MTA Economics

We first heard rumblings of an impending MTA real estate transaction back in March when The Wall Street Journal reported the authority’s interest in offloading its Midtown office space. Today, those rumors grow louder as The Times discusses the how the authority is looking to sell the buildings it owns at 347 Madison Ave. in an attempt to generate at least $150 million in revenue.

What I feared earlier this year would emerge a one-time attempt to cash in seems to be morphing into a long-term plan to consolidate office space. The authority purchased the three buildings on the block 44th and 45th Sts. over the span of 12 years. According to The Times, the authority paid $11.9 million for 347 Madison in 1979 and a total of $36 million for the two neighboring buildings in 1991. While the authority considered selling in 1998 and 2005, with the commercial real estate market on the upswing and the authority’s finances heading south, now may be the ideal time for either a sale or as “long-term lease.”

Charles V. Bagli reports:

Transportation officials are hoping that a developer will pay top dollar for the properties, three 20-story office buildings that form the eastern blockfront between 44th and 45th Streets. A buyer could demolish the structures and erect a modern skyscraper, and could also buy unused development rights over Grand Central Terminal and build an even taller tower than might otherwise be allowed. “The point is, it’s a valuable asset,” said Jeffrey B. Rosen, the transportation authority’s director of real estate.

The decision comes as developers are beginning to shake off a three-year hibernation following the collapse of a speculative real estate boom in 2008. Investors are once again buying office buildings, while developers are looking to revive dormant projects or start new ones. The three buildings might look bland and unappealing, but the allure is their location in a prime office district next to Grand Central, a workday entry point for executives coming from New York’s northern suburbs. The Yale Club is on the same square block.

Mr. Rosen said a sale, or possibly a long-term lease, would happen this time. Jay H. Walder, the authority’s chairman, has streamlined departments, cutting 3,500 positions in the last year from its New York City Transit, Metro-North Railroad and Long Island Rail Road operations. The authority is also evaluating its space needs at 26 other buildings it owns or leases.

As Bagli notes, the MTA’s recent cost-cutting measures have gutted the Madison Ave. buildings. Approximately 20 percent of the job cuts were at the MTA’s headquarters, and the remaining 873 employees are likely to be moved to 2 Broadway, Transit’s current headquarters in Lower Manhattan which houses 4200 MTA workers. Noticeably absent from the article and the MTA’s plans is any talk of the controversial 370 Jay St. building in Downtown Brooklyn.

In an ideal world, the MTA would be able to consummate a sale and generate would some sources say would be “substantially” more than $150 million in order to avoid a fare hike or service cuts later this year. Going forward, the MTA would reduce its costs by cutting down on its physical footprint as well. The savings wouldn’t be that steep, but they wouldn’t be insignificant either.

Of course, questions abound. Does it make sense to move Metro-North operations away from Grand Central? Would the authority be able to rent space in Midtown for the commuter rail administration at cheaper rates? Could they find a buyer willing to pay top dollar right now? None of these are insurmountable obstacles, but I have a sneaking suspicion a deal won’t materialize overnight.

In the 1980s, subway cars were filthy, and stations were decrepit and unsafe. (Photo via NYCSubway.org)

The MTA’s current fiscal situation pales in comparison with the budget wranglings that have enveloped Albany and Washington, D.C., over the past few weeks, but for New York City’s economy and productivity, a relatively stable MTA is vital. Over the past 25 years, the authority has worked to upgrade its massive infrastructure, and while the system isn’t yet at a State of Good Repair, it has made great strides since its nadir thanks to the five-year capital budgets.

Today, though, there is a problem: The capital fund is nearly empty. The MTA has a $10 billion gap in its current five year plan — and that’s a gap that I’ve heard may be a few billion dollars higher — and after this five year plan, it can no longer bond out construction projects. It has reached the limits of debt it can take on and pay off in the future, but it must continue to invest in its system. That is, after all, the problem with running a modern subway system through a 110-year-old physical plant.

Last Friday, in this space, I examined how the MTA could close the gap in its capital budget through fare increases, and my conclusion wasn’t an optimistic one. The MTA would have to raise fares significantly to generate enough revenue to close that $10 billion gap, and the riding public has little appetite for fare hikes these days. So what happens if the fares don’t go up and the capital budget remains unfunded? That’s a topic Noah Kazis tackled on Streetsblog yesterday.

