MTA Economics

While this morning, I wrote about the naming rights aspect for the MTA’s restructured deal with Bruce Ratner for the Vanderbilt Yards land. For posterity’s sake, let’s go over just how much sweeter the MTA has made this sweetheart deal.

The short of the backstory is that Bruce Ratner doesn’t have the money to build much of what he wanted to build at Atlantic Yards and can no longer afford the below-market rate of $100 million for the Vanderbilt Yard land rights. He also can’t afford the $225 million state-of-the-art train facility he originally promised.

So what did the MTA do? Well, instead of opening up the process to a new round of bidders and requests for proposals, the agency has simply sweetened the deal for Ratner. Instead of a lump sum payment of $100 million, he will pay just $20 million upfront and cover his purchase in installments totaling $80 million over the next 22 years. He will pay $2 million a year from 2012-2016 and then $11 million a year for the following 15 years. Instead of a $225 million rail facility, he will supply one with three-quarters of the original plan capacity for $150 million instead.

As you can imagine, reaction from the MTA Board members and Atlantic Yards critics bordered on the incredulous. Whether the full board supports this project tomorrow remains to be seen.

“It is one month shy of four years since the board accepted Forest City Ratner, and this committee is being given less than 48 hours to understand a complex transaction,” MTA Board member Doreen M. Frasca, said. “I think that’s pretty outrageous.”

Various groups are planning to file suits to stop this new deal from going through. They probably face an uphill battle, but then again, so does the MTA. During an economic crisis, they’re relinquishing land and a rail facility for a below-market payment. The trains might run on time, but public opinion will not smile upon this sweeter sweetheart deal.

In the end, as some critics called it a “bait and switch” by Ratner, MTA CFO Gary Dellaverson had the final, understated word: “It’s not quite as good as we hoped.” And that was a choice made by the MTA with which it will have to live for a long time.

One of the key issues in last month’s debate over the MTA rescue plan centered around source of revenue for a widely-used mass transit system. Should the state and city be subsidizing transit or should the MTA, through farebox revenue, be largely self-sufficient?

Similar to many political economic debates, this one gets to the root of government’s role in society. Those who support government funding of transit recognize that it is a social and public good. The city and state need transit to exist, and transit should turn to the state for money. Those who believe the MTA should survive on farebox revenue trend toward a privatized model of public transportation. Private entities set fares to run a profitable or net-zero operation. The government carries a small percentage — generally close to zero — of the costs but forfeits the rights to any profit.

Outside of a few key examples, the privatization of mass transit systems has been unsuccessful, and the vast majority of the world’s transit authorities rely on significant state contributions. New York, in a sense, is an outlier. It relies on farebox revenue for a majority of its operating expenses. In fact, New York City Transit’s 2009 adopted budget calls for a 60 percent farebox operations ratio. With so few government contributions on the table, no wonder the MTA’s finances are maxed out.

Even within the MTA, the numbers aren’t consistent. A piece by Mitchell Pally, the Suffolk County representative to the MTA, lays it out. In 2008, the MTA’s farebox operations ratios ranged from 16 percent on the Staten Island Railway to 44 percent on the LRR to 53 percent for New York City Transit. That hardly makes sense.

In his call for a dialogue, Pally makes a few good points. He writes:

For the past 44 years, under Democratic and Republican administrations, the state’s policy has been that mass transit riders should not pay the full cost of their ride. Instead, they pay a percentage – with the remainder of the cost coming from taxpayers. This fundamental policy extends to riders across the state, whether they take the LIRR, the city subways and buses, or the buses in Syracuse, Buffalo or Dutchess County…

The operating and capital costs to safely and effectively operate these complex but socially beneficial systems are simply too great to be borne by riders alone – that has been and continues to be the view of governmental decision-makers…

Under the original “doomsday” budget adopted by the MTA, riders would have paid more than 50 percent of the cost of their LIRR ride, and 61 percent of the cost of their subway trip. With the State Legislature’s rescue and this month’s increases, these percentages will be about 44 for the LIRR and 52 for New York City Transit. Are these numbers too high, too low or just right?

The answer can only be found in a public policy argument that must take place as part of the entire MTA financing discussion. Without a real answer, the region will just continue to move from one dramatic fare discussion to another without a real understanding of what is actually being discussed.

Right now, though, Pally is preaching to empty church. Our state representatives in Albany are too busy bickering over leadership issues to focus on anything important that might actually be plaguing New York state. While 62 Senate members fight it out, the rest of us are left to weather a bad economic storm on our own.

