MTA Economics

The latest Comptroller's report echoes findings issued last month by the RPA. Image via RPA/ESTA.

When the MTA unveiled its latest three-year budget projections, transit advocates and transportation experts raised the debt alarm. As I detailed in early August, the MTA’s three-year projections relied on numerous assumptions and a larger debt burden. A few weeks ago, a recent report by the Regional Plan Association and the Empire State Transportation reinforced that idea. Debt service could account for nearly a quarter of the MTA’s operations budget by 2014.

It is, then, no surprise that yet another report issued by Thomas DiNapoli, New York State Comptroller, reaches the same conclusions. What is surprising, though, is the amount of time it took DiNapoli’s office to release this report and the ways in which it does little to help the MTA’s economic position. In an eight-page report (available here as a PDF) with lots of graphs published at a size far too small, DiNapoli explores the MTA’s basic assumptions and raises the same debt alarm.

“The MTA is in a very difficult position as it struggles to hold together a strained operating budget while proposing the largest borrowing program in its history to fund capital projects,” DiNapoli said. “There is no debating that the capital program is critically important, but my analysis shows that the magnitude of this borrowing plan will have serious implications for the operating budget in the coming years. Before taking on nearly $15 billion in new debt, the MTA must present the public with the facts about the potential long-term implications of this new borrowing on services, fares and budget gaps.”

The MTA hasn’t yet been forthcoming with the real impact the debt will have on services, fares and budget gaps, but the RPA/ESTA analysis did. DiNapoli’s work basically rehashes those findings. Here are his key conclusions in bullet-point form:

• Debt service as a percent of total revenue could rise from 16.4 percent in 2011 to 22.7 percent in 2018 without new fare and toll increases. (The burden could reach 20.5 percent in 2018 even with biennial fare and toll increases of 7.5 percent).
• In total, the proposed financing program would cost the authority’s operating budget $33 billion over the term of the loans, or nearly $13 billion more than the approved financing program.
• The July financial plan assumes that any wage increases during the first three years of a new labor agreement will be offset by savings from union concessions. Wage increases at the projected inflation rate, for example, without offsetting savings would increase costs by $62 million in 2011 and as much as $327 million by 2015.
• Spending continues to rise at a rate more than twice that of inflation. Despite an assumed three-year wage freeze, the MTA projects annual spending increases of 5.1 percent through 2015 based on rising costs for health insurance, pensions, debt service and services for disabled commuters.
• The pace of the economic recovery is a matter of grave concern. Roughly one-third of the MTA’s revenues come from economically sensitive taxes, and the use of mass transit is closely tied to employment levels in the region.

Now, over the years, I’ve been fairly critical of DiNapoli’s reports. They don’t really shed light on any new problems with the MTA. In fact, we’ve known about the debt bomb for years; the recent three-year plan just accelerates the high percentage of the operating revenue that will have to be spent on debt service rather than on transit service. How many taxpayer dollars are going to DiNapoli’s office to duplicate research that’s already been published?

Yet, this report shows glimpses of, well, something. DiNapoli notes that spending has increased at twice the rate of inflation, and he pinpoints a variety of causes — labor costs, debt service and services for disabled commuters — as the primary culprits. The next steps then involve addressing these problems. How can the MTA lower its health care and pension obligations? What must be done to streamline debt service? How can we reduce Access-A-Ride costs? Those question don’t even address the concerns astutely raised by Andrew Smith in this extensive comment he left yesterday.

At some point, New York politicians who are in these positions of power are going to have to get serious about identifying cost savings plans. This report by DiNapoli is a small step toward that goal, but to save the MTA will require more than just small steps.

Fitch, the investor ratings company, has assigned nearly $100 million in MTA revenue variable rate bonds an A rating and has downgraded over $14 billion in preexisting debt from an A+ to an A, the company announced today. According to the press release, available on Transportation Nation, “the downgrade reflects higher than expected near-to-medium term financial pressure.”

The release explains further:

The downgrade reflects higher than expected near-to-medium term financial pressure stemming from increasing operating costs (projected to moderate in growth in the outer years) and pension obligations and growing annual debt service obligations from expected near-term issuance associated with the capital program. This is exacerbated by the strong likelihood that operating subsides (dedicated tax sources) will not grow as anticipated in the near term leading to wider deficits. The Stable Outlook reflects the authority’s institutional focus on monitoring developments and willingness to take corrective action albeit that the options available are fewer in the current environment.

