MTA Economics

The latest glimpse at the MTA's debt service obligations. (Via)

The problem with building infrastructure is the need to maintain it in the future. As the MTA is learning right now, the bill always comes due, and someone has to pay. As the authority’s debt service obligations creep ever upward and will remain well above $2 billion a year through 2030 and $1 billion a year through 2040, the riders may inevitably have to bear the costs if the system cannot.

The theory behind debt is a deceptively simple one. When an entity — government or otherwise — needs to build something, it must raise capital to do so. Many corporations or organizations raise that capital by issuing debt based on time value theories of money. A debt-holder will turn over $1 now so that the builder has capital in exchange for a promise of more money in the future. That more money can be bonded from revenue-generating activities such as fare collection.

When building a subway line, debt is the perfect funding vehicle because future ridership projections can be used to estimate a bond issuance, and the revenue from that ridership can be used to pay down the debt. After a certain period of time, the debt will be paid, and the new infrastructure will be a profit generator. Unfortunately, this model of financing breaks down once an entity has to issue debt for maintenance of a vital piece of infrastructure rather an expansion, and the MTA is learning what happens when too much debt is used to sustain instead of expand a a pre-existing subway system.

Right now, the New York City Subways range in age from over 100 to nearing 80, and the MTA is tasked with making sure the system still operates 24 hours a day and improves. Unfortunately, maintaining the current status quo and even incremental improvements are not investments that should be funded with much debt. They don’t lead to an increase in ridership great enough to justify the debt and mean that we’ll be paying for today’s improvements in 10 or 15 or 20 years when more improvements are necessary. That, in a nutshell, is a simplified view of one of the drivers of the MTA’s current financial crisis.

Right now, nearly 20 percent of the authority’s annual expenses consist of debt service payments, and according to the MTA’s CFO, that situation is only going to worsen without city or state help. In speaking with the MTA Board’s Finance Committee yesterday, Bob Foran warned of the spectre of a looming debt service increase. Reuters reported the following:

The New York Metropolitan Transportation Authority might have to raise subway and bus fares by approximately four-and-a-half times the last fare increase to cope with a jump in debt service that kicks in as soon as 2016, Bob Foran, the MTA’s chief financial officer, said on Monday.

The MTA, the nation’s biggest mass transit agency, has a balloon-type borrowing program in which the amount repaid rises sharply in later years. Monday was the first time officials spelled out the impact the rising debt service could have on fares if no additional state or federal aid is received.

An MTA spokesman said fare hikes of the magnitude cited by Foran are not being considered.

We know that the MTA is going to raise fares again in approximately 23 months and will likely continue to request biennial increases to meet the growing expense pie. This debt service warning is a real one that, while seemingly obtuse, riders should take seriously.

As these financial questions arise every so often, I’m often asked if the MTA can declare bankruptcy, and the short answer is that it cannot. Its obligations are state obligations, and the state would have to grant the MTA permission to enter bankruptcy. The authority still has a strong credit rating, and it still is going to issue debt. Meanwhile, commentators including Nicole Gelinas and Joe Weisenthal say that the MTA should be more concerned with the state going bankrupt than vice versa. Neither solution would lead us down a good path.

Ultimately, the lesson is one that few politicians take to heart. Without state contributions, the MTA can maintain its system only through more debt, and the MTA must continue to maintain its system. Since politicians won’t be in office when the MTA must scrounge up $2.5 billion for debt service payments in 2025, Albany is more than willing to shirk current funding obligations and foist them off on future generations. Eventually, we the riders will have to pay one way or another.

It’s no small feat to run a transit system without any leeway in the budget, but lately, that’s what the MTA has had to do. It’s suffered through bad spending, a bad economy and bad politicians who have taken dedicated funds away from its coffers, and now, it might suffer through another bout of bad economic times if Gov. Andrew Cuomo and the State Senate has their way.

The news today focuses around an off-hand comment Cuomo made at Marist College yesterday afternoon. While responding to student questions, he levied an indictment of the payroll tax. “It is a very onerous tax, not just in this area,” he said. “People are complaining on Long Island, the entire metropolitan region. I’ve said from the beginning I understand the need to finance the system. If we can find a better way to do it, I’m open.”

For Cuomo, this is a more nuanced approach on the payroll tax than what we heard during his campaign. In late October, Cuomo threatened to reassess the tax, and the MTA had to issue a spirited defense of the dollars. “The payroll tax has proven to be crucially important to the MTA,” MTA spokesman Aaron Donovan said at the time. “Its existence prevented service cuts and fare increases from being even worse, and it is reducing the funding gap in our five-year capital plan.”

