Fitch Ratings warned that a downgrade may be coming for the Washington Metropolitan Area Transportation Authority, which is facing massive service cuts without fresh support from its local and state partners.

The agency is “at an inflection point where federal funds have been running dry and collectively the funding partners will need to make a decision on what type of system they want to service the region,” said Fitch analyst Michael Rinaldi.

The ratings agency, which put WMATA on negative outlook in May 2020, pegs the agency’s issuer default rating at AA-minus, and its senior-lien dedicated revenue bonds a notch higher at AA.

“All U.S. mass transit agencies are faced with the challenges of rethinking and redefining their revenue structure,” said Michael Renaldi, a Fitch Ratings senior director.

Fitch Ratings

In December, WMATA unveiled a fiscal 2025 budget with “unprecedented” cuts that would eliminate rail service after 10 p.m., close 10 rail stations, cut bus service by one-third, and hike fares by 20%. The proposed budget would lead to an “unrecognizable Metro,” officials warned in 2025 budget documents.

The agency’s operating budget is supported primarily through farebox revenues — which last year made up only 20% of the operating budget — and subsidies from a range of local and state governments, including Washington D.C., Montgomery and Prince George’s counties in Maryland, and several cities and counties in Virginia. The subsidies are all subject to appropriation and a 3% cap.

Fitch said WMATA has reported a “productive dialogue” with participating governments. “However, the prospect for additional subsidy support (on either a recurring or temporary basis) remains uncertain, as several legislative hurdles must be cleared ahead of the schedule to finalize service plan changes and board budget adoption in April and May, respectively,” Fitch said.

Though WMATA is rare among transit agencies in lacking a dedicated operating revenue stream, it’s not unique in the pressures it faces. After ridership dove during the COVID-19 pandemic, Congress gave transit agencies a total of $72 billion in four stimulus packages to prop them up. That money is now running out, while ridership nationally hovers at around 60% of pre-pandemic levels.

“All U.S. mass transit agencies are faced with the challenges of rethinking and redefining their revenue structure,” Rinaldi said. “The idea of ridership returning to a pre-pandemic level seems unlikely at any point in the near future. This is a challenge that faces all mass transit stations not unique to WMATA by any means.”

The bulk of WMATA’s bonds, which total around $3.5 billion, are secured by 2018 agreement that has D.C., Virginia and Maryland send dedicated capital funding revenues totaling $500 million annual to the authority, subject to appropriation. The money is used for capital projects and debt service.

Rinaldi said the negative watch will likely be resolved within the next few months pending the outcome of legislative sessions in Maryland, Virginia and D.C.

“At this point it’s quite clear that additional operating resources are necessary to stave off those fairly unprecedented cost-cutting measures,” Rinaldi said. “So, time will tell.”

S&P Global Ratings rates the agency’s dedicated revenue bonds at AA with a stable outlook. Kroll Bond Ratings Agency has them at AA-plus/stable.

The agency is the country’s third largest heavy rail transit agency and sixth largest bus operator. It was created in 1967 by an agreement between the District of Columbia, Virginia and Maryland to plan, develop, build, finance and operate a regional transportation system.