements, with a new entity, LaGuardia Gateway Partners, serving as the project sponsor. Through the transaction, LaGuardia Gateway Partners was responsible for designing, building, financing, operating, and maintaining the project, with a lease period through 2050. Financing for the deal closed in 2016,¹²⁸ though construction completion was meaningfully delayed by Covid-19.

The preliminary verdict appears positive. LaGuardia’s newly revamped Terminal B received accolades including – in what the Wall Street Journal compared to “Arby’s winning a James Beard”¹²⁹ – UNESCO’s 2021 Prix Versailles award for “best new airport in the world.”¹³⁰

While LGA’s P3 experience may prove above-average – Puerto Rico’s recent electric transmission P3, for instance, appears less than award winning¹³¹ – the transformation of “what was once regarded as the nation’s worst airport into a world-class facility” illustrates the latent potential for America’s aging infrastructure.¹³²

D. The Infrastructure Investment and Jobs Act Falls Short

Though commendable for recognizing America’s infrastructure and climate-related challenges, the 2021 Infrastructure Act falls short on a number of dimensions. Most consequentially, the IIJA is estimated to provide only 18.2 to 22.4% of the ‘investment gap.’¹³³

In contrast, Australia’s ARI effectively leveraged private capital, coupled with extensive oversight, to enhance program scale without straining government budgets or sacrificing broader stakeholder priorities. If the IIJA was structured similarly – a 15% incentive match coupled with asset recycling – the legislation’s allocated capital could be sufficient to close the funding gap entirely.¹³⁴

The IIJA acknowledges a theoretical role for private capital, but rather unambitiously stops at the research phase, asking the Secretary of Transportation to submit a report with proposals to “address [] impediments” to private capital deployment, including asset recycling.¹³⁵

As a related matter, the ARI was more fiscally efficient, creating a debt-neutral solution for the states, supported by transparent incentive funding from the federal government.

Unlike the IRA, IIJA funding is relatively murky, leaning on the Highway Trust Fund to the point of rendering it insolvent, with a Congressional Budget Office analysis of the legislation estimating a $191.5 billion shortfall by 2031.¹³⁶ That is important because, notwithstanding the generally positive multiplier associated with infrastructure investment, the net economic impact is highly sensitive to the funding profile, with the potential for negative economic returns from inapposite policy.¹³⁷

Finally, the ARI’s structure elegantly optimized around dual-federalism, respecting traditional allocations of responsibility through state-level asset selection, but advanced national priorities through the matching program. In contrast, the IIJA arguably over-emphasizes delegation to administrative agencies, at least relative to prevailing norms; for instance, the Department of Transportation is responsible for allocating about half of new funding, totaling $274 billion. While there are logical arguments for greater utilization of federal capital for infrastructure,¹³⁸ it does represent a departure from traditional divisions of responsibility, risking sub-optimal capital allocation and unnecessary jurisdictional frictions.¹³⁹

II. Case Study: The MTA’s Tribulations & Restructuring Limitations

The challenges – and opportunities – facing U.S. infrastructure are well illustrated by the New York Metropolitan Transportation Authority (“MTA” or “MTA Group”), proprietor of New York City’s subway system. The MTA is the largest revenue bond issuer and a cornerstone of the $4 trillion municipal debt market.¹⁴⁰ It is also critical for both economic activity and day-to-day life in the nation’s financial center.¹⁴¹ The MTA is struggling under a debt load exceeding $50 billion, reeling from over $20 billion of Covid-19-related losses and facing potential long-term demand deterioration.¹⁴² At the same time, the MTA’s “state of crisis” pre-dates Covid-19, reinforcing the long-standing nature of the underlying issues.¹⁴³

Though perhaps exceptionally acute, the MTA’s circumstances are also not unique. Its challenges closely parallel those facing infrastructure nationwide – with early 2022 transit utilization 59% below pre-pandemic levels,¹⁴⁴ an aggregate $39.3 billion public transit funding shortfall and over $40 billion of unfunded liabilities.¹⁴⁵ On a relative basis, Boston’s MBTA is arguably more leveraged than the MTA, with $5.4 billion of debt against less than one-tenth of the revenues. The Chicago Transit Authority carries $4.44 billion of debt, while Washington’s MATA has $2.7 billion.¹⁴⁶ Thus, with some caveats, the themes identified in the case study are, in many respects, broadly applicable nationwide.

This part of the Article is divided in two sections. First, it offers an overview of the MTA’s governance, financials and capitalization, and subsequently discusses the MTA’s twin challenges of Covid-19 and climate change adaptation, as well as federal support to date. Second, it details limitations on the MTA’s ability to restructure its obligations, due to policy, contractual and legal constraints.

In sum, the MTA is an essential public entity facing deep financial challenges, but unable to restructure its obligations – illustrating the necessity of innovative solutions.

A. Overview, Financials & Covid-19

The MTA operates the nation’s largest “integrated mass transportation” network, comprised of New York City’s famed subway, bus lines and commuter trains, as well as toll bridges and tunnels in and out of the city. The system was created through the municipalization and merger of two private lines with a third government-controlled competitor.¹⁴⁷

The MTA is a public benefit corporation and a component unit of the State of New York, established in 1965 pursuant to New York Public Authorities Law Title 11.¹⁴⁸ A public benefit corporation is a “corporate entity separate and apart from the State of New York . . . without any power of taxation.”¹⁴⁹

The MTA Group is structured as a group of “related entities”, with the MTA itself essentially functioning as a holding company above subsidiary public benefit corporations, and adjacent to affiliate entities responsible for different aspects of the system.¹⁵⁰ The MTA Board “serves as the overall governing body of these related entities,”¹⁵¹ which are considered component units of the MTA.¹⁵² These component units maintain some interrelationships, but fundamentally operate independently.

Thus, the MTA is not unlike a large conglomerate with distinct business units ultimately overseen by a single board of directors.¹⁵³

As detailed in Appendix II, the MTA Group consists of ten primary entities, the most pertinent of which can be segmented into two core components:¹⁵⁴

Transit and Commuter Systems (henceforth, collectively, the “Transit System”), comprised of the NYC subway (formally, the “NYC Transit Authority” or “NYCT”),¹⁵⁵ bus lines (the “MTA Bus Company”) as well as the Long Island Rail Road and the Metro North Commuter Railroad (collectively, the “Commuter Trains”); and
the Triborough Bridge and Tunnel Authority (“TBTA”), “a public benefit corporation empowered to construct and operate toll bridges and tunnels and other public facilities in the City.”¹⁵⁶Bridges & Tunnels, Port Auth. of N.Y. and N.J., https://www.panynj.gov/bridges-tunnels/en/index.html (last visited Nov. 7, 2024).