Evoking the “disrepair” of the 1970s, Kazis warns of a long, steep fall for the MTA. If you look closely, it’s sort of starting to happen now as the MTA simply cannot keep up with the demands of its aging infrastructure. He writes:

At the other end of the spectrum from fare-backed borrowing, the MTA could decide that it cannot take on any additional debt. In that scenario, the MTA would simply have to cancel or postpone every unfunded maintenance and expansion project — most of the next three years of the capital program. You can see those projects at the MTA’s capital dashboard, here. The result will be breakdowns, delays, and a slide back toward the decrepit and dangerous subway system of the late 1970s.

“You can expect to see the condition of the system decline pretty rapidly if you’re not doing this work,” said Felice Farber, the director of external affairs for the General Contractors Association of New York. “It’s not too hard to get back to the poor quality service of the past,” she said.

“You’ll have older buses, so they’ll be breaking down more often,” explained Pete Foley of TWU Local 100. “Subways will have to go slower,” as they pass over worn out tracks, he continued. “Eventually you’re going to have cracks. You’ll have derailments if you have a crack in the rail.”

Delays will be more common during rush hour as well, due to the lack of regular preventive maintenance. “You’ll be fixing things when they break,” said Foley. “They’ll wait until it’s an emergency.”

That is a grim picture made worse by the reality of the way the MTA spends capital dollars. For every dollar in capital spending, 23 cents go to expansion plans, 27 cents go “basic repairs,” 35 cents go toward rolling stock replacement and the remaining 13 cents are used to upgrade communications and technology infrastructure. The MTA can ill afford to let any of these projects stop, let alone all of them.

“In reality,” Kazis writes, “the MTA can choose to mix and match between fare-backed debt and deferred maintenance, putting off the features that might be nice to have and charging riders for the ones they need to have. The MTA could also potentially swap in service cuts or layoffs for fare hikes.”

That’s a bad reality. We’ve seen the MTA cut the Second Ave. Subway from three tracks to two; we won’t enjoy a station at 10th Ave. and 41st St. along the 7 line extension. What else will go before some action is taken to rescue the system from the slippery slope of the 1970s? Let’s hope we can avoid making the same mistakes of the past; that’s one history I’d rather not see repeated.

Regular readers of Second Ave. Sagas know all about the MTA’s budget problems. As the authority has slashed subway lines and bus routes, raised fares, trimmed internal spending by hundreds of millions of dollars and fought to keep costs down, its money is drying up. Its capital plans can no longer be bonded out, and its operations budget is under attack in the form of assaults on the payroll tax. It’s only going to get worse.

In the new print edition of Crain’s New York Business, Erik Engquist and Jeremy Smerd ran down the challenges facing the MTA’s budget, and the picture they paint is a depressing one indeed. From Washington, D.C, where Republicans want to cut infrastructure spending to Albany where an austerity budget will leave the MTA with few capital dollars, the authority’s money is under assault. As I noted on Friday, the worst-case scenario could include 33-percent fare hikes. For New Yorkers who need transit, that’s a scary thought.

In three concise paragraphs, Engquist and Smerd delve into the budget battles:

The budget plan of Rep. Paul Ryan that House Republicans unveiled last week would cost the MTA more than $2.3 billion over 10 years in funding for rail and bus infrastructure and security projects, Rep. Anthony Weiner, D-Brooklyn/Queens, calculates. While that plan for 2012 is unlikely to pass, cuts in federal funding for the MTA appear probable.

A larger problem for the agency is that the last three years of its five-year, $26.3 billion capital plan have no state funding, and it’s unclear how it will be raised. Gov. Andrew Cuomo, who did not appropriate money for the capital plan in the new budget, has not said whether his no-new-taxes pledge applies to the MTA capital plan. Funding it from user fees alone would result in huge fare and toll increases. The MTA payroll tax imposed two years ago will continue for two decades but funds only the first two years of the plan.

Meanwhile, state Sen. Martin Golden, R-Brooklyn, intends to introduce legislation to eliminate the 50-cent surcharge on taxi rides that goes to the Metropolitan Transportation Authority’s operating budget. The surcharge brought in $81 million during the state fiscal year that ended March 31.