In its coverage of Cuomo’s statement, the anti-tax Post tried to spin the news as an obvious sign that the payroll tax is flawed. It rehashed a story from last February about projections coming in under budget and noted how business owners in the suburban counties claim the tax is “counter-productive, because the MTA mostly serves New York City.”

Of course, the reality is a bit more complex. The payroll tax is structured such that 75 percent of the revenue comes from within the five boroughs, and the suburban counties are paying a far smaller share of the total. Furthermore, those outer-lying areas are better off with Metro-North and the Long Island Rail Road, and they can’t reap those benefits without paying for them in return. Somehow, someway, suburban riders and residents will have to pay to enjoy the services.

Furthermore, since the early 2010 projections were reduced by the state budget office, the revenue collected has actually been higher than anticipated. According to the MTA’s most recent budgetwatch publication, the payroll mobility tax totals came in at $1.351.9 billion or around $3.8 million higher than forecasted. As Cuomo noted and as the MTA has said, it will require significant compromises to cut the payroll tax and generate that money elsewhere. Without it, the MTA would be bankrupt.

Meanwhile, in the Daily News yesterday, Gene Russianoff and Paul Steely White issued a spirited defense of the dedicated transit funds. As Gov. Cuomo has yet to issue his budget, we don’t yet know how the state’s budget deficit will impact transit funding. The two advocates though have urged the governor to keep his hands off of dedicated funding:

Not only does raiding a dedicated tax fuel public cynicism, which could hardly be higher than it already is in New York, but it shifts some of the high costs of state government onto the shoulders of transit riders and downstate taxpayers. There is no free lunch. The money Albany takes out of dedicated transit funds will result in higher fares and expensive repairs of a system hurt by deferred maintenance down the line.

More raids will also mean more service cuts. That will create a drag on the economy as employers have a smaller workforce to draw on, and workers have to spend more time getting around.

We don’t need to look at ancient history to prove this. The last series of transit raids, just last June, triggered the worst transit service cuts in memory – axing 36 bus routes, closing 570 bus stops, eliminating all or parts of three subway lines and burdening millions of city riders with longer waits, more crowding and longer trips. Commuter rail riders had trains eliminated and stops added to remaining trains. Paratransit service for individuals with disabilities has been made even less convenient or, in some communities, eliminated completely.

Nobody likes paying taxes. But the wide range of businesses and people who pay dedicated transit taxes generally accept them. That’s because, in one way or another, they get what they pay for. What the public will never and should never support is seeing their transit taxes spent to plug the state’s huge budget gap.

These are tough choices that Cuomo must make, but the future of the MTA, our public transit network and the city’s economy depends upon it. Trade the payroll tax for congestion pricing and bridge tolls, but keep those dedicated funds flowing to their intended recipients. It’s just good government.

Via NYC The Blog comes this news clip from the TV station Russia Today. In it, reporter Lauren Lyster tracks down people who are giving away free swipes on their MetroCards to stage an economic protest against the MTA. The one person Lyster tracked down who went by the name of Ollie is speaking in clear class-protest terms, but many lower class neighbors pool resources to buy unlimited cards to save cash.

The MTA says this behavior isn’t illegal as long as people aren’t selling swipes, but Daily Intel’s Chris Rovzar calls this a “moronic protest.” I think he’s onto something. Looking at the Free Swipe Movement’s Facebook page, Rovzar levels his indictment:

you should be on the lookout for a person “standing by the turnstile making a swiping motion.” You’ve likely seen people doing that, or heard the ones who flat-out just ask for a swipe. How often are they the type of people who look like they need the swipe in order to commute to and from work? Or, on the other hand, how often are they the type of young, entitled people who would know about this system from joining a Facebook group?

But that’s beside the point. My opinion is admittedly 100 percent biased by the people I see try to pull this move at the First Avenue L station. Perhaps I’d see a more noble slice of humanity if I commuted from somewhere that wasn’t the exact spot where the East Village and Williamsburg intersect. Here’s the real problem: The reason these fare hikes happened was because the MTA is broke. How, exactly, is cutting into the MTA’s earnings supposed to fix the situation and prevent further hikes? When you hand out your expensive swipes, are you really “sticking it to the man”? Or are you “sticking it” somewhere else, maybe a little bit closer to where you wear your messenger bag?

The problem is, as always, one of public trust. The general public doesn’t believe the MTA can be broke, and thus, they think mismanagement and corruption are responsible for the fare hikes. They don’t believe that state representatives, who stole $143 million from the MTA but also bash the authority, are wrong. So this protest will hurt only the riders who claim to be protesting. It’s a good idea gone bad.

For all of its criticism, the state’s Payroll Mobility Tax delivers $1.3 billion a year to the MTA, and without that tax, the authority would have to either cut a tremendous amount of services or jack up the fares well beyond any acceptable level. We’ve long heard how New York Republicans in the State Senate would like to repeal the payroll tax, and now, as Streetblog’s Noah Kazis reported today, a splinter group of State Democrats has joined the repeal efforts.