1. Operations & Financials

At a high level, the MTA has two core top-line drivers: (i) operating revenues, comprised of transit system fares and TBTA tolls; and (ii) dedicated taxes and government subsidies at the state and local levels. Historically, operating revenues made up about 56% of the MTA’s top-line, with taxes and subsidies covering the balance. In 2019, for instance, the MTA generated operating revenues of $9.1 billion, supplemented with $7.3 billion of dedicated taxes.¹⁵⁷

The chart below shows MTA revenues by component unit for the period from 2015 to 2021.¹⁵⁸ The data can be divided into two periods: (i) the ‘baseline’ between 2015 and 2019, and (ii) Covid-19’s impact in 2020 and 2021. During the baseline period, revenues were extremely consistent and steadily increasing, reflecting the MTA’s large and growing customer base with a relatively inelastic demand profile.¹⁵⁹ As discussed below, this is precisely the revenue structure most attractive to fixed income investors, allowing for high system leverage. COVID-19, represented by the red oval, was a “once in a 100-year fiscal tsunami,” resulting in a 56.2% collapse in NYCT revenue.¹⁶⁰

Figure 4. MTA Component Unit Revenues: 2015 to 2021

Historically, the subway (highest line above, in orange), was by far the MTA’s largest component, responsible for between 54% and 56% of baseline period revenues. TBTA tolls, the second largest top-line component, accounted for between 23% and 25% of baseline period revenues. The Commuter Trains were third largest, and the bus system a significant fourth.

Economics vary considerably across MTA operating units. Most importantly, the TBTA is the only ‘profitable’ part of the system, contributing the entirety of unit-level operating income and generating cash flow to subsidize the rest of the MTA Group. Further, the TBTA held up significantly better during Covid-19, with a much shallower decrease and faster rebound.

In the 2015-2019 baseline period, the MTA Group essentially operated on a break-even basis, with the revenues just matching expenses, even after including tax subsidies.¹⁶¹ To put it differently, the MTA historically operated with minimal margin for error.

2. Capitalization

The MTA’s aggregate funded debt exceeds $51 billion, with $50.3 billion of direct obligations and nearly a billion of indirect liabilities as of 2021.¹⁶² The system’s operations are inherently expansive and capital-intensive and generate insufficient earnings to fund investment needs. Because of this, the MTA has required extensive borrowing to finance capital costs across its operating segments. Historically, its robust top-line has supported a relatively low cost of capital and generally favorable market access.

Figure 5 below provides a snapshot of the MTA’s largest obligations as of Q1 2021.¹⁶³ As common for U.S. infrastructure, the MTA’s obligations are largely “revenue bonds,” supported by dedicated revenue streams and paid through a ‘trust’ structure.¹⁶⁴

Figure 5. MTA Group Debt Summary (Q4 2021)

The MTA’s pledged revenue obligation (as of Q4 2021) fall into four primary categories, with two backed by fare or toll operating revenue, and the others representing securitizations of tax revenues¹⁶⁵:

$28.75 billion of Transportation Revenue Bonds (“TRB”), equal to 58.6% of total pledged obligations, backed by Transit System “farebox revenue” from the NYC subway, buses and commuter trains;
$9.41 billion of TBTA bonds, backed by bridge and tunnel toll revenues;¹⁶⁶
$5.53 billion of dedicated tax fund (“DTF”) bonds, backed by the Mass Transportation Trust Fund (“MTTF”) and Metropolitan Mass Transportation Operating Assistance (“MMTOA”) receipts; and
$5.37 billion of payroll mobility tax revenue-backed obligations (“PMT Bonds”).¹⁶⁷

The MTA’s financial position deteriorated significantly in 2021, with debt increasing $5.2 billion and liquidity shrinking by $1, despite extensive federal support.¹⁶⁸ Further, limited investor appetite for additional fare-linked exposure required the MTA to introduce the PMT bonds, a new obligation type backed by securitized tax-revenue, perceived as “more stable.”¹⁶⁹ That said, despite initial shocks¹⁷⁰, the bond market view appears to have calmed considerably, with MTA spreads relatively tight relative to higher credit quality issuers.¹⁷¹ The below is an MTA-produced diagram, detailing the consolidated flow of funds underlying its obligations:¹⁷²

Figure 6. MTA Pledged Revenues Flow of Funds

The MTA pledged revenue structure reflects a system built around subsidizing the NYC subway — a deliberate policy determination intended to optimize the associated externalities.¹⁷³ The flow of funds works essentially as follows. The TBTA and NYCT, both operating entities, collect toll and farebox revenues, which are first used for their operating expenses and then go to pay for debt service. The DTF and PMT are not operating entities – really, closer to securitizations of tax revenue – and thus don’t have operating expenses, only their debt service. Because of the Transit System’s structural shortfall, the three other types of bonds – TBTA, DTF and PMT – provide “excess funds” (after operating expenses and their debt service) to support the TRB obligations, without which the MTA Group could not meet the TRBs’ debt service requirements.

The critical point to understanding the MTA Group’s financial predicament is that the TRBs constitute the majority of the its obligations, but the Transit System does not generate sufficient revenue to cover their associated debt service requirements, effectively requiring cross-subsidization.

3. The MTA’s Challenges

The consistency of the MTA’s historical performance allowed markets to get comfortable with a capital structure leveraged to perfection and contractual terms set in stone – including a ‘no bankruptcy’ clause. Then, the world changed.

As described in a recent State Comptroller report, the MTA is “facing significant long-term financial challenges, including risks to its capital plan and pressure from escalating debt, while the impacts of climate change demand a sharper focus on preparation for and response to extreme weather events.”¹⁷⁴

Many of the MTA’s challenges pre-date the Covid-19 pandemic but have been significantly exacerbated by it.¹⁷⁵ At the same time, the core issues – particularly systematic infrastructure underinvestment, exacerbated by climate change – are hardly unique to the MTA, but rather a reflection of issues consistently facing the U.S. infrastructure sector as a whole.¹⁷⁶

This section proceeds in three parts. First, it will discuss the ‘revenue side’ in respect of the impact of Covid-19 on the MTA’s financial position. Second, it will discuss the ‘cost side’ focusing on effects of climate change through a discussion of the MTA’s now-delayed $51.5 billion capital program.¹⁷⁷ As discussed below, though impossible to precisely quantify,¹⁷⁸ climate change adaptation and mitigation efforts will unambiguously require significantly higher capital expenditure for decades to come.¹⁷⁹ Finally, it will outline pandemic period government support measures, and challenges to further assistance.

a. Revenues: Covid-19 Ridership Declines

Covid-19’s unprecedented shock nearly created a liquidity crisis for the MTA. Though, the potentially more significant impact may ultimately be structural degradation of the MTA’s long-term revenue profile, and, correspondingly, credit quality stemming from secular demand changes.