Now, these problems admittedly sound worse than they are. The federal government isn’t going to cut $2.3 billion from the start, but the MTA has come to lean on federal funds for major projects. The Fulton Street Transit Center has been funded solely through federal dollars, and while we can and have debated the wisdom of that expenditure, nothing would have happened in Lower Manhattan without federal money. Along the East Side and underneath the East River, the Second Ave. Subway and East Side Access projects are powered by large federal grants as well.

Hand-in-hand with those considerations are fears of inaction from Albany. How will Andrew Cuomo address the MTA’s capital budget? The authority’s current five-year plan, which includes the completion of both SAS and ESA as well as numerous station rehab plans, is funded only through this year. As April ticks away, no sign of action on this problem has emerged. The MTA will likely prioritize big-ticket items that have federal money (and thus require completion) over maintenance, and thus, the State of Good Repair will suffer further if Albany stays quiet.

And then finally, we arrive at Marty Golden’s latest plan to strip $81 million from the MTA. Is he aware that $81 million would lead to more subway and bus cuts? Golden, a Brooklyn Republican, is currently serving on the state’s Capital Program Review Board, and so he has — or should have — first-hand knowledge of the MTA’s fiscal woes. Golden has long opposed the cab fare surcharge on that grounds that it is just another tax on New York City residents that somehow winds up in upstate coffers, but it’s undeniable that the MTA needs that money. How will he replace it?

Times are tough right now for the MTA, and they’re only going to get tougher. The folks who end up losing the most though are riders who will wind up paying more for less. Without proper support, our transit system, our wallets and our city economy will suffer.

In a sense, the MTA is broke. It currently has a $10 billion gap in its capital plan, and it can’t bond out anymore. Without state intervention and funding, the authority’s revenue sources have run dry, and by all accounts, it will have no money for another five-year capital plan when the current one expires after 2014.

On the bright side, the MTA’s megaprojects are in no danger of being canceled. The 7 line extension has been funded solely through city dollars while enough federal money has been pumped into the Second Ave. Subway to keep it afloat. The Fulton St. Transit Center is being powered by stimulus dollars while East Side Access is simply too far along to cancel. But what of the future?

At Streetsblog yesterday, Noah Kazis pondered the MTA’s next few years, and the picture is not a pretty one. He writes:

Albany has twice passed up the chance to plug a major part of this gap by enacting bridge tolls or congestion pricing. Increasingly, it’s time to ask what happens to transit riders if legislators just don’t do anything. The options aren’t appealing: a $3.00 base fare or 1970s-style breakdowns and delays.

In one scenario, the MTA could decide that everything in the capital plan, from basic repairs to the system to megaprojects like the Second Avenue Subway, has to happen. In this case, they’d have to borrow the money to pay for the improvements up front. If the MTA borrowed all $10 billion, according to the state comptroller’s office [PDF], the MTA’s yearly debt service obligations would soar even higher than they are already projected to. In 2010, debt service cost the MTA $1.9 billion. If the capital plan is paid for by borrowing, by 2019 debt service would total $3.9 billion.

To pay for all that extra debt, the MTA would have to increase its yearly revenues the only way it can, by raising fares and tolls. According to Neysa Pranger of the Regional Plan Association, the MTA would need between $1 billion and $1.5 billion in new annual revenues to pay for $10 billion in bonds. The 7.5 percent fare hike scheduled for 2013 — that’s on top of this year’s equivalently sized hike — is predicted to raise around $460 million a year, according to the comptroller’s report. Based on that number, it will take roughly a 24 percent fare hike to get $1 billion in new revenue and a 32.25 percent hike to reach $1.5 billion.

Kazis sees a world in which 30-day unlimited cards cost nearly $140. It was bad enough a few days ago when I had to buy a new triple-digit MetroCard. If the prices go up even more, it simply becomes a greater drain on the wallet.

Of course, this analysis isn’t new to anyone who’s followed along over the past few years. City and state politicians have routinely ignored the MTA’s fiscal pleas. It may be tough to take seriously an organization with four decades of financial ineptitude behind it, but the State Senate approved Jay Walder with the understanding that he knew what he was doing. Now that the true picture has emerged, it’s not a pretty one for a state nearly bankrupt.