The Independent Democratic Caucus, a splinter group consisting of Diane Savino, David Valesky, David Carlucci and Jeffrey Klein have already called the payroll tax a Democratic failure, and now they will join the Republicans in seeking a repeal. From their full agenda comes this gem:

MTA Tax Reform: Gross mismanagement is blamed for 1/3 of the MTA’s current fiscal debt. Our goal is to conduct a comprehensive forensic audit of the MTA to find areas of waste and corruption and determine the need and the efficacy of the current MTA tax.

As Kazis says, there’s a lot to be concerned about in this two-sentence statement. He writes on Streetsblog, “It’s the phrase “determine the need” that’s most threatening, with its suggestion that there may be no need at all. Remember, the transit agency’s capital program — which covers expansions and badly-needed repairs — is a staggering $10 billion short and the agency just went through a painful round of service cuts, fare hikes and layoffs to make its operations budget add up. Even a deal that exempts the suburbs from the payroll tax but not the city would cause some combination of more service cuts, higher fares, and deferred maintenance.”

I have two takes on this development. First, enough with the threats of a forensic audit. For two years, since the payroll mobility tax first found its way to the legislative docket, representatives have been threatening forensic audits, but none have been forthcoming. At some point, these politicians must take responsibility for the fact that they have direct oversight over the MTA. If they want a forensic audit, then they should do one. My belief is that they’ll find out that far, far less than one-third of the MTA’s current fiscal debt is a result of “gross mismanagement” and will lose their ability to scapegoat the MTA for their own failures of government. Bring on the audit.

That said, the payroll tax should go. It’s a crazy way to subsidize transit, especially in a bad economy, and repeal seems all but inevitable. That said, as I mentioned earlier today, if the payroll tax goes, it must be replaced with something else. The MTA can’t afford to see a $1.3 billion revenue stream dry up, and even congestion pricing — the ideal trade-off for the end of the payroll tax — would generate only between $400-$500 million a year for the authority.

Again, we’re seeing State Senators playing a game of Russian Roulette with the MTA’s finances, and for the city’s 5 million subway riders, this story almost can’t have a happy ending.

New York’s newest governor gave his State of the State speech went unmarked in this space last week because of what he didn’t say. While he talked about smart growth, he didn’t discuss the MTA, and that silence left many fearful for the future of the city’s vital transit authority.

Today, City Hall News goes one better and names the MTA and Jay Walder the speech’s losers. They say:

Jay Walder – Walder took the Amtrak up to Albany to see Cuomo’s speech, but the fare might have been better put towards the cash-starved MTA operational budget. The governor did not mention anything about transportation or the beleaguered agency during his speech, leaving many straphangers and transportation advocates wondering whether it will even be on his priorities list. And with Republicans now in control of the Senate, a repeal of the payroll tax seems more likely than any expansion of one, no matter how bad the budget looks.

A repeal of the payroll tax by the State Senate would be a largely symbolic move as it is doubtful that the Assembly would pass a similar repeal or that Cuomo would sign off on the bill. Still, the MTA budget is under fire, and the payroll tax may become the victim of legislation logroll in which Republicans push through repeal in exchange for a congestion pricing measure.

With the recent fare hike fresh in New Yorkers’ minds, politicians are playing fast and loose with the MTA’s delicate budget. Things may just get far, far worse before they get better.

As Nassau County and the MTA drag out their dispute over funding for Long Island Bus, a state court decided this week that the Long Island count must pay the MTA $20 million for a loan the county took out 15 years ago. Newsday has the details on this latest bit of financial chicanery:

Already struggling to meet its financial obligations to the MTA, Nassau County may have to pay the transit agency an additional $20 million following a state court’s decision in a lawsuit stemming from a financial deal made between the two sides 15 years ago.

According to the suit, the Metropolitan Transportation Authority lent “the cash-strapped county” $51 million in 1996 in a “2-for-1” agreement in which Nassau agreed to pay back twice that sum in funds for MTA capital projects in Nassau.

Nassau issued bonds to raise the full $102 million and made good on $89 million of the capital funding it had committed to the MTA. But, according to the suit, in 2001 the county filed a lawsuit looking to get out of the agreement, arguing that the MTA had overstepped its authority in making the deal.

The court is now requiring the county to fork over $13.6 million to cover the difference in payments as well as another $7.3 million in interest, legal fees and other capital improvements. County officials, of course, are none too pleased. “We are very disappointed in the ruling and have directed staff to file a notice of appeal,” Nassau County Attorney John Ciampoli said.