An MTA-commissioned McKinsey study estimated Covid-19’s aggregate impact to total about $20 billion through 2024, with “[o]perating revenues…projected to be down $10.7 billion, subsidies $6.9 billion lower, and expenses $2.7 billion higher.” ¹⁸⁰

This is likely to be particularly acute for the NYCT subway system, which supports nearly $30 billion of TRBs. The MTA’s 2022 Final Proposed Budget was unambiguous, stating that:¹⁸¹

NYCT’s financial outlook remains fragile, with current projections…forecasting NYCT will only reach 87.5% of pre-pandemic ridership by the start of 2024, resulting in significantly less farebox revenue.

The chart below shows MTA ridership figures across system components on a quarterly basis as compared to pre-Covid-19 levels:

Figure 7. MTA Group: Ridership Volume Pre-and Post-Pandemic (2020, 2021)

The data can be divided into three core periods, each represented by a different oval:

The first (red oval, at left), reflects the direct impact of Covid at the worst part of the pandemic in early 2020. That period saw the sharpest utilization declines across system units. The MTA’s subway system (dotted red line) – its largest revenue driver – experienced some of the deepest declines, with ridership down over 90% in April, 2020; the Metro-North and LIRR saw even steeper deterioration.¹⁸² However, consistent with the revenue data above, the TBTA experienced a far shallower drop and faster recovery.
The second period (light green oval, at center), corresponds to the nationwide vaccine roll-outs starting around mid Q1 through Q2 2021. This period saw significant recovery across system components, with the TBTA returning to utilization above 90%. The NYCT improved to nearly 40% utilization, with the LIRR and Metro-North close behind.
The final period (teal oval, at right) corresponds to Q4 2021. Due to continued vaccination increases, the NYCT has improved utilization to nearly 60% of pre-Covid levels, with the LIRR and Metro-North reflecting a similar upward trend. TBTA utilization, meanwhile, essentially recovered to pre-Covid levels, with some days in November 2021 actually exceeding pre-Covid period traffic.

The trends in the ridership and revenue data are highly consequential for thinking about the future of the MTA Group, and, correspondingly, the system’s options for regaining its financial footing. Infrastructure utilization is, in many ways, a reflection of day-to-day life.¹⁸³ Shifting work and life patterns – including the increase in remote and ‘hybrid’ work¹⁸⁴ – ultimately raises serious questions about the long-term demand structure for the Transit System¹⁸⁵ and TBTA in a post-pandemic world.¹⁸⁶

b. Costs: Climate Change

The revenue side of the equation is unfortunately only half the problem for the MTA. “With extreme weather events becoming more and more frequent – [climate change] clearly has to be a major priority for the agency,” remarked Janno Lieber, the MTA’s chief executive officer at a September, 2021 board meeting.¹⁸⁷ Indeed, for over a decade, the MTA has viewed climate change adaptation as being “imperative.”¹⁸⁸

For our purposes, the two sets of issues are closely related as the shock from Covid-19 also forced the MTA to delay its long-planned capital investment program to conserve cash, as noted above.

The economics and engineering literature has identified the “increasingly urgent” issues, as well as the novel challenges, facing transit systems as a result of climate change and adaptation.¹⁸⁹ In a recent paper, Martello, et al, developed a quantitative framework for incorporating climate costs, using the Massachusetts Bay Transit Authority in Boston as a case study.¹⁹⁰

In many ways, the impacts of climate change are not necessarily creating wholly new issues, as much as they are exacerbating long-standing problems in novel ways and at unprecedented rates.¹⁹¹

In 2012, system-wide damage from Hurricane Sandy totaled over $5 billion; the MTA has not yet completed repairs.¹⁹² In 2017, then-governor Cuomo declared a “state of emergency” following a series of tragic events.¹⁹³ More recently, in September, 2021 Hurricane Ida’s record-setting rainfall caused subway flooding in 46 locations, requiring the MTA cut service overnight, leaving many passengers stranded.¹⁹⁴ A New York Times analysis determined that the MTA’s maintenance budget was largely unchanged over the last 25 years, despite passenger volume more than doubling.¹⁹⁵

To address these issues, in 2018, the MTA unveiled an ambitious capital program, which called for $51.5 billion of system-wide investment in the 2020-2024 period (the “2020-24 Capital Program”), 70% more than the 2015-2019 capital program.¹⁹⁶ The 2015 capital program “did not directly address climate resilience,” while the 2020-24 Capital Program discussed climate largely in context of broader capital needs.¹⁹⁷

Due to the financial impact of Covid-19, the MTA delayed deploying the 2020-24 Capital Program. While the MTA has filed its 2021 budget, which incorporates various elements of capital spending, it has yet to directly address how the 2020-2024 Capital Program will be amended and deployed.

While the MTA has been understandably reluctant to put an explicit number on the costs of climate change, the impact is clearly large, requiring significant new investments, well above and beyond prior programs – and potentially beyond the $51.5 billion capital plan delayed by Covid-19.

c. Pandemic Period Government Support

At the depths of Covid-19 in 2020 and 2021, the MTA only averted a full-blown liquidity crisis through multiple rounds of federal support, totaling “almost $15 billion.”¹⁹⁸

First, in 2020, the MTA received an approximately $4 billion infusion from the March, 2020 CARES Act, the single largest allocation of $25 billion in transit support.¹⁹⁹ Over the course of 2020, demand did not recover, resulting in large deficit forecasts going into 2021. The MTA warned of potentially drastic service and workforce reductions – affecting up to 40% of subway lines and 9,300 jobs.²⁰⁰

Because of this, the MTA received a second $4 billion federal infusion through the December 2020 stimulus bill,²⁰¹ which addressed the MTA’s 2021 shortfall, postponing potential layoffs and service cuts.²⁰² The MTA also expects to receive “more than $10 billion” of direct and indirect support through the 2021 Infrastructure Act.²⁰³

Along with fiscal support, when it was shut out of bond markets,²⁰⁴ the MTA also leveraged federal monetary measures, borrowing $3.36 billion from the Federal Reserve’s Municipal Liquidity Facility.²⁰⁵ The only other issuer to utilize the facility was the state of Illinois which borrowed $3.2 billion.²⁰⁶

New York state’s fiscal year 2020-21 budget also incorporated provisions to support the MTA, including increasing its total bond cap to $90.1 billion (from $55.497 billion) and creating “new authorization” for the MTA to issue up to $10 billion of bonds annually for three years through 2022.²⁰⁷ The MTA has taken advantage of this though the PMT bond issuances, however the market’s appetite for additional exposure appears unclear.

Additional proposals to support the MTA have included a levy on package deliveries, notwithstanding the lack of a clear nexus to the MTA’s activities and operations.²⁰⁸

Further federal support is hardly unproblematic, either. Particularly as the worst of the pandemic passes, allocations of federal capital for state-specific projects raises distinct policy questions in respect of the traditional divisions of responsibility for infrastructure.²⁰⁹ Lawmakers from California and Texas, for instance, may query federal resource allocation to effectively subsidize the New York MTA, from which they do not benefit.