So what’s the answer here? As always, we have two choices. Either New Yorkers — the five million who take the subway every day — will see their annual commuter costs increase drastically over the next four years or the city begins to levy a fare on those who choose to eschew mass transit. We can charge drivers for their bridge usage; we can bump up on-street parking rates to better reflect market prices; we can levy fees on congestion-causing activities that drag down the region’s economy.

Ultimately, the debate sounds the same after a while, but as city politicians argue over a 17-block bike lane on Prospect Park West, the mass transit system that powers New York slides ever backwards. Streetsblog says they will soon look at a system plagued by deferred maintenance and unreliable service. Anyone old enough to have lived through the 1970s and early 1980s knows what that means, and what that means is higher costs for everyone, congestion pricing or not.

Over the past year, as the MTA has struggled to maintain a balanced budget, “making every dollar count” has emerged as the authority’s mantra. Since finding itself on the wrong end of a budget crisis, the authority has identified over $500 million in annual savings and, amidst repeated cries for a forensic audit, has identified nearly $200 million more in savings with the potential to save on labor costs as well. But since the state comptroller can’t seem to figure out how to drill down on the MTA’s finances quickly, we have no way of knowing what the MTA should target and if their cuts are efficient.

To rectify that problem, the influential Citizens Budget Commission unveiled a report benchmarking the efficiencies — or lack thereof — at the MTA, and the findings may surprise a casual observer. The CBC found that the MTA’s subway operations are their most efficient and compare very favorably to subway systems across the country. The authority’s city-based bus network, however, is among the least efficient in the country, and their commuter rail network suffers as well. Across the board, the agency must rein in maintenance costs, the report noted.

“This benchmarking analysis highlights both the national leadership of the MTA and specific opportunities for improvement,” CBC President Carol Kellermann said. “It’s a very valuable tool for understanding the efficiencies and inefficiencies of the system and how the taxpayers’ money can be better spent.”

The report — available here as a PDF — is pretty straightforward in its methodology. Using readily available numbers, it compares the MTA’s costs of operations across a variety of metrics to assess efficiency. Using vehicle revenue miles and hours, unlinked passenger trips, passenger miles traveled and vehicles in use, CBC analysts determined a variety of unit cost measurements. It also examined employee productivity levels as well.

The CBC bulleted the findings in a top-line summary:

• New York’s subways are among the most efficient in the nation. Among the ten largest subway systems in the United States, the MTA has the lowest cost per passenger trip; it has the second-lowest cost per passenger mile (behind Atlanta) and second-lowest cost per hour of service (behind Chicago), and it is third (behind Philadelphia and Chicago) in cost per active vehicle. New York is fifth in cost per mile of service. In non-vehicle operations (stations and other facilities), the MTA scores only in the middle of the group – a notable opportunity for further improvement.
• The MTA’s bus operations are relatively inefficient. Among the ten largest urban bus systems in the nation, the New York City Transit bus operations rank last in three of five cost indicators: cost per mile of service; cost per hour of service, and cost per active vehicle. The MTA Bus Company ranks seventh or below in all five indicators; the other two being cost per passenger trip and cost per passenger mile.
• The two MTA commuter railroads, the Long Island Rail Road and Metro-North, also are relatively inefficient. Among the ten largest commuter railroads in the nation, the Long Island Rail Road was at or near the bottom on three of five indicators (last on cost per passenger mile; ninth on cost per active vehicle; eighth on cost per mile of service) and below the median on the other two (seventh on cost per passenger trip and sixth on cost per hour of service). Metro-North was in the bottom half of the group on all five indicators (eighth on cost per active vehicle; seventh on cost per hour of service, and sixth on the other three indicators: cost per mile of service; cost per passenger trip, and cost per passenger mile).

When it comes to buses, the CBC fingers both poor road conditions and congestion as the likely culprits for the costs. Because our city roads are in such bad shape, MTA buses break down more frequently. Because the roads are so crowded, buses do not operate efficiently. The MTA has two of the nation’s three bus operators that run their vehicles at an average speed under 10 miles per hour.

