(Bloomberg) -- US public transit systems have faced a slew of challenges from trying to bring riders back after a pandemic-induced slump to struggling with financial shortfalls. The latest hurdle will be trying to avoid credit-rating downgrades that will make borrowing more expensive. 

California’s Bay Area Rapid Transit District had its credit rating lowered two-notches to A+ by S&P Global Ratings last week. That revision also cited a negative outlook on its score, indicating future downgrades may be likely. 

It’s one of several public-transit agencies put on notice by S&P, including the San Francisco Municipal Transportation Agency and DC’s Washington Metropolitan Area Transit Authority. Both S&P and Moody’s Investors Service have negative outlooks on the public-transit sector broadly.

“I do expect to see downward rating pressure as these systems try to find a way to operate in this new normal,” said Dora Lee, director of research at Belle Haven Investments. “How hard it will be is truly determined on how state level actors are committed to seeing these systems survive.”

Transit agencies across the US are already facing budget shortfalls in the coming years as federal Covid aid evaporates and persistent remote-work trends suppress weekday ridership. Credit-rating downgrades would likely raise borrowing costs for accessing the $4 trillion municipal bond market exasperating financial pressures. 

New debt sales by public transit systems are already depressed. Municipal-bond issuance for mass transportation totaled about $4.3 billion this year, down about 44% from the same period in 2022 and the lowest since 2018, according to Refinitiv data as of May 25.

Related: Biggest US Transit Systems Face a $6.6 Billion Funding Shortfall

As costs mount and those federal dollars run dry, the systems are reliant on state bailouts to avoid service cuts, layoffs and fare-hikes. 

New York Governor Kathy Hochul gave the largest mass-transit provider in the US, the Metropolitan Transportation Authority, a major cash infusion in April. In the state’s most recent budget, lawmakers raised a tax on New York City’s largest businesses to bring in about $1.1 billion for the agency. 

Not all states have been so generous as revenue declines make spending decisions harder. California Governor Gavin Newsom has offered no new funding for transit system budgets amid a state cash crunch, despite systems pleading for $5.15 billion over the next five fiscal years. 

“We are seeing interest and dollars out there to support transit systems, but there has also been some more challenging stories like what we’ve seen in California,” Baye Larsen, vice president for Moody’s said. “Mass transit enterprise ratings are more vulnerable to the declining fare revenues to the decline in federal stimulus aid.”

Empty Bucket

Bay Area Rapid Transit, which services six million people in Northern California, has an unusually high dependency on fares, making it more susceptible to pandemic-induced shortfalls. But S&P analyst Kurt Forsgren said that all systems are on their radar. 

“They are all kind of suffering in some extent, but clearly BART is ahead of the pack,” Forsgren said in an interview. “We are keeping an eye on all systems and how they address this sort of empty bucket that was previously addressed with passenger fares.”  

James Allison, a spokesperson for BART, said they are “concerned” about how its outstanding debt is evaluated by rating companies and investors. The agency, like its peers nationwide that are reliant on riders to produce revenue, have begun to adjust to the post-pandemic landscape, he said.

The agency doesn’t currently have plans to halt capital projects or cut service to make up for increased borrowing costs, Allison said.

Meanwhile, the transit system that runs through the nation’s capitol has rebounded to only about half of its pre-pandemic ridership. Washington Metropolitan Area Transit Authority chief financial officer Yetunde Olumide said the system needs a long-term funding plan which addresses operational, maintenance and capital needs. 

And the Chicago Transit Authority has recaptured roughly 60% of its passengers. In March, Moody’s analysts said that if there is a decline in ridership and regional sales taxes, the system could see a downgrade. 

“Based on conversations to date with the State legislature, we are optimistic about receiving additional funding,” Maddie Kilgannon, a CTA spokesperson, said in a statement. “We believe a funding solution will be viewed positively by the rating agencies.”

(Updates last paragraph with CTA statement)

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