The combination of government support and delayed capital spending have stabilized the MTA’s near-term financial position. However, it continues to project multi-billion-dollar deficits and has not ruled out future service cuts or workforce reductions.²¹⁰ Based on the data, it appears that exogenous changes have fundamentally altered the core revenue model predicating the MTA’s $50 billion of debt, logically requiring changes to reflect the MTA’s its altered reality.

B. Why Can’t the MTA ‘Right-Size’ its Obligations?

Normally, an entity facing severe revenue pressure and an increasingly unsustainable debt burden would have broadly three sets of avenues for healing itself: (i) improving the ‘business’; (ii) re-negotiating its obligations out-of-court; or (iii) if all else fails, bankruptcy protection.

This section discusses each of these three approaches, concluding that the MTA cannot utilize any, leaving it stuck between a rock and the proverbial hard place.²¹¹

1. Limited ‘Commercial’ Options

The MTA’s financials show a business facing secular demand declines across key customer segments, coupled with a rising cost structure. For a private company, the traditional avenues for endogenously ‘right sizing’ its financial position fall into two categories: (i) increasing revenues or (ii) decreasing costs. However, this is where the MTA’s position as an imperfect public good with public purpose –responsibilities beyond the numbers – comes into sharp focus.²¹² Specifically, for the MTA, potential fare increases or service cuts present policy concerns, as such measures can arguably function like a regressive tax, most punitive on individuals with limited means.

The MTA’s operating revenues are basically a function of price (fares) and quantity (number of users). As a result of Covid-19, quantity declined while prices stayed constant, resulting in less revenue. However, despite likely long-term demand pressure, the MTA cannot simply raise rates to make up the difference.²¹³

Demand elasticity for public transit appears highly non-linear across income and wealth. This, in many ways, is this is a function of the uneven distribution of return-to-work mandates. While many higher-income ‘white collar’ workers can work remotely, the typically-lower-income ‘critical workers’ have often had to continue coming to work even during the pandemic.²¹⁴ Middle class workers are now starting to return as well.²¹⁵ These lower-income individuals are most price sensitive and least likely to have access to more expensive substitutes, like ride-share services.²¹⁶ Given the circumstances, fare increases simply do not seem like the right thing to do, and, to its credit, the MTA is holding back for the time being (in part due to federal aid).²¹⁷

The MTA’s cost structure is also relatively fixed, as cost-reduction measures would entail decreasing service or further paring back capital investment.²¹⁸ However, given the nature of the NYC subway system – with a dense Manhattan core and ever-thinner arteries towards the boroughs – service cuts also carry elements of a regressive tax, with disproportionate impact of reduced transit options for lower-income individuals living outside of Manhattan. At the same time, given the continued effects of climate change discussed in Part II.A.3, additional reductions in capital investment are problematic and likely to increase long-run total expenses.²¹⁹

Furthermore, a combination of higher fares and deteriorating service (not to mention safety issues)²²⁰ could further reduce the ridership base, leaving ever-fewer people to shoulder the MTA’s debt burden, and risking a utility “death spiral.”²²¹

Fundamentally, the reality is that the MTA was on shaky financial footing pre-pandemic; Covid-19 accelerated the challenges, but did not cause them, suggesting that even a return to pre-pandemic volumes will not be a comprehensive solution. However, particularly given the MTA’s rapid financial deterioration and economic importance, it cannot afford to continue kicking the proverbial can.²²²

2. Contractual Hurdles to Creditor Negotiations

Given the clear policy constraints on exercising traditional commercial levers, the MTA’s next step may be to attempt to re-negotiate its obligations to creditors. For many organizations, an out-of-court transaction provides a viable alternative for ‘right-sizing’ obligations.

While a bankruptcy prohibition, detailed in the next sub-section, is rather uncommon – indeed, largely impermissible for corporate or individual debtors²²³ – for sovereign borrowers it is very much the effective norm, as there is no formal forum or process for adjustment of debts of a sovereign nation.²²⁴ Thus, all sovereign debt restructurings are, in highly simplified terms, carried out on a contractual basis through bilateral negotiations with creditors. In effect, a sovereign debt restructuring is a modification of contracts for entities without the ability to file for bankruptcy. From that vantage point, while the MTA’s challenge is somewhat unique, it is not entirely novel.

In practice, however, an out-of-court solution for the MTA is unlikely to be viable for at least 3 reasons.

First, to account for the lack of an insolvency forum, the contractual structure of sovereign bonds has evolved to include features that the MTA’s bonds lack. A key innovation in this regard was the development of so-called collective action clauses, or CACs.²²⁵ CACs are essentially a mechanism to bind creditors to a transaction upon reaching a requisite threshold of votes. CACs can be (i) ‘single series,’ applying to solely a particular series of bonds, or (ii) ‘global,’ allowing modifications to be made by bondholders aggregated across series.²²⁶ Many of the MTA’s bonds, however, do not appear to have contractual modification provisions at all – in other words, they did not contemplate ever being amended.²²⁷

That is markedly worse than even the circumstances facing distressed sovereigns, like Lebanon and Argentina.²²⁸ Global collective action clauses allowed Argentina to effectuate a modification by votes of bondholders aggregated across series in its recent restructuring. Even Lebanon’s sovereign contracts, which lack global CACs, allow for modification of individual series with 75% consent.²²⁹

Figure 8. Collective Action Clauses – Argentina, Lebanon & The MTA

Lacking these contractual provisions makes restructuring the MTA bonds out of court very difficult as it would require wholesale consent, which appears problematic given innately high hold-out risk.²³⁰

A second and closely related issue is the sheer complexity of the MTA’s capital structure, which features hundreds of outstanding bonds, with a range of tranche sizes and maturities.²³¹ Those bonds are held by a wide array of investors – including likely many individuals²³² — the identities of which are often not publicly known. Even with CACs in place, the structure would make for an unwieldy transaction; without CACs it may well prove impossible.

Finally, conflict between bondholders at different issuing entities is possible, if not likely. Leverage is highest (and credit quality lowest) for the TRBs. However, those bonds benefit from a second-lien on the other three sets of cash flows, making it difficult to see how a deal could play out on a purely consensual basis.

