The COVID-19 pandemic exacerbated the declining ridership trend that began in 2014 in the U.S. mass transit sector. As health and safety conditions improve, S&P Global Ratings believes that the sector's challenges will continue as providers are faced with new and developing credit risks including changing behavioral trends such as an increasing transition to remote work. While the transit sector view and ratings outlooks were changed to stable from negative in April 2021, we believe longer-term credit risks highlighted in this report remain on the horizon.

Other pre-pandemic challenges that remain include large capital plans due to high and costly infrastructure needs for many transit systems; an increasing focus on asset resiliency for legacy systems; adjusting to climate change challenges and reducing emissions; navigating an evolving cybersecurity landscape; and an increasing focus on social equity, facilitating regional economic opportunity and service levels to transit-dependent riders. Despite these challenges, opportunities remain if management teams are flexible in right-sizing operations to meet demand, particularly given an infusion of federal aid as activity levels recover.

Chart 1

Ridership Levels Remain Depressed, But Are Improving

Activity levels across mass transit providers remain depressed, but weekly data indicates gradually improving demand due to easing COVID-19 restrictions and ongoing vaccination progress (chart 2).

We expect to see some recovery after widespread vaccination beginning in the third quarter as more passengers return to work and regain a measure of comfort being part of the "masses" in mass transit. However, we believe a return to pre-pandemic ridership levels is likely many years away. (Please refer to our "Updated Activity Estimates," published Jan. 13, 2021, on RatingsDirect, for more detailed analysis.) Disparities in the ridership recovery remain across regions and travel modes (e.g. rail, subway, light rail, bus), due to lingering local health and safety restrictions, vaccination progress, and remote working. Nationwide, ridership remained down approximately 51% during the week of June 13 to June 19 compared with pre-pandemic levels according to American Public Transportation (APTA) data.

Chart 2

Despite improving ridership trends, we believe mass transit operators broadly face headwinds related to changes in user preferences and post-pandemic commuting patterns, both influenced by perceived health and safety concerns, or convenience and quality of life considerations as the substitution of technology and remote working removes some portion of the pre-pandemic transit ridership base. We view a persistent shift toward remote work, hybrid work schedules, and online shopping as posing the greatest risks to traditional public transit operating models in general.

Addressing Ongoing Challenges And Opportunities For The New Normal: Flexibility Will Be Key

Beyond ridership declines, the transit sector faces familiar, long-standing challenges to credit quality as well as newer or evolving risks reflecting updated priorities and mandates to meet a variety of policy objectives.

Despite these issues, we believe that management teams across the transit sector have been prudent in addressing ongoing risks to mitigate credit impact, especially for those reliant on fare revenues, by adjusting operating expenses and service levels where possible during this interim period, modifying capital plans, and implementing health and safety measures. We view the infusion of federal aid as key to maintaining credit quality in the near term as activity levels recover in the transition to a new normal for post-pandemic transit operations. Table 1 shows potential credit impacts from certain challenges and opportunities.

Table 1

Changing behavioral and work trends.  We believe mass transit sector ridership levels will remain depressed in the near term due to the lingering effects of the pandemic with longer-term recovery facing exposure from changing behavioral trends such as evolving employment norms allowing for flexible and remote work options and other factors.

Service level modifications.  During the pandemic, there was a material reduction in service levels as demand tumbled for many mass transit providers, including reductions in the number of buses or trains per hour or eliminating service routes altogether. In our opinion, service level modifications can provide material cost savings, somewhat mitigating the financial effects of farebox revenue declines. These effects can be particularly effective in preserving the bottom line given that most transit operators rely more heavily on tax revenue and other funding sources than fare revenues to fund their operations. We expect management to be proactive in reintroducing routes and service levels as needed while demand recovers and peak travel flattens or declines.