The downgrade comes following the release of a long-term capital plan that relies heavily on debt-backed bonds and other shaky assumptions. Transit advocates were none too pleased to hear the news. “Just like in Washington, decisions made by our elected officials in Albany caused this downgrade,” Paul Steely White, Executive Director of Transportation Alternatives, said. “The State’s raids on public transit funding have forced the MTA to pay for subways and buses with debt. Now, it will cost more for the MTA to run the system, and this will hit New Yorkers where it hurts—fare hikes and service cuts; unless our elected officials in Albany find secure revenue for public transit.”

Apparently my talk of debt earlier today was not all that premature.

Debt payments are making up an ever-increasing amount of the MTA's annual budget. Image via RPA/ESTA.

A few weeks ago, the Regional Plan Association and the Empire State Transportation Alliance dug deep into the MTA’s budget projections and voiced their concerns over the MTA’s ballooning debt balloons. For long-time transit watchers, the agency’s debt isn’t a new storyline, but the numbers are increasingly heading upwards. The system is saddled with more debt than every before, and there’s no sign of relief on the horizon.

Yesterday, Streetsblog excerpted parts of the presentation which I’ve seen as well, and the picture isn’t a pretty one. According to the MTA’s own metrics, debt payments will account for over 17.5 percent of its operating budget by 2014, and according to the RPA and ESTA, the real total based upon the MTA’s sleight-of-hand accounting may be closer to 23 percent. Labor costs will fall to around 53 percent of expenditures.

“Every year,” Noah Kazis wrote, “more and more money that might go toward paying bus drivers, buying fuel, cleaning stations or keeping fares affordable is instead spent on debt service. Even over a period when pension costs will have risen by a billion dollars per year, it’s debt that is chewing up the MTA’s budget.”

Besides the debt, though, the other area of growth concerns pensions. In 2003, pension spending accounting for under five percent of the MTA’s operating budget, but by 2014, that number will rise to around 9.36 percent. That type of growth is unsustainable and worrisome. The MTA cannot become a pension and debt organization while running a subway system, but by 2014, over 30 percent of its operating budget will be tied up in those two areas.

So why so much debt? Kazis explains:

That debt is the outcome of decades of diminishing state support for public transit. After a major infusion of capital under the Hugh Carey administration, Governor Mario Cuomo cut all direct support for the MTA capital program. Though Cuomo found other revenues for the capital plan, notably by repurposing Westway dollars for transit, George Pataki just let those zeroes stand and put the cost of the capital plan on the MTA’s credit card, starting the debt build-up in earnest. Pataki also started using dedicated transit funds to pay the state’s commitments to the MTA, essentially double-dipping on those funds and costing transit almost $200 million a year.

The 2009 passage of the payroll tax helped the MTA’s budgets significantly — it is now the agency’s largest dedicated revenue source – but Albany’s decisions to kill congestion pricing and bridge tolls meant that the MTA still had to borrow heavily to pay for repairs and mega-projects like the Second Avenue Subway.

The result is a massive run-up in debt. Though the MTA spent only $848 million on debt service in 2004, according to RPA, it is projected to spend more than three times as much, $2.67 billion, in 2014. Debt alone will eat up 17.6 percent of the MTA’s operating budget by 2014; worse, RPA says that an alternative calculation shows the 2014 debt load at 23.1 percent of the operating budget.

Talk about debt often causes other people’s eyes to glaze over. They just want to know that trains will run frequently and on time, that the fare won’t go up and that there will be a seat for them on the next train. But these debt payments will impact the MTA’s ability to provide service. The authority can cut employees; they can cut trains and buses; they can raise; but they cannot cut debt. Without better and more concrete investment in the system, debt will balloon, and the rest of us — the riders and commuters who depend upon the subways — will lose out.

With the MTA’s release of its 2012-2015 budget, the analysts came out in full force. While most were skeptical of the various assumptions tenuously supporting the authority’s plans, the city’s Independent Budget Office takes a different approach. The MTA revenues, they say in a report released on Friday, are resting on some highly volatile taxes and fees, and small shifts in the economy and political winds could leave the authority flailing for dollars.

For many transit policy wonks, the IBO report simply reinforces what we already know. By relying so heavily on real estate transfer taxes, an unpopular payroll tax and various other subsidies instead of a relatively steady stream of revenue generated by fares and tolls, the MTA risks financial instability tied to the economy. When, for instance, the real estate market collapses as it did in 2008, the MTA’s own financial outlook plunges.