3. Bankruptcy Ineligibility

As discussed above in Part I, dual-federalism is an integral facet of the U.S. governmental framework. This creates unique tensions for municipal bankruptcy. Bankruptcy law is a national framework promulgated by the federal government. It does not apply to the states themselves, however, because they are ‘dual-sovereigns’ alongside the federal government.²³³ Each state must specifically authorize municipal entities within it to utilize Chapter 9, the Bankruptcy Code provisions specific to “municipalities.”²³⁴

As discussed below, covenants in the MTA’s bond documents, as well as New York state law, prohibit the agency from filing for bankruptcy. Though certain provisions of New York state law render the situation somewhat less cut-and-dry than perceived by market participants, the practical reality is that the MTA would have significant challenges in pursuing a formal debt adjudication process.

a. Lack of Chapter 9 Authorization

Chapter 9 eligibility is governed by a five-prong test under Section 109(c) of the Bankruptcy Code. The first two prongs are likely to be most relevant for purposes of this discussion.²³⁵ Pursuant to those provisions, an entity is permitted to file under Ch. 9 “if and only if such entity: (1) is a municipality;²³⁶ [and] (2) is specifically authorized . . . to be a debtor under such chapter.”²³⁷

The Bankruptcy Code defines a “municipality” as a “political subdivision or public agency or instrumentality of a State.”²³⁸ In New York City Off-Track Betting Corp, for instance, the court determined a public benefit corporation operating a horse betting parlor to be “‘municipality’ as defined by the current Bankruptcy Code.”²³⁹ The MTA is thus quite likely to meet this definition.

The second prong is where the challenge arises. That provision holds that unlike corporate and individual debtors, a municipality cannot file for bankruptcy unless it is specifically authorized to do so. Some states explicitly prohibit municipal filings; others, including New York, condition the ability to file for Chapter 9, and may prohibit it for certain entities, as appears to be the case with respect to the MTA.²⁴⁰

Indeed, the market consensus view is that the MTA doesn’t just lack authorization to file for Chapter 9, but is specifically prohibited from doing so.²⁴¹ The relevant language in the MTA’s TRB bond documents provide as follows:²⁴²

No Bankruptcy. State law specifically prohibits MTA, its Transit System affiliates, its Commuter System subsidiaries or MTA Bus from filing a bankruptcy petition under Chapter 9…As long as any [TRB] are outstanding, the State has covenanted not to change the law to permit MTA or its affiliates or subsidiaries to file such a petition. Chapter 9 does not provide authority for creditors to file involuntary bankruptcy proceedings against MTA or other Related Entities.

The underlying state law language referenced in the MTA TRB documents is arguably even firmer, providing that:²⁴³

So long as the [NYC Transit Authority] or any of its subsidiaries, or [the MTA], shall have outstanding any notes, bonds, lease, sublease or other contractual obligations…neither the authority nor any of its subsidiaries shall have the authority to file [under Ch. 9], and neither any public officer nor any organization, entity or other person shall authorize the authority or any of its subsidiaries to be or become a debtor under said chapter nine…

On their face, the provisions appear generally consistent with the market view.²⁴⁴ Indeed, analysts have noted that the MTA’s “inability to file for bankruptcy protection [is] an important criteri[on]” in supporting its ability to borrow.²⁴⁵

b. State Law Alternatives Inoperable

Aside from the sovereign context, the premise of an entity being ‘shut out’ from bankruptcy protection is uncommon, but not entirely new.²⁴⁶ The most prominent recent example is perhaps the Commonwealth of Puerto Rico, which found itself underdoing a severe financial crisis and unable to file for bankruptcy within existing frameworks. ²⁴⁷

Puerto Rico’s predicament was ultimately addressed by the PROMESA legislation, which was inspired by A Two-Step Plan for Puerto Rico, in which Professors Skeel and Gillette proposed addressing Puerto Rico’s unique challenges by: (i) first creating a financial oversight board and, (ii) second, giving the Commonwealth a formal mechanism for adjusting its debts.²⁴⁸

Here, New York State law appears to provide the MTA access to an “oversight board,” somewhat akin to the “first step.” Critically, however, the MTA likely lacks access to the second step of a “formal mechanism for adjusting its debts.”

Following New York City’s financial distress in the 1970s, New York enacted a so-called “municipal distress statute,” allowing a financial control board”²⁴⁹ to be put in place during a financial “emergency period,” for any “municipality,” other than the city of New York That legislation also provides a state-level mechanism²⁵⁰ for the resolution of debts, subject to state court approval, rather than Chapter 9, as well as specific authorization for a financial control board to effectuate a petition in federal bankruptcy court.²⁵¹

However, the main hurdle to utilizing the state-level provisions is 903 of the Code, which generally prohibits state-specific proceedings from binding non-consenting creditors.²⁵² In Puerto Rico v. Franklin California Tax-Free Tr., the Supreme Court reiterated that Section 903 acts as a “pre-emption provision” for purposes of state-law-created bankruptcy processes.²⁵³ This suggests that New York likely could not utilize its municipal distress statute to bind creditors without their consent.

Further, putting aside Section 903, satisfying the contractual bond document language discussed above would require making the difficult argument that an emergency financial control board is not a “public officer nor any organization, entity or other person” for purposes of the MTA Act.

Perhaps even more importantly, Chapter 9 access would not necessarily be a panacea for the MTA or other revenue bond issuers, given the challenges in restructuring revenue bonds.²⁵⁴ Thus, while many dimensions discussed above are inherently distinctive to the MTA, the underlying issues – deteriorating financials and insufficient avenues for adjustment of obligations – are broad-based, with applicability to a range of municipal infrastructure entities.

III. Asset Recycling: MTA Application

“What actually needs to happen is for the US to adopt an infrastructure asset recycling programme, and now it has a golden opportunity to do so.”²⁵⁵ – Jigar Shah, Director, Department of Energy Loan Programs Office

A tailored asset recycling strategy provides a highly attractive avenue for resolving the MTA’s financial challenges, with significant implications for infrastructure policy nationwide.

This Article finds that a concession for just the TBTA assets can, conservatively, generate $33 to $53 billion in proceeds, sufficient to repay the majority, if not entirety, of the MTA’s $51 billion debt load. As a result, the MTA will have the financial wherewithal to make long-needed investments for the future – without further government support.

This section is organized in three sub-parts. First, it discusses the asset recycling proposal, with a focus on structural safeguards. Second, it details the underlying valuation analyses, including a waterfall model showing the deleveraging impact. Finally, it contrasts the proposal with alternatives, illustrating superior value creation and distinguishing it from privatization.

A. Transaction Structure

Asset recycling, as discussed above, is a two-phase process consisting of: (i) monetization of existing infrastructure and (ii) reinvestment of the proceeds.²⁵⁶

Applied to the MTA it could be structured as follows (henceforth, the “MTA A/R”):

First, through a long-term concession, the transaction would ‘monetize’ only the TBTA assets – not the Transit System itself (the “TBTA Concession” or “TBTA P3”).
Second, proceeds would be used to deleverage the Transit System, rather than for investment in new infrastructure, as is more typical.²⁵⁷

From a technical perspective, as shown in Figure 12 below, the MTA A/R transaction is predicated on separation of the two operating segments, and a concession agreement for only the TBTA assets.²⁵⁸ The transaction would not contemplate any operational or ownership changes to the Transit System.