However, we note that some operators face political and practical challenges to implementing substantial service reductions in times of budgetary stress. For example, service reductions involving staffing reductions could render an operator unable to scale service back up if demand were to snap back quickly. This challenge could be particularly acute as transit operators in some parts of the country have struggled to attract and retain a sufficient number of operators to meet pre-pandemic demand levels consistently. Over the past year, certain issuers like New York MTA have avoided implementing major service reductions and have applied federal government aid to retain staff, thereby preserving the ability to accommodate ridership demand if it rebounds quickly.

Adjusting CIPs.  Transit systems are capital-intensive and rely on significant federal, state, and local funding for their capital improvement plans (CIP), as they typically have insufficient operating revenues from farebox revenues to cover ongoing capital needs. Given substantial declines in ridership, some mass transit providers have pushed out capital projects toward the back end of their multi-year CIP or have eliminated system expansion components of their CIPs altogether. At the same time, some operators were able to accelerate capital projects during the pandemic, making use of the down time created by service reductions, enabling them to avoid some service disruptions related to system maintenance as ridership rebounds. We view modifications of CIPs tied to overall system demand as promoting structural balance with system capacity and reliability to appropriately match rider demand.

Health and safety measures.  To limit the spread of COVID-19 and meet local health and safety restrictions, mass transit providers implemented measures including social distancing, contactless payments or elimination of fares, rear boarding, and enhanced cleaning. While these measures incrementally increased operational costs, they also alleviated rider concerns about the safety of mass transit during the pandemic. Improvements in fare collection technologies will continue as ridership returns but fare structures will likely be adjusted to reflect ridership preferences (i.e., more-flexible fare products).

Micro-mobility friendly innovation. 

With the proliferation of mobility providers, including bikes, e-bikes, and scooters, many mass transit operators have entered partnerships that complement service offerings, and alleviate the first mile and last mile challenge for riders. In 2018, there were 84 million micro-mobility trips, including 38.5 million scooters, 36.5 million station-based bikeshare trips, and 9 million dockless bikeshare trips. We expect the growth in micro-mobility to continue and view this partnership as providing more convenience and accessibility to riders, and an embrace of technological innovation to enhance the user experience. Less clear is the extent to which micro-mobility poaches some would-be transit ridership, and whether the net effect adds to or detracts from total transit ridership. There may also be a role for transportation network companies in filling the void for some service provision.

Dedicated tax support.  Transit operators rely on a variety of non-fare sources of revenue to support operating and capital costs. We view additional dedicated tax support, either through sales or property tax, as a potential long-term opportunity providing more revenue stability with less reliance on farebox revenues that are sensitive to ridership fluctuations, particularly given ridership declines since 2015. Value-capture tax sources like those related to transit-oriented development popular in some countries has potential to provide additional funding in the future in the U.S.

Congestion pricing.  Currently, only New York City has advanced the concept of congestion pricing to support transit capital investment. Nonetheless, we view congestion pricing as a potential opportunity for other operators and, more consequently, if the cost of driving a vehicle during peak levels of demand becomes more prohibitive, we could see drivers shift their commuting habits to mass transit. Preliminary estimates have New York City generating about $1 billion in annual net revenue to the Metropolitan Transportation Authority and, to the extent other large cities such as Los Angeles and San Francisco consider similar congestion initiatives, revenue and ridership increases could be the result.

Social equity.  Social justice has its roots in transit with protests over segregation on public buses and the obvious concentration of mass transit in urban regions--along with the current emphasis by the Biden Administration on expanding economic opportunities to historically disadvantaged populations--suggests operators will face pressures to expand service while minimizing commensurate fare increases. We anticipate mass transit providers will continue expanding service offerings based on local demand, but expansion may also meet broader social justice objectives by alleviating community inequities. This may translate into more capital market offerings like the Commonwealth of Massachusetts' 2021 series A Sustainability Bonds to fund a portion of the Green Line Extension project for the Massachusetts Bay Transportation Authority that provides service in areas that did not historically have access to fast and reliable public transit.

Resiliency and cybersecurity. 