In closing, Pally issues a challenge to lawmakers and transit experts a like. “So policy-makers need to adopt an agreed-upon fare-box ratio for each of the mass transit systems in New York State, including the various MTA entities,” he writes. “With such an agreement on the table, the MTA and the public can engage in a reasonable discussion about fare adjustments that will be tied to an inflation-sensitive series of funding sources to cover the rest of the cost of the ride.”

Pally gets it. We need a steadier funded MTA that knows what to expect from its farebox operations ratio and the city and state which it supports. When we will get that is anyone’s guess.

The daily weekday ridership for Metro-North is around 270,000. For the Long Island Rail Road, that figure clocks in at about 290,000. Meanwhile, in New York City last year, average daily subway ridership hit 5.2 million. So how would you expect funds from a New York State transit slush fund to be distributed? If you guessed “disproportionately favoring the suburbs,” congratulations. You’ve just won the Second Ave. Sagas Award for Ineptitude in Government.

According to a report in Sunday’s Daily News, state lawmakers have access to a $240 million transit slush fund. The fund — called the Customer Service Reserves — is supposed to spent on projects that could enhance, you guessed it, customer service. Somehow, though, around $190 million of this fund have gone to suburban-based projects while just $50 million has been invested into New York City Transit properties.

Of course, this story isn’t nearly as clear cut as that outrageous disproportionate dispersion of wealth makes it out to be. Allow me to quote Pete Donohue’s article:

The fund is part of the Metropolitan Transportation Authority’s capital construction and maintenance program. Five-year spending plans are negotiated with the Legislature and governor’s office and need approval from representatives of the Senate, Assembly, governor’s office and mayor.

Between 1995 and August, approximately $195 million in reserves was assigned to the majority party – Republicans in the Senate, Democrats in the Assembly. Approximately $155 million has been spent or committed to transit projects through August.

Since just a few GOP senators represent city neighborhoods, the vast majority of Senate reserves has flowed to commuter rail projects in suburbs north and east of the city in counties like Nassau, Suffolk, Westchester and Putnam. About $40 million remains unspent.

Nearly $200 million in reserves was assigned to Assembly Democrats, who represent all but one Assembly district in the city. Approximately $40 million has gone to commuter rail projects, and another $45 million or so to subway upgrades – but more than half of the Assembly reserves remain unspent.

So, okay. Let’s reassess. The Senate and Assembly divide up a few hundred million based along party lines that ensures New York City Transit, with 91 percent of the MTA’s ridership, gets around 50 percent of the available funds. The suburban areas have enjoyed far more actual spending than the subways, and yet the subways need massive capital investments over the next few years and decades.

The assembly reps, meanwhile, claim that the money is unspent because, well, it’s hard to spend it. “It takes a while to decide how best this can have an impact … because of the limitations and how it can be used,” Sisa Moyo, a spokesperson for Sheldon Silver, said to Donohue. “We found it to be a slow-going process.”

News stories such as this and quotes such as Moyo’s make me want to slam my head against a wall. This is basically free money. It should be spent on projects, and the projects are out there. Invest it in a rehab of the 4th Ave. Culver Line stopped, shelved because of budgetary concerns. Buy some more trash cans for the perennially dirty subway stations. Further fund studies to replace the MetroCard with a contactless fare system.

For now, New Yorkers are used to a system that seems similar to an annoyance and not the convenience it should be all because the money isn’t there. When the money is there, it just sits there. All it takes to implement change and improvements is a little creativity and drive. Without it, the subway system just sits in neutral, underfunded, under-maintained and perennially in fiscal trouble.

Over the last few years, New York State Comptroller Thomas DiNapoli has emerged as one of the state’s leading authorities on the MTA’s financial crisis. He has repeatedly asked the agency to perform some internal belt-tightening and seems to display an understanding of the agency’s expenses and revenues that few New York State politicians possess.

With that qualification in mind, I would hope that, when he releases a report, people would listen. Outside of a few inches of space in the local papers, though, DiNapoli’s analysis is often discarded. Yesterday afternoon, while announcing three new audits of the MTA — one of its cash management controls and banking services and fees; one of the agency’s maintenance program; and one examining the costs and timeliness of the MTA’s capital program — DiNapoli issued a preliminary report on the current fiscal health of the MTA.

While the Albany bailout will help the beleaguered transit agency, the MTA is, in the words of the comptroller, not out of the words yet. “The MTA has to deliver on its promise to reduce costs. I’m also concerned that the next five-year capital plan may rely too heavily on debt, which would divert resources from operating needs, just as heavy borrowing in the past has contributed to the MTA’s current fiscal crisis,” he said. “The audits we’re announcing today will help make sure the MTA stays on the right financial track.”