Figure 9. MTA A/R Transaction Structure

Three aspects of the above structure are notable for our purposes:

Entity Formation & Governance (Step 0). Preliminary step of forming and capitalizing the concessionaire special-purpose-vehicle (SPV), the entity formally party to the TBTA Concession, and establishing bespoke governance reflecting the specific agreement and associated safeguards. ²⁵⁹ This critical gating step is denoted as preliminary step 0 (rather than step 1) to reflect that the primary transaction should not move forward unless this can be satisfactorily accomplished.²⁶⁰
Monetization / Contract (Step 1). Under the agreement, the MTA:
- Receives $30-50 billion concession payment
- Retains ownership and title of the TBTA assets; and
- Transfers all maintenance obligations to the SPV
Reinvestment (Step 2). The MTA applies the Concession Payment proceeds to repay its obligations.²⁶¹See Part III.B.3.

As a general proposition, the asset recycling framework offers the MTA significant optionality in respect of process control, transaction structuring, retained economics, governance and oversight.²⁶² For instance, the MTA could retain residual economics in the TBTA assets, mimicking Australia’s approach in some transactions.²⁶³

The TBTA Concession must be particularly thoughtful with respect to the regulatory structure.²⁶⁴ Of particular importance are toll rates and asset maintenance, where there must be continuity comprehensive public sector oversight and regulation, akin to Australia’s approach.²⁶⁵ Another guidepost may be rate-setting for investor-owned utilities, with substantive rate changes requiring regulatory approval following a public process with comprehensive disclosures.²⁶⁶

B. Concession Valuation

Perhaps the single most intriguing aspect of the proposed transaction is the extremely attractive valuation of a long-term TBTA asset concession. This sub-section of the Article empirically analyzes both the monetization and reinvestment phases of the proposed transaction.

The concession is valued using two methodologies,²⁶⁷ each of which embeds multiple layers of highly conservative assumptions: (i) EBITDA multiples, the industry-standard approach, which produces a midpoint value of $43.05 billion; and (ii) discounted cash flows, which yields a range between $37.03 and $42.74 billion.

1. EBITDA Multiples

EBITDA multiples are a common valuation methodology for mature infrastructure assets, such as toll roads and bridges.²⁶⁸ Methodologically, the main advantages are relatively simplicity, with limited inputs, and a capital structure neutral framework, making it preferable to the DCF in this context. Prior research on toll asset transactions has found an EBITDA range between 18.3x and 35.5x, with an average of 26.2x, and suggested a range between 20x and 30x (the approach taken below).²⁶⁹ The author’s review of publicly-available data regarding recent transactions found an average of 29.6x EBITDA, with the two U.S. transactions in the data set both above 30x.²⁷⁰ Other research has observed a significant premium placed on U.S. infrastructure by investors, finding an EBITDA multiple of 60x, relative to the mid-teens for comparable French assets.²⁷¹

The below sensitivity analysis uses as the midpoint the TBTA’s MTA-estimated 2022 forward EBITDA of $1.72 billion, with a range between $1.67 and $1.82 billion.²⁷² Given the pricing on U.S. transactions, a multiples range between 25x and 35x is likely more appropriate, but to provide a conservative estimate, the shaded box corresponds to a 20x to 30x range. At 20-30x, the analysis indicates a midpoint of $43.05 billion, with a range between $33.4 and $53.2 billion; at 25x to 35x, the midpoint is $51.66 billion, with a range between $41.8 and 62.02 billion.

Figure 10. TBTA Concession – EBITDA Multiples Valuation & Sensitivity Analysis

2. Discounted Cash Flows

The analysis below values the TBTA Concession based on discounted cash flows, with forecasted figures for 2022-2025 from the MTA Group’s 2022 Final Proposed Budget.²⁷³ Importantly, P3 valuations are highly sensitive to the concession length and overall contractual structure. Correspondingly, the below shows the present value based on contract lengths of 30, 50, 75, and 99 years (common in such deals).²⁷⁴

As shown below, the MTA forecasts that TBTA revenue will be relatively steady between $2.2 and $2.3 billion going forward, while costs will widen somewhat from $501 million in 2021 to $600 million by 2025. The model incorporates the impact of higher post-deal leverage, resulting in increased interest expense totaling about $867.6 million annually, and net income around $850 million annually through 2025.²⁷⁵ Cash flows are discounted based at the estimated pro forma post-transaction weighted average cost of capital.²⁷⁶

Figure 11. TBTA Concession – DCF Valuation

For a 99-year lease, the analysis finds a value of $37.03 billion, incorporating pro forma impact of increased post-transaction leverage and interest expense, or $42.74 billion on a constant capital structure basis. This is likely rather highly conservative given that the analysis (i) uses a highly conservative estimate of the cost of capital;²⁷⁷ and (ii) models a steady margin contraction, which implicitly assumes relatively low volume without meaningful rate increases.

3. Concession Reinvestment Waterfall Analysis

This analysis focuses the second phase of asset recycling – capital reinvestment – illustrating the transformative balance sheet impact.

Figure 12 shows a simplified capitalization, accounting for the P3 transaction pro forma based on EBITDA multiples between 20x and 40x. The analysis applies a waterfall of payments, with funds first going to the TBTA bonds, then the TRBs, then DTF and then PMT, and finally the outstanding revolver.²⁷⁸

Figure 12. Asset Recycling: Capital Reinvestment Pro Forma Waterfall Analysis

The above analysis shows a vast impact on the MTA Group’s financial profile at any of the EBITDA multiples — specifically:²⁷⁹

Even at a 20x EBITDA multiple, all of the TBTA bonds, and $25 billion, or 87%, of TRB bonds would be paid off.
At a 25x multiple, the entirety of the TBTA and TRB bonds, as well as most of the DTF bonds would be paid down, leaving total debt of just $7.21 billion.
At 30x, 35x and 40x, the transaction would repay the entirety of the MTA Group’s debt, while yielding incremental payments of $1.4 billion, $10.01 billion and $18.62 billion, respectively.

The resulting deleveraging would create an entity with not only a sustainable debt profile, but also capacity to invest incremental billions into building the sustainable infrastructure of the future.

C. Benefits & Contrast to Alternatives

The proposed MTA A/R transaction creates significant new value, representing a financially superior option relative to available alternatives. At the same time, from a policy perspective it is distinct from – and distinctly preferable to – a privatizations or sale of assets.

1. Financially Superior to Additional Debt

The value creation from asset recycling is aptly illustrated through a comparison to a potential alternative: the TBTA taking on more debt, and using the proceeds to retire TRB obligations.²⁸⁰ There is some industrial logic to this, as the TBTA could support more debt but instead subsidizes the TRBs – this would just move the obligations to the ‘box’ truly responsible.

Figure 13 below shows the stylized pro forma impact. Theoretically, the TBTA could support approximately between $10 and $15 billion of additional debt.²⁸¹ As illustrated in the “new bond issuance” box below, this would imply reducing TRB obligations from $28.75 billion to between $13.75 and 18.75 billion, and increasing the TBTA’s leverage by a corresponding amount.