We believe climate resiliency and cybersecurity present ongoing challenges for the sector. We expect to see a continued focus on green and sustainability bond issuances to reduce carbon emissions and harden assets from extreme weather events for legacy systems (see "2021 Sustainable Finance Outlook: Large Growth In Green, Social, Sustainable Labels As Municipal Market Embraces ESG, Feb. 16, 2021). Furthermore, remote work by employees of mass transit providers during the pandemic exposed systems to elevated cyber risk. For example, the MTA reported that in April 2021 hackers gained access to certain computer systems, but the hackers did not make any changes to MTA's operations, compromise any MTA accounts, or collect any employee or customer information, nor did they gain access to systems that control train cars. And a 2020 survey by the Mineta Transportation Institute at San Jose State University of 90 transit agency technology workers, found that only 60 percent actually have a cybersecurity preparedness program, and 43 percent reported they do not believe they have the resources necessary for cybersecurity preparedness. Under half of respondents, 47 percent, said they audit their cybersecurity programs at least once per year.

We consider management teams that have implemented robust cyber policies and procedures, along with cyber insurance, more favorably within our risk management assessment of operators. In our view, this is a governance factor under ESG. (For more on how S&P Global Ratings incorporates ESG factors in its criteria frameworks, see "ESG Brief: Cyber Risk Management In U.S. Public Finance," June 28, 2021; "Through The ESG Lens 2.0: A Deeper Dive Into U.S. Public Finance Credit Factors," April 28, 2020, and "ESG Brief: Emerging Themes In U.S. Public Finance," June 3, 2021.)

Impact Of A Gradual Recovery And Shift To Remote Work

The COVID-19 pandemic has exacerbated already declining ridership trends across the mass transit sector while also rapidly accelerating remote working trends. We discuss some of the factors contributing to longer term ridership growth challenges further below. In the immediate and near-term, factors like increasing flexibility in remote working, including a shift to a hybrid work model--remote and in-person--along with changing consumer preferences, pose a significant risk for a recovery in ridership to a level comparable with pre-pandemic levels, in our opinion. We believe risks to a recovery in ridership remain. Moreover, will ridership recover to pre-pandemic levels or has the pandemic materially altered consumer preferences for both transit and work?

The key variables influencing our view for ridership demand in 2021 and beyond are when, and if, people will return to in-person office work, changing behavioral trends, and ongoing vaccination progress. We believe ridership will be boosted as workers begin transitioning back to the office beginning in the third quarter as a result of ongoing vaccination progress and reopening of local economies, followed by a gradual recovery as more workers become more comfortable taking mass transit. However, we expect a portion of pre-pandemic riders will likely be missing from the mix given the option of a hybrid work model adopted by workers and certain business sectors during the pandemic, resulting in mass transit riders splitting time between remote working and office-based working and an altered post-pandemic ridership demand base.

Based on return-to-work surveys, typical office workers could spend one to two days per week working remotely, and McKinsey estimates that more than 20% of the U.S. workforce has the ability to work remotely. In 2017, about 49% of riders used mass transit for commuting nationally either to or from work according to the APTA. As a result, this could equate to a 2% to 4% permanent loss in ridership compared to pre-pandemic levels if commuters transition to working remotely one or two days per week, respectively, following the pandemic. Furthermore, the contraction in ridership could become more severe if the transition to remote work broadens or accelerates, or if technological advances enable more sectors to adapt to remote work.

As shown in chart 3, surveyed return to work preferences indicate there could be a significant and lingering shift towards more remote working following the pandemic that we expect could impact commuting and future ridership levels.

Chart 3

Long-Term Ridership Decline Highlights Underlying Challenges Facing Transit Operators

Mass transit operators' management teams and governing bodies have control over many of the variables that influence ridership levels. They set fares, put forward ballot initiatives to sustain or augment funding and that voters continue to support, set bus routes and schedules, lay the plans for rail system build-out, and partner with neighboring agencies and pilot last-mile collaborations. It is surely some reflection on the successes of mass transit planners and operators that nationwide transit ridership hit its peak in 2014 (chart 4).