Take a look at the following chart from the IBO report:

It ostensibly showcases the volatility of fees and taxes as compared with fares and tolls, but it tells another story as well. That story focuses on addition. By adding the payroll tax the previous mix of various fees and taxes that support the MTA, the state was able to push its contributions in line with the 2005-2007 trend line after three years of collecting amounts below normal. As the MTA depends upon these revenue streams to stay afloat, how often can they expect Albany to add more? Based on recent responses, the answer is “not very.”

The IBO’s report is short, but it sheds some light on the appropriations process. It walks through the convoluted ways in which various taxes and fees are collected by the start, siphoned into general funds or specific appropriations buckets and then redistributed to the MTA. Along the way, the state often reappropriates funds for other uses, and that’s how the MTA has seen $260 million in supposedly dedicated revenue vanish at the click of a button.

For a sense of the process, take a look at this table. Click to enlarge.

From the IBO’s perspective, the problems involve volatility. The MTA expects to draw in nearly as much in dedicated taxes and fees as it does from fare revenue. Adding the dollars collected from its tolls alters the balance to an extent, but the agency is still depending upon fees and taxes for over 40 percent of its annual budget. The IBO sees these revenue streams as too volatile and would prefer the MTA rely on fares and tolls — which have a tendency to remain constant over the years.

“While dedicated taxes and fees can hold down upward pressure on fares and tolls, the transportation authority’s growing reliance on these revenue sources does not assure fiscal stability. Some of the authority’s largest dedicated revenue sources are among the most sensitive to the ups and downs of the business cycle and the even more pronounced swings in the market for real estate,” the report says.

So what can the MTA do? The IBO clearly wants to see the authority rely more on fares. “Dedicated revenues do not assure stable funding,” they say over and over again. But the MTA’s current fare policies are the result of legislative bargaining. By agreeing to avoid fare hikes more frequently than every other year, the MTA earned the $1.5 billion in payroll tax revenue. If the payroll tax were to disappear, the MTA would have to institute a steep fare hike, and if they institute a steep fare hike off schedule, they risk incurring the wrath of Albany.

Finally, the 800-pound gorilla in the room concerns spending. The IBO report doesn’t delve into the MTA’s expenses, but they do highlight how in 2003, the authority’s overall revenue hit $6.4 billion while in 2010 it was over $10 billion. Even accounting for inflation, a jump in revenue — and concurrent spending — by nearly 50 percent is alarming. A good chunk of that money is going toward debt service on the never-ending capital plans while others are going toward increased labor expenses. Either way, spending has to be curtailed as well. Just as the MTA’s revenue streams cannot keep increasing ever upwards, neither can its expenses.

Ultimately, the issue circles back to the purposes behind mass transit. If the subways and buses are a public good for everyone, fares cannot be too high, and the MTA must depend upon a steady stream of taxes and fees for support. If, however, Albany is reticent about balancing the taxes and fees, the fares must go up, and public transit starts to become to expensive. The MTA has managed to walk that tight rope without falling, but the latest from the IBO seems to pull the safety net out from underneath the precariously balanced authority.

I found myself glancing over a map of the New York City subway and in a sense, marveling over the expansiveness of the subways. The current system may fall short of the dreams from the 1920s and 1930s; after all, where are those grand Second System routes or the Utica and Nostrand subway extensions? But we live in an age in which it takes a decade to build a two-mile, three-stop subway, and the system as it exists represents a fortuitous alignment of political will and corruption, reckless spending and a disregard for the lives of construction workers.

Today, subway expansion moves at a far more leisurely pace. A one-stop extension of the 7 line to 11th Ave. and 34th St. won’t be ready until late 2013, and Phase 1 of the Second Ave. subway is still at least five years away. After that, the MTA’s capital plans slow to a halt. With no long-term environmental studies under way, the best hopes for subway expansion rests on the shoulders of Phases 2-4 of the Second Ave. Subway. We’ll probably find a pot of gold at the end of the rainbow before that comes to pass.

Right now, the MTA is working to find a way to continue even its current meager slate of very expensive construction projects. The authority has put forward a budget for the next three years that rests on assumptions. It assumes that the city will fork over some dollars. It assumes that the federal government will sign a check. It assumes that Albany will do something, anything, to help continue infrastructure construction projects in New York City. Few people are comfortable with those assumptions.