Ultimately, this report doesn’t help to highlight specific ways in which the MTA can solve money. Being a leader in efficiency, at least on the subway side of things, doesn’t mean the MTA can’t spend less; they likely could. But these totals should help policy analysts pinpoint ways in which the MTA can save. Right now, buses — and to a lesser extent, commuter rail — remain the 800 pound gorilla in the room. Now who wants to tackle the problem?

Yesterday afternoon, Streetsblog reporter Noah Kazis alerted to the world to a potentially crippling raid on transit funding from the good folks in Albany. As part of the looming budget discussions, the legislature could remove an additional $170 million from the MTA’s budget. Around $70 million of that would come from the partial repeal of the payroll tax, and the other $100 million would come in the form of discretionary spending. Combined with Gov. Andrew Cuomo’s plan to cut $100 million, the MTA could be staring down the wrong end of a $270 million budget hole.

Today, Jim Brennan, chair of the Assembly’s Committee on Corporations, Authorities and Commissions, vowed to protect the MTA’s budget. Noah Kazis reports:

According to Brennan’s legislative director, Lorrie Smith, the Assembly remains opposed to having its money be used for the MTA, but will find another source for that $100 million. “The MTA is not going to lose that money,” she said. “Mr. Brennan’s main goal here is to protect the MTA’s budget.” It is not clear, however, what the alternative source for that $100 million will be.

Smith also told us that the payroll tax exemption was not going to make it into any final budget. “The payroll tax, as I understand it, is off the table,” said Smith, “because the Assembly is adamantly opposed to it.” According to the leaked memo we reported on yesterday, the Cuomo administration is also opposed to cutting back the payroll tax in this budget.

Finally, Smith revealed that a third transit issue is keeping the transportation section of the budget from being completed: Long Island Bus, which recently cut more than half of its lines. “This is an issue that is being decided some place above us,” said Smith, who knew only that negotiations were ongoing.

Better late than never, I guess, but I’m not going to hold my breath quite yet. The state has a huge budget gap, and transit funding has always been the first to go in times of crises.

The MTA must close a $100 million budget gap before the end of the year, and CEO and Chairman Jay Walder has pledged to avoid fare hikes or service cuts. Thus, the agency is turning to its real estate holdings to see if it can eke enough money out of sales to help close that gap, The Wall Street Journal reported this morning.

Andrew Grossman has more:

Since the end of 2009, the MTA has slashed administrative staff by 18%. That has left it with thousands of empty desks throughout the city. Late last month, the authority issued a request for proposals seeking a real-estate firm to help it figure out how to wring more money out of its office space. The MTA owns or leases offices in every New York City borough and in White Plains. It spends nearly $89 million each year on rent, taxes and operating costs for that space, according to the request for proposals. Meanwhile, it’s trying to close the gap in its $13.4 billion budget by the end of the year without raising fares or cutting service…

The 277,000-square-foot MTA headquarters site [at 347 Madison Ave.] could be worth a lot…Properties in the area have fetched about $300 a square foot in recent months, according to real-estate website PropertyShark. The headquarters occupies three adjoining buildings that make up the entire west side of Madison Avenue between 44th and 45th streets. The buildings are connected to Grand Central Terminal by an underground passageway.

While the buildings themselves are cramped and outdated, they could fetch a high price because of an invisible advantage that comes with them: air rights from Grand Central. Because developers can’t build on top of the historic terminal, its air rights can be purchased by the owners of neighboring sites who want to build higher than regulations would otherwise allow. A large chunk of those rights went to now-defunct Bear Stearns when it built its headquarters on Madison between 46th and 47th streets in 1999.

The MTA’s real estate holdings have often come under scrutiny from politicians. The decrepit building at 370 Jay St. in Downtown Brooklyn has long incurred the wrath of local representatives, but the MTA has been hesitant to sell anything because it had needed the space. Now that staffing levels are down significantly, the MTA should be able to consolidate operations and begin to sell off some unnecessary assets.

Of course, the only problem with selling off real estate assets is that it’s a short-term fix for a long-term problem. The MTA can placate politicians by dumping its properties, and it can close its 2011 budget gap by doing so. But it’s not going to help the 2012 budget, and it won’t help restore sanity to the way the MTA is funded. By all means, the MTA should operate efficiently, but the politicians who grandstand on these issues must be willing to meet the agency halfway.