Figure 13. Pro Forma Comparison: MTA A/R vs Incremental TBTA Bond Issuance

While resulting in a somewhat more sustainable TRB debt burden, the critical failing of this approach is that it does not reduce aggregate MTA debt, but merely re-arranges it. Though a more logical allocation, it still leaves the MTA without room for much-needed capital investments.

In contrast, even at a 20 or 25x EBITDA multiple (well below average U.S. transactions), the MTA A/R yields a respective $10.3 and $12.9 billion in incremental value. That value creation comes from monetization of latent TBTA equity.²⁸²

At present, there is no ‘value’ attributable to TBTA equity exposure. The MTA A/R transaction would unlock it by creating investable equity in the concessionaire SPV. This would also expand the potential investor base, with respect to both institutions²⁸³ and geography²⁸⁴.

The elegance of the transaction is further reinforced by market dynamics: there is an insatiable demand for yield, and $300 billion of infrastructure-specific ‘dry powder’ and sector capital estimated to grow to $1.87 trillion by 2026.²⁸⁵ By supplying exactly what the market wants – a marquee infrastructure asset with high, consistent and stress-tested cash flows – the MTA would be able to command a premium while offering a uniquely compelling value proposition to a broadened investor base.²⁸⁶

2. Rationalizes Structure & Capital Strategy

At present, the MTA houses two fundamentally different businesses with minimal economies of scale or scope, and seemingly no clear synergies warranting keeping them together.²⁸⁷ Indeed, the primary linkage between the TBTA and the Transit System is the second lien on TBTA cash flows supporting the TRB obligations.²⁸⁸

The contractual structure and capitalization of the MTA group makes a separation of TBTA assets feasible. The MTA and TBTA are operationally and legally separate entities, as the TBTA is an affiliate rather than a subsidiary of the MTA. They are also separately capitalized.²⁸⁹

The TBTA already subsidizes the NYCT but does so in a relatively financially inefficient manner. Instead of making annual payments through TBTA excess funds, the P3 transaction would simply bring forward those cash flows by monetizing otherwise “latent equity,”²⁹⁰ taking out the MTA Group’s debt and savings billions in annual debt service costs.²⁹¹

This has the additional benefit of temporally aligning the MTA’s revenues and liabilities. At present, the MTA has extensive unfunded climate liabilities that risk swelling if not addressed. With the caveat of commercial best practices in monetization and reinvestment being essential,²⁹² given the circumstances, bringing forward the TBTA Concession payment is valuable because the MTA’s problems are very much in the present.

3. Distinct from a Sale or ‘Privatization’

A concession is also meaningfully distinct from either a sale or privatization. Some scholars have argued that long-term concessions effectively represent a sale akin to full privatization because, amongst other considerations, the asset’s useful may fully depreciate by the time the government regains control.²⁹³ While the economics of a long-term concession can indeed mirror that of a sale, two distinctions are relevant for our purposes.²⁹⁴

First, the physical asset encompasses a limited portion of the TBTA’s true value; the real economics stem from title and ownership to a natural monopoly.²⁹⁵ For instance, the TBTA’s capital assets are marked around $6.6 billion, representing at most 15-20% of the concession value. If asset is at the end of its useful life by the end of the contract, the MTA could simply enter into a greenfield concession for a private entity to develop and manage replacement assets, earning itself a replacement revenue stream.²⁹⁶

Second, and most importantly, a concession allows for bespoke contractual structuring with embedded optionality to an extent not feasible in a sale transaction, as discussed below.²⁹⁷ Following a sale, the primary ‘checks’ would be regulatory – which can be effective – though more significant actions could implicate constitutional considerations, including ‘takings’ issues.²⁹⁸

Some commentators have suggested a ‘traditional’ privatization of the Transit System to resolve the MTA’s financial challenges.²⁹⁹ While effective in other jurisdiction – such as Japan, which is pursuing an IPO of the Tokyo Metro – the approach would not work for New York, implicating significant commercial and policy issues, while offering few benefits.³⁰⁰

Commercially, the Transit System, and NYCT in particular, is unlikely to be particularly attractive for investors. The economic value of the TBTA stems from its stable EBITDA and significant free cash flow; the Transit System offers neither. Further, while the TBTA is operationally not dissimilar to commercial real estate³⁰¹, the Transit System is a complex enterprise with tens of thousands of employees.

More importantly, a Transit System privatization would raise serious policy concerns. The Transit System is part of the socio-cultural fabric of New York City. It also closely interplays with core police powers and regulatory functions, including coordination with law enforcement.³⁰² Further, the Transit System reduces negative externalities, which is difficult for the private sector to internalize.

Indeed, a core rationale for the MTA A/R is to resolve the MTA Group’s financial challenges to ensure a ‘fresh start’ through which the MTA has the wherewithal to develop and finance a world-class transportation system for the future – and the public good. Notably, in contrast to the MTA, other jurisdictions, such as Japan, have privately-owned transit systems.

IV. Policy Implications & Considerations

This final Part of the Article discusses normative considerations and policy implications raised by the earlier analyses, while identifying areas for future research.

A. Principles for ‘Hybrid’ Models

As the MTA proposal illustrates,³⁰³ asset recycling, and ‘hybrid’ models more broadly, offer a vast opportunity – estimated at over $1 trillion in the aggregate.³⁰⁴ Leveraging our stock of existing infrastructure to finance the development of new assets can create a virtuous cycle that alleviates the infrastructure investment gap – helping mitigate climate change and build a sustainable economy for the future.

However, deployment of asset recycling must be thoughtful and disciplined. The strategy can work well for certain assets; for others, it may be inapposite, perhaps even counterproductive. This is well illustrated by a contrast between the TBTA and Transit System. The TBTA is a highly-mature, cash-flowing asset with limited operations, and largely removed from much discernable ‘public purpose’; it does not need to be owned by the government. The NYCT, in contrast, likely should be in public hands; it is integral to core governmental functions – including public safety and substantive policy.³⁰⁵

That contrast helps illustrate some guiding principles regarding asset selection. First, the transaction has to provide integrative value creation – in other words, a payoff profile that results in a better aggregate outcome than the alternatives. For instance, while as some have pointed out, a transaction for profitable MTA assets decreases future years’ cross-subsidy cash flows, monetizing the TBTA’s otherwise-latent equity provides upfront net present value in excess of those cash flows: a quintessential accretive solution.³⁰⁶ Second, asset selection must be mindful of externalities. Certain asset types are likely better suited for private sector participation, particularly mature infrastructure with limited potential to reduce negative externalities, which represents an area of divergent incentives between the public and private sectors. Finally, assets closer to ‘core’ governmental powers – like the Transit System – are less likely to be viable candidates for ‘hybrid’ models. From that vantage point, our prevailing approach raises some normative inconsistency. Privately-run prisons and emergency services, for instance, appear incompatible with this framework.³⁰⁷

Subsequently, once a potential asset has been selected, it is essential to follow governance and communications best-practices. Along with thoughtful, comprehensive public disclosures, the public sector entity should also maximize engagement, with any transaction subject to robust debate and public comment, with an open-mindedness towards incorporating changes.³⁰⁸ Furthermore, as the assets are held in trust for the public welfare decisions must be subject to robust democratic processes, including, if applicable under respective state law, public referendums.