The voices speaking out the loudest have come, of course, from the advocacy arena. The politicians have been deadly quiet. Kate Slevin of the Tri-State Transportation Campaign expressed her concerns that the MTA’s proposed spending plan relies on too many assumptions, and already those assumptions are breaking down. “If any of them,” she writes, referring to and listing the various assumptions, “don’t play out as the agency hopes, the whole plan could fall apart.”

The first to go, as TSTC itself noted, is federal funding. In the latest infrastructure bills making the rounds in the House, the MTA comes out behind. TSTC provided this dire summary: “In particular, House Transportation & Infrastructure Chairman John Mica’s proposal for the next federal transportation bill would cut federal funding to the state by $7.2 billion over the next 6 years and would cost the state almost 45,000 jobs in the first year alone. If the House bill is enacted, federal transportation aid to the state would be cut by about a third, which would decimate both the MTA and the New York State Department of Transportation’s unfunded capital construction plans.”

The MTA’s current funding plan assumes over $4 billion in federal grants. If even $1.2 billion of that is stripped away, as TSTC notes, the impact could be devastating. That cut would be the equivalent of canceling all Metro-North maintenance and improvement work for the next three years; or canceling all subway station renewal, rehab and accessibility work for the next three years; or delaying much of the East Side Access project indefinitely. That is a future no one wishes to contemplate.

Streetsblog sees these assumptions and fears that the MTA will take on more debt to fund projects whose revenues cannot truly support bonded debt. A financial crisis then is ticking ever nearer for the MTA. Forget, then, about dreaming big; forget even about dreaming small. We likely won’t see any semblance of a fantasy map pass for reality any time soon, and the system we have soon — along with the few additions currently under construction — are all that we’re going to get for some time. That’s a shame.

One way or another, the MTA's turnstiles will earn some revenue. (Photo by flickr user Karen Foto)

Every few months, the MTA rolls out another report on the revenue lost to fare-jumping, and every few months, the same report leads to a bunch of outrage. How could the MTA give up so much fare revenue? Why aren’t more cops patrolling the stations? This is why we can’t trust the authority do anything properly. And over and over and over again.

This year’s story rings true to form. After finding that the MTA lost approximately $27 million to fare-jumpers in 2009, a report covering 2010 found $31 million in lost revenue due to fare-beaters in 2010. According to coverage of the report, fare-jumpers entered the system in 2009 18.5 million times without paying. That’s 50,684 per day, and cops handed out 120,000 summonses all year.

Per The Daily News, turnstile-hopping seems to be the rare case where crime does pay. As The Daily News notes, a fare-jumper who gets caught just once every six weeks would gain money. Six 7-day MetroCards cost $174 while the summons sets them back $100. This year, with the economy stagnant and the fares up over early 2010, the MTA estimates that’s 1.5 percent of riders jumped the fare as compared with 0.9 percent last year.

Pete Donohue had more on the MTA’s response:

The MTA said the report – presented at a transportation think tank’s conference this year – was not an official document. Average weekday ridership is about 5.4 million.

“New York City Transit takes fare evasion very seriously and is continually working with the NYPD on cost-effective strategies to combat it, such as targeting high-incidence locations and placing cameras in key areas,” MTA spokeswoman Deirdre Parker said.

She said transit cops have made 12,468 arrests for fare evasion this year, up 5.5% from the same time last year. Officers have issued 37,825 summonses to evaders this year, a 1.7% increase from the same period in 2010.

Whether or not there is an actual problem, police officers have called upon politicians to raise the fine. A 2009 effort to jack up fare-jumping penalties to $250 went nowhere in Albany, but NYPD officials want a renewed effort. “I think the state legislature should consider raising the fine,” Police Commissioner Ray Kelly said. “It would probably be a good idea.”

What would be a good idea though? Perhaps raising the fine makes sense. If the price is high enough to deter fare-jumping, then the penalty would be ideal. If, as the News says, jumpers get caught on average of once every 6-13 week, it would have to be a substantial fine.

Beyond that though, the MTA and the NYPD probably shouldn’t do much. While the pure numbers sound high — 18.5 million! — in percentage terms, they’re not. As even the News noted, only 1.5 percent of riders are jumping this year. For any business that’s more than an acceptable bleed rate, and it’s tough to tell how much extra revenue one police office at nearly $80,000 a year would net. Perhaps it would make sense, but perhaps it wouldn’t be the best use of police resources.

Basically, fare-jumping is a sunk cost for the MTA. It is the price of doing business in a system that can’t station a cop in 468 stations 24 hours a day, 7 days a week. A higher fine should temper the problem, but anything else is simply overkill.