The MTA, meanwhile, with support from Newsday’s editorial staff, is starting to take an agressive approach toward Nassau County’s dismissive attitude toward its MTA funding obligations. “This ruling makes it clear that Nassau County’s obligations to the MTA are not optional and shouldn’t be treated that way,” agency spokesman Jeremy Soffin said. If only the authority would say the same to Albany.

As New York State prepares to welcome its new governor with a massive budget crisis, Transit advocates are ramping up their efforts to secure supposedly dedicated funding. After watching state tax revenue fall $500 million short of projections and yelling loudly from the sidelines while the legislature reappropriated — or is this misappropriated? — $143 million in transit funding last year, a group of transit advocates, good-government organizations and labor unions sent a letter yesterday to Andrew Cuomo urging him to protect transit dollars.

“What could be more basic to good governance than keeping the promise to taxpayers and transit riders that dedicated transit funds be spent for the sole purpose for which they were enacted?” the letter asks. “One quarter of the state’s workforce relies on mass transit to get to work.”

The organizations pushed the impact the cuts have on riders. “Twice in the last year, the Paterson Administration has raided funds dedicated solely to transit and taken a total of $160 million for other purposes,” it reads. “The diversion of dedicated transit funds in the fall of 2009 directly triggered the worst transit service cuts in memory. These included axing 36 bus routes; eliminating 570 bus stops; killing all or parts of three subway lines; and burdening millions of city and suburban riders with greater waits, more crowding, extra transfers and longer trips.” These crippling service cuts come on top of the third fare hike in as many years.”

Essentially, this letter lays the blame on the feet of, well, everyone. Gov. Paterson in fact proposed taking the transit dollars while state tax assessors woefully overestimated revenue figures. In fact, for 2011 already, the MTA expects $292 million less than originally anticipated.

Now, it’s time to renew calls for a transit lockbox in New York City. There’s no reason why dedicated funds can’t remain as such, and as long the state has the option to take the money, transit funding will always be at risk. “These taxes were enacted for a specific reason: to help pay for subway, bus and commuter operations and transit capital projects,” the letter says. “As a matter of principle and practice, the dedicated funds should continue to serve those purposes.”

I’ve long beaten the drum for a transit lockbox, and in the coming months, I should have more on the MTA’s financial relationship with New York State. Protection and support for transit is long overdue, and as this letter with its 30 signatories shows, support is growing. When will the state act?

After the jump, a full copy of the letter.

The future is not looking bright for the MTA’s balance sheet. Facing the spectre of looming raids on its supposedly dedicated funding, the state Department of Taxation and Finance confirmed that they did indeed overestimate the payroll tax revenues. While the MTA has long since adjusted its budget projections to align with state totals, the payroll tax is increasingly coming under fire.

This development, first reported in February, drives home the need for a better and more reliable source of revenue for the MTA. Tom Namako at The Post reports:

The latest jostle for commuters is that the wide-ranging “bailout” package of fees and taxes approved in 2009 is coming in about $400 million short of projections that were established earlier this year, statistics show. The controversial business tax — which hits all business owners in the MTA region with a 34-cent levy for every $100 of payroll — appears to be $321 million under expectations, MTA data show. Overall, it will bring in about $1.34 billion instead of the $1.66 billion that bean counters projected.

And the “MTA aid” levies — like a 50-cent surcharge on every yellow-cab ride along with car-rental, garage-parking and license fees — are under projections by $60 million, the numbers show.

“The riders have done their part with service cuts and fare hikes, but motorists aren’t doing their part,” fumed Andrew Albert, an MTA board member. He added that the bailout bill “is not a good package” and that city’s free bridges should be tolled to help finance mass transit.

A state Division of Budget spokesman confirmed that the MTA had already been prepared for this shortfall. “The $320 million drop reflects current projections for 2010 against what the MTA had in its February plan,” said Erik Kriss said. “The MTA’s February plan numbers are based on the payroll projections the state made in December 2009.”

Meanwhile, as Republicans have reclaimed the New York State Senate, Newsday brings us some alarming news: Because so many Republicans campaigned on anti-payroll tax platforms, the GOP members in the Senate will try to repeal the tax. “It’s such an infamous, self-explanatory tax that is has to be addressed,” Sen. Kemp Hannon (R-Garden City) said to Newsday. “Will [the Assembly and Gov. Cuomo] go along with it? I’m not sure they know what they’ll go along with.”

It’s basically impossible for the state to overturn the payroll tax because of the massive crisis it will create. If the state were to revoke $1.3 billion in MTA financing, the authority and our transit system would simply collapse. Until Republicans propose a better way to generate this revenue, their attempts to overturn the tax cannot be supported. Albert’s proposal won’t be popular amongst drivers, but it’s high time for a renewed attempt to toll the East River bridges.