From a fiscal and process perspective, a structural risk – illustrated by less successful transactions³⁰⁹ – is the government being a “forced seller.” In other words, budget considerations should not drive short-sighted decisions on long-term agreements – asset recycling is intended to generate funds for infrastructure, not operating budgets.³¹⁰ Optimizing the transaction structure also necessitates discipline; the MTA, for instance, would not be unwise to reject any TBTA Concession insufficient to repay a large majority of outstanding debt. This can be supported by a robust marketing and auction process facilitated by experienced independent advisers.³¹¹

Finally, given the economics of the respective assets – with rates ultimately paid by the public – a transaction must optimize not only the upfront payment, but instead balance consideration with governance rights and rate-setting oversight. Indeed, generating too much upfront is likely to result in ongoing tensions over rates, quality, or concessionaire financial distress. In that regard, the contracting structure is essential — and presents an area ripe for further research, including for instance structures incorporating retained economics coupled with equity ‘ratchets’ triggered based on ESG-specific considerations. As long as the mechanics are effectuated contractually, with ex ante clarity, the approach need not be problematic, but instead could offer an innovative, integrative approach to optimizing inherent trade-offs.³¹²

B. Governance: Nexus Between Public & Private

Our prevailing governance frameworks are well suited for public and private goods, with a rich literature regarding allocations of power between shareholders and managers – the separation of ownership and control.³¹³

Third, with respect to private sector participation, the investor base is not irrelevant. While, aside from geo-political considerations,³¹⁴ a significant amount of the allocation may be left for market mechanisms, some policy considerations remain. Certain stakeholders may have greater normative alignment with broader policy goals – such as pension funds, in particular.³¹⁵ While we may be ill-served by investment mandates, policy also should not disincentivize participation by such investors.³¹⁶ In that regard, asset recycling offers value by transitioning assets to a taxable structure that can allow tax-exempt asset managers to consider the investments on an apples-to-apples basis.

Finally, the optimal frameworks must put sustainability first, particularly with a focus on externalities – internalizing the negative, and incentivizing the positive. From that perspective, multi-stakeholder models could add value by having a broader range of impacted parties ‘at the table,’ providing voice to considerations and constituencies that are, all too often, not heard in the respect of matters impacting them the most.

C. Infrastructure Policy & Climate Change

Climate change and infrastructure are deeply intertwined. Without appropriate shared resources, it is difficult to overcome a crisis of externalities, aptly termed a ‘tragedy of the horizons.³¹⁷ This Article raises a number of considerations with respect to the optimal corresponding policy mix– particularly from the perspective of allocative equity with respect to costs and risks.

In many ways, it comes back to divisions of labor and responsibility – first as between the private and public sectors,³¹⁸ then between levels of government,³¹⁹ and ultimately, amongst individuals with an emphasis on social equity.³²⁰

With respect to the public-private interplay, as discussed above, the critical takeaway is that more private sector involvement may be beneficial, subject to appropriate safeguards. Further, while private capital can fill gaps, it is the government that must ultimately drive.

From that vantage point, a larger federal role in infrastructure policy may be logical – perhaps overdue – arguably warranting a transition away from the traditional federalist delegation of infrastructure responsibility to the states. The federal government has a structurally lower cost of capital with broader market access, incentives to look beyond state borders,³²¹ and is ultimately responsible for coordination with other nations.³²² However, the state and local expertise should not be ignored, particularly with respect to asset selection and project implementation.³²³

Finally, policy must be mindful of the deep underlying inequities of wealth, income and power that plague America. Thus, we must ensure that policy is not functionally creating regressive taxes, such as rate increases for natural monopoly assets.³²⁴ Equity, from both an allocative and socio-economic justice perspective, must be at the heart of infrastructure policy.

Conclusion

Infrastructure is an essential “shared means to many ends.”³²⁵ Yet, the ‘market’ for it exhibits pervasive disequilibria – with a $2.6 trillion funding gap – impairing our economy, quality of life and ability to address climate change. The disequilibrium goes beyond politics, driven by a combination of infrastructure’s unique economic attributes, and distinctive features of the U.S. system, including a public sector-centric framework and federalist delegation of infrastructure responsibility to the states.

Other countries take very different approaches, driving better outcomes – and illustrating that there is more than one option. Based on a holistic, global analytical framework this article proposes asset recycling as a solution, illustrated through the MTA case study.

The MTA is used, in part, because of its scale – with over $50 billion of debt, a long-delayed $51.5 billion climate investment program and ‘no bankruptcy’ bond covenants – but mainly because it reflects broader issues plaguing infrastructure policy nationwide. Transit systems in Boston, Chicago, Washington and San Francisco are burdened by eerily similar challenges. Our electric grid is “increasingly unreliable”; Flint’s water poisoned a generation of children.³²⁶

Asset recycling offers an extremely attractive solution for the MTA’s financial woes, with potential to repay the majority of its debts, freeing up resources to build the sustainable infrastructure New York deserves.

Beyond the mechanics and empirics, the underlying principles – leveraging existing assets to engage private capital, coupled with robust oversight – have implications well beyond the MTA, while the magnitude of the challenges reinforces the necessity of innovative solutions.

Appendix

Appendix I. Detailed MTA Financials

Appendix II. MTA Organization & Component Units

Appendix III. MTA Capital Structure (Q4 2021)

* Assistant Professor, William & Mary Law School; Affiliated Professor, William & Mary Mason School of Business; Faculty Fellow, William & Mary Center for the Study of Law and Markets. For helpful input and feedback, I am grateful to Brett Frischmann, Teresa Ravenell, Todd Aagaard, Andrew Lund, Edward Greene, Robert Poole, Chaim Saiman, William Organek, Steven Xie and Daniel Rosenblum, as well as all participants at Villanova faculty workshops. Ana Blanco and Andrew Schwartz provided excellent research assistance. The Journal of Law and Mobility has offered exceptional insights and suggestions through the course of the peer-review process. All errors and omissions are my own.

+ As detailed further alongside the respective discussions, it is critical to note that the primary analyses in this Article are as of late 2021 (when this research was conducted). The Article thus does not reflect changes and subsequent developments, including with respect to prevailing interest rates, financing terms or term structure, as well as legislative and policy developments. Correspondingly, the results of certain analyses may differ today based on evolving interest rate conditions and assumptions which are subject to change, as detailed further in the Article.