Most notable in DiNapoli’s reports are the debt warnings. While fairly technical and seemingly far off into the future, the MTA’s current projected borrowing levels will come back to plague the agency. The MTA is going to use the mobility tax to generate $6.8 billion in Bonds. By 2020, according to DiNapoli, debt service will cost the MTA $440 million in revenue from the mobility payroll tax. Furthermore, the agency is going to take on new debt to fund the 2010-2014 capital plan, and the MTA could be mired in $3.2 billion of debt service spending by 2020.

DiNapoli bullet-points some other key findings:

• The MTA still faces budget gaps of $100 million in 2009 and $60 million in 2010, which should be manageable given the MTA’s $10 billion budget and $75 million in annual reserves;
• Nearly three-quarters of revenues from the mobility tax would come from employers in New York City, with Nassau, Suffolk and Westchester counties making the next largest contributions. The report includes a break-out of expected revenue from the mobility tax by county;
• School districts will initially pay $67 million in new mobility taxes for 2010, with half of that amount coming from New York City. The state intends to reimburse school districts within the MTA’s 12-county service region for the cost of the tax;
• Real estate transaction tax collections peaked at nearly $1.6 billion in 2007, but are projected by the MTA to decline by more than $1 billion by 2009. The report also found that collections have been weaker than expected through May and could be $125 million less than projected by the MTA for the year;
• The MTA is expected to save $227 million in 2009 and $359 million in 2010, but the MTA has a history of falling short of target and the operating agencies often identify new funding needs. The MTA is also counting on savings of $65 million in 2009 and $112 million in 2010 from certain state and federal actions. In the event the anticipated savings are not realized, the MTA ought to identify alternative actions;
• The MTA could generate surpluses in 2011 and 2012, but the amounts will depend on the economic recovery, the realization of planned savings, and whether fares and tolls rise by 7.5 percent in 2011 as planned. The report recommends that surpluses, if they materialize, be used to fund reserves or the capital program on a pay-as-you-go basis.

Missing from the bullets is a short note on pensions found in the report (PDF). The MTA may have to increase its already sizable pension contributions due to a shortfall in the New York City Employees’ Retirement System.

In the end, DiNapoli’s report is and is not surprising. We know that the MTA is suffering through some financially bad times, but while Albany has proclaimed itself a savior, it hasn’t improved the agency’s long-term financial outlook. The MTA still has to turn to crushing debt; it still has unresolved revenue issues; and it will be back at Albany’s door, cap in hand, waiting congestion pricing and East River Bridge tolls, before we know it.

Since the Ravitch Report landed on the desk of Gov. David Paterson in December, “internal belt-tightening” has turned into an MTA buzzword. Throughout the build-up to the Doomsday budget and all throughout the transit fight in Albany, the MTA has proclaimed itself ready for cuts. These cuts could come in the form of fewer station agents, one-person train operations and fewer stations cleaners. While the agency has given lip service to the idea of cutting down its bureaucracy at MTA HQ, a new report begs to differ.

In a piece published in The Post on Sunday of a three-day weekend, James Fanelli reports that the agency has actually increased staff salaries at HQ by around $3.46 million. He writes:

Between March 2008 and March 2009, 140 directors, managers and other employees who work in the MTA’s main Madison Avenue offices received raises, according to a Post analysis of agency records. Of these bump-ups, 79 came without title changes.

In the same period, the Midtown HQ’s headcount surged by 43 staffers to 695, records show. The new hires included a $75,000-a-year photographer, a $117,000-per-year director of police support and a $134,204-a-year director of workforce development. Also, for $172,000 a year, it brought on a “chief diversity officer” who is supposed to help give contracts to minority-owned businesses. All were newly created positions.

Overall, payroll at headquarters rose 6.7 percent to $55.5 million.

Fanelli spoke to MTA spokesperson Ernest Tollerson about the increases, and Tollerson noted that many of them were cost-of-living increases. He also said that many of the new hires will help save money in the future.

It seems to me that this story is more about The Post riling up anti-MTA sentiments than anything else. The $3.5 million in increases represent less than one quarter of one percent of the MTA’s current debt, and the agency has to retain the workers who help move over eight million people a day.

At a time when the agency is working to convince its union to take a pay freeze, when the agency is raising fares, when the agency wants to cut station agents, this news looks bad. In a world in which failed CEOs earn tens of millions of dollars though, annual raises for mid-level workers is hardly a national crime. With an Albany-mandated audit heading the MTA’s way, we’ll see those bureaucratic cuts soon enough.

Graphic detailing the spending courtes of The Post.