MTA Economics

“How does this make sense?” That is the question Assembly Member Jim Brennan, the chair of the Committee on Corporations, Authorities and Commissions, asked when faced with Gov. Andrew Cuomo’s smoke-and-mirrors approach to MTA funding during a recent hearing. His has hardly been the only incredulous voice throwing all levels of shade toward Cuomo’s proposal, and as we sit in Month 15 of a stand-off over funding for the MTA’s capital plans, planning for work to be performed under the current five-year program has slowed to a crawl.

The problem began back in October when Cuomo announced a funding agreement covering the MTA’s capital funding gap. Along with coercing the city to give $2.5 billion to the plan, Cuomo promised around $8 billion of additional state funding, but he was ambiguously vague about the source of the money. A noted motorist, Cuomo has never tried to use his political capital to push through any congestion pricing plan or Sam Schwartz’s tolling plan, and transit advocates and economists were concerned Cuomo would force the MTA to fund the capital plan through debt. The $8 billion, in other words, wasn’t really there at all, and the state would simply enable more MTA borrowing.

That is essentially what’s happened but worse. In his budget release [pdf], The state’s additional contributions beyond an initial grant of $1 billion would, as Cuomo noted, be available to the MTA only “after MTA capital resources planned for the capital program…have been exhausted,” and the state anticipated fulfilling its funding pledges for the 2015-2019 capital program by 2025-2026. For those keeping score at home, 2025 is supposed to be the launch year for the MTA’s second five-year program after the one currently under endless review.

With the measure also increasing the MTA’s debt ceiling to $55 billion for capital expenditures from 1992-2019, it’s clear that the governor wasn’t too interested in ponying up the billions in a way that would prevent future pressure on the MTA’s operating costs in the form of ever-increasing debt service obligations. Thus, his October promise was anything but a promise and simply consisted of debt, debt, and more debt. The capital program, meanwhile, still hasn’t been approved, and the MTA can’t spend money on needed projects yet.

No one watching the watchers is too happy about Cuomo’s proposal. Brennan pushed MTA CEO and Chairman Tom Prendergast a few weeks ago on sources for the money, but Prendergast’s lack of concrete answers pushed the legislators toward pointed criticism. “At some point,” Brennan said, “it would be nice to see a proposal from this person who’s the elected leader of the state.”

Senator Marty Golden was similar skeptical. “I have no idea how we can actually do a capital program and actually approve a capital program with language that it’ll be there when you need it. Corporate America would laugh at this. Any country would be surprised with this type of approach in funding.”

Advocates have written pleading op-eds urging the Governor to right this wrong, and the New York City Independent Budget Office has thrown up some serious red flags as well [pdf]. In a report released late last week, the IBO warned that both the city and state are likely to delay their actual contributions until the MTA exhausts its borrowing capabilities and then delays repayment until 2025-2026. This, in turn, could affect access to federal funding, delay budgetary considerations until after the next rounds of state and city elections and jeopardize actual contributions to the 2020-2024 plan, if not that plan in its entirety (which, by the way, is when I would expect to see the bulk of Phase 2 of the Second Ave. Subway receiving funding).

The state and city have continued to push back on this narrative by claiming their budgetary contributions are “iron clad,” but it’s hard to take Cuomo or Mayor Bill de Blasio as their words. They have hardly been transit boosters before, and the budgetary shenanigans are just another way to stick it to New York City’s transit riders without tackling the larger issues of mobility and capital funding. It’s the same old song and dance, and 15 months after the capital program was due to start, we are still no closer to a real solution.

During their last meetings of 2015, the MTA Board on Wednesday took care of one piece of pressing business: The agency’s oversight body approved the 2016 budget with projections for the next few years. For the perennially beleaguered agency, the outlook is rosy. With a boost from what officials call “modest” fare hikes every two years, the MTA has predicted positive balances through 2019 and over $240 million in service increases on the horizon. But one watchdog worries that the agency’s planning could take a serious hit were another recession to arrive, and the riders would bear the brunt of the pain.

As budgets go, the MTA’s outlook is shockingly optimistic. After years of deficits and cost reduction efforts, the MTA is predicting surpluses until 2019 (and those out-year projections never seem to materialize). So with nearly $300 million on hand at the end of this year and with a $123 million surplus predicted for 2016, the MTA plans to add service but won’t eschew biennial fare hikes. It’s also not clear, as I’ve discussed before, if the MTA is adding enough service to meet spiking demand, but more service is on the way.

“The MTA is committed to bringing high-quality service to our customers at a reasonable cost, and our updated Financial Plan shows how we are putting that commitment into action,” MTA Chairman and CEO Thomas F. Prendergast said in a statement last mont. “We are continuing to find new ways to save money, we are making smart investments to serve our growing ridership, and we are doing this while minimizing the impact on our customers’ wallets.”

The new projections are powered by higher real estate tax receipts (which we’ll return to shortly), higher toll revenue. With this money, the MTA plans to do the following:

• Fare and toll increases in 2017 and 2019 will be limited to 4% per increase.
• The MTA will increase bus and subway service, but only by $38 million over the next four years. By contrast, the service cuts in 2010 resulted in nearly $100 million in savings.
• The MTA will spend $13 million on new Select Bus Service routes and $35 million on Second Ave. Subway operations.
• Maintenance backlogs will enjoy $42 million worth of work.
• Capital contributions from the MTA will increase by $125 million annually which allows for $2.4 billion in additional bonding but also leads to more debt down the road.
• The agency will reduce its liability for unfunded pension obligations by around $140 million.