Since 1990, transit ridership in the U.S. increased by 11.1% through 2019, before plummeting in 2020 due to the COVID-19 pandemic. To its peak level of 10.74 billion rides in 2014, transit ridership increased 20.0% from 1990. This level of growth is significant, and stagnation and decline in ridership from 2014 to 2019 could be excused as a result of a natural combination of factors that produce cycles in all sorts of human activities. A closer look at other findings, however, point to broader issues outside of management teams' control that highlight serious challenges to spurring ridership growth into the future.

Chart 4

A Growing, But Changing, Urban Population

From 1990 to 2019, the U.S. population increased by 32%. The urban population increased by 45%, with the share of the U.S. population living in urban areas increasing to 82.5% from 75.2%. These trends would seem to portend good times for transit operators, with expectations of more people living more closely together in the urban and suburban areas where the vast majority of mass transit infrastructure exists likely to lead to greater demand for transit services. However, transit ridership growth was less than half that of urban population growth from 1990 to 2019, and was nearly 33% below total population growth over that span (chart 5). Clearly, the influx of more people and more development into areas where transit exists has had a limited impact on the trajectory of transit ridership in the U.S.

Chart 5

One trend we are watching that we believe is affecting transit ridership is the changing demographics within the urban and suburban areas where most transit systems operate. Increasingly over the last decade or so, relatively wealthier residents have moved closer into urban cores and denser neighborhoods, following with many of the redevelopment efforts municipal officials have undertaken in an effort to revitalize flagging neighborhoods and increase the value of tax bases, and the revenues flowing from them.

Along with these redevelopment efforts, lower income individuals and families have increasingly been priced out of these denser neighborhoods, relocating to less dense and more affordable suburban communities--a phenomenon referred to as the suburbanization of poverty. In their place are relatively wealthier residents with a greater willingness and ability to pay for other means of transportation, such as their own vehicle or a ride-sharing option, and less likely to use transit frequently, such as to commute to work or run errands. In addition, it is a much greater challenge for transit operators to efficiently serve more sparsely areas where portions of their ridership base have relocated. We suspect these population shifts to be one reason ridership growth has stalled in recent years for many transit operators.

The Allure Of The Automobile

The automobile, a centerpiece of the American spirit dating from Ford's assembly lines, has not shown any signs of driving off into the sunset as transit networks spread through metropolitan areas in the 1990s and 2000s. Rather, Americans are driving more and more, seemingly everywhere they go. From 2003 to 2019, total transit ridership increased just 6.7%, while total vehicle-miles traveled (VMT) increased 12.8%. And, on mass transit's home turf, VMT on urban arterial roads increased 23.2% (chart 6).

Chart 6

A common thought is that congestion is mass transit's best friend: the more congestion drivers deal with, the more they grow frustrated and will choose other transportation options. Indeed, transit ridership did increase along with congestion at least through 2011, according to the United States Department of Transportation and Texas Transportation Institute's Roadway Congestion Index (RCI). The index's tracking from 1982 through 2011 shows a 43.5% increase in average roadway congestion over that span. From 1990 to 2011, average congestion increased 17.9%, slightly more than total transit ridership's 15.7% rise over that span. The RCI data run only through 2011, though based on the VMT data (chart 7) we can infer that congestion has at least not substantially improved since 2011. Despite persistent congestion, however, transit ridership declined 4.0% from 2011 through 2019.

Chart 7

Given ever-present roadway congestion in American cities and towns, why have Americans increasingly opted for their own vehicle for their trips from home over the past decade? Challenges such as buses sharing lanes with automobiles, fixed schedules, service reliability challenges, and limited scope of service for fixed rail networks in particular make it difficult for transit operators to compete with the automobile on flexibility and convenience. Transit providers are making some progress in these areas, such as through dedicated lanes and priority signals for buses, but these efforts have yet to reverse the long-term trajectory in bus ridership declines, for example. Other challenges, such as relatively low borrowing rates boosting private vehicle ownership rates, and persistently low gasoline prices (chart 8), enhance the appeal of owning and paying to drive a vehicle.

Chart 8

Despite Riding It Less, Americans Continue To Fund Mass Transit

Despite the broad trend of Americans using transit less and less, voters in many communities throughout the nation continue to support it. Data from the APTA indicate U.S. voters considered 110 ballot initiatives between 2018 and 2020, approving 84, or 76%, for a total of $11.39 billion in new revenue to support mass transit operations and infrastructure investment (chart 9).

Chart 9

Continuation of public support will be crucial for mass transit to be able to continue to exist in anything close to its current form in the U.S. Across our rated universe of 34 issuers under our Global Transportation Infrastructure Enterprises (including confidential internal ratings), the mass transit issuers we rate derive an average of 63% of total revenue from net tax revenue. (Our calculations net out tax revenue that an entity collects only to remit to other entities, and we include this net tax revenue available to support an entity's operations and/or debt service in our analysis.)

Only three mass transit issuers reported less than 37% of total revenue as derived from taxes, with 89% representing the greatest share of total revenue from taxes among the transit operators that we rate.

The relatively low correlation between ridership and total revenue for mass transit operators has served as a stabilizing credit factor in times of economic stress, including the major shock of the COVID-19 pandemic, when most of our transit ratings went unchanged despite plummeting ridership. However, we believe transit operators ought not to take for granted the funding support voters have continued to provide, as only time will tell whether a population that increasingly does not use mass transit will continue to view it as an important public service worthy of its financial support.

Federal Aid And Prudent Management Mitigate Near-Term Financial Effects

We view an infusion of federal aid and prudent management actions as supporting near-term credit quality, partially mitigating the effects of revenue losses and expenses related to the pandemic. Overall, we consider near-term financial metrics, particularly fiscal years 2020 and 2021, as transitory and not indicative of where we expect longer-term metrics to be sustained following a recovery in activity. Like the pandemic itself, the scale and breadth of support provided by federal stimulus aid was unprecedented, allocating $69.5 billion to the mass transit sector as shown in table 2.

Table 2

While grants are no substitute for a recovery in recurring operating revenues, in our opinion, the latest infusion of federal dollars from the American Rescue Plan Act will bolster liquidity positions and provide important financial flexibility for the next 24 to 36 months as ridership levels recover and stabilize, allowing those transit operators that rely heavily on fare revenues time to implement measures to right size operations to achieve structural balance. Nonetheless, to the extent mass transit providers are unable to maintain financial metrics near historical levels as they right size operations and budgets post-pandemic, we could see deterioration in credit quality

In addition, management teams have generally acted prudently in mitigating the financial and operational effects of the pandemic. Management actions have included significant service reductions to counter lower ridership levels, suspension of certain routes or service offerings, hiring or pay freezes, reduction of operating expenses, and modifying capital improvement plans including deferring capital needs or delaying system expansion plans until demand recovers. Many operators are facing pressures to return to pre-pandemic service levels despite a slow recovery, citing the receipt of federal aid.

Despite expense mitigation efforts, revenue losses along with COVID-19 related expenses have generally exceeded these expense reductions, resulting in near-term structural budget deficits, largely for operators more reliant on fares. Consequently, management teams are proactively utilizing the federal stimulus aid to bridge the shortfall until demand and revenues recover.

Although near-term risks remain, we generally expect mass transit providers to adapt operations commensurate with demand as we emerge from the pandemic. Furthermore, our forward-looking view for the sector is stable reflecting improving health and safety conditions, higher economic growth forecasts, encouraging demand trends, and, in particular, more than $69.5 billion in federal stimulus aid which we view as providing flexibility as ridership levels recover and stabilize, despite emerging and on-going credit risks within the sector.

Related Research

• U.S. Not-For-Profit Transportation Infrastructure Sector View Is Now Stable For Airports, Mass Transit, And Toll Roads, March 24, 2021
• Across U.S. Public Finance, All Sectors Stand To Benefit From The American Rescue Plan, March 18, 2021
• Updated Activity Estimates For U.S. Transportation Infrastructure Show Public Transit And Airport Operators Still Face A Long Recovery, Jan. 13, 2021