As you can see, this is very much a mixed bag of expenditures, and the agency still needs to receive final sign-off on the 2015-2019 capital plan and has asked Albany to address declining taxi surcharge revenues due to the increase in popularity of Uber, Lyft, Via and other car-hailing services. There is also, according to a recent report issued by the Citizens Budget Commission, an 800-pound gorilla in the room. If another recession hits, they said [pdf], the MTA is ill-prepared to handle it, and riders would be socked by higher-than-anticipated fare hikes and deep service cuts. The CBC worries that the MTA’s revenue growth projections — 2.2 percent annually — are too optimistic and that by relying on real estate taxes and fares, the MTA’s budget is too susceptible to an economic downturn.

If a recession were to arrive during this financial plan, the CBC says we should expect these surpluses to turn into deficits that could be as much as $600 million. Such a deficit would require a fare hike of nearly 12 percent, and the CBC expects the state to turn to congestion pricing to fill the MTA’s coffers. Considering how New York politicians don’t seem to have the appetite for congestion pricing during good times, it’s tough to see them embracing this solution in bad ones. The MTA would also have to further reduce head counts and draw on any reserves they could.

So what’s the takeway? The CBC opines:

Based on the MTA’s response to recent budget gaps created by mandates for higher labor costs, the likely response would not be politically unpopular service cuts or fare increases. Instead resources in its financial plan related to capital funds and retiree benefits would be reallocated to cover operating expenses. This will increase future costs, create risks, and ultimately impose a greater burden for future transit riders and taxpayers.

A wiser strategy is to take other actions sooner to anticipate a future recession. More cautious
economic and revenue assumptions seem appropriate, and new policies regarding reserves would be a constructive step. Accumulation of general reserves should be permitted, and an explicit rainy day fund established covering a larger share of total expenses before releasing future reserves to reduce other long-term liabilities. Greater restrictions on diversion of OPEB funding and a firmer commitment to PAYGO capital allocations would reduce the risks associated with reallocation of those items. Finally, continuing to increase planned efficiency gains beyond current targets for future years would help bring expenditures in line with the revenues available when a downturn occurs.

In other words, even in good years, we shouldn’t grow complacent. It’s sound advice for an agency that has struggled (or even, as some may say, bumbled through various economic crises). For now, though, the footing looks solid, but the fare hikes will come. And that will be the way of things for the foreseeable future.

For the nitty-gritty on the MTA’s budget, feel free to peruse the 2016-2019 Financial Plan Adoption Materials, available here as a PDF.

In response to the Riders Alliance’s call to improve transit access to LaGuardia Airport by rebranding the Q70 and eliminating its fare, the MTA came down hard against the idea. Despite the Riders Alliance’s contention that a fare-free service would likely generate more ridership, and thus more revenue, for the MTA, the agency opted to highlight the potential affect on its bottom line such a free service would have. Cost estimates ranged from a few hundred thousand to tens of millions, and while officials stopped short of uncategorically dismissing the idea, they might as well have.

“One-fourth of riders do not come from the subway and don’t use the free transfer, and thus we would lose money on one out of every four customers under their plan,” Transit spokesman Kevin Ortiz said to me in a statement. “If ridership would continue to grow on the route to the level they claim, we would have to add service, and that costs money. And where would we find the buses?”

Where would the MTA find the buses? Well, that must be the costs MTA spokesman Adam Lisberg had in mind when he later said on Twitter that the agency is “generally opposed” to ideas that “would cost the MTA tens of millions” of dollars. It’s hard to believe increasing service from every 12 minutes to every 10 for a few hours a day would have that much of an effect on the MTA’s budget, but that was the party line earlier this week.

Meanwhile, it wasn’t the only time the MTA, or its surrogates, relied on an argument over token amounts of money to reject a rider-friendly initiative. Earlier this week, Governor Andrew Cuomo vetoed a measure that would have upped MetroCard transfers on certain routes from one per two hours to two. The measure had bipartisan support, but Cuomo claimed it foisted an unfunded $40 million expense onto the MTA’s shoulders. “The bill,” he said in a veto message, “does not provide any funding to account for this expense. Such funding decisions should be addressed in the context of the state budget negotiations.” The MTA urged those riders who need the extra transfers to buy unlimited ride cards instead.

For the MTA, this recent attention to dollars lost around the edges of its $13 billion annual budget — a half a million here, $40 million there — is hardly a new development. The MTA’s operating budget has, for years, run on razor-thin margins, thanks in part to capital debt payments, and the agency has recently focused on penny-pinching when it comes to operations, often at the expense of rider-friendly initiatives. Costs matter.

Meanwhile, just a few weeks ago, the MTA secured $28 billion for its capital projects, and boy do costs not even come into consideration here. The MTA is currently building, along the East Side, the world’s most expensive subway and, underneath Grand Central, the world’s most expensive commuter rail terminal. The 7 line extension was the world’s second most expensive subway, and the Fulton St. Transit Center’s $1.4 billion price tag looks low only because the WTC PATH Hub across the street costs nearly three times as much. Meanwhile, future phases of the Second Ave. Subway are likely to cost even more, and no one at the MTA is decrying these dollar figures which are orders of magnitude higher than a free shuttle bus to the airport.

It’s hard to say that the MTA cares about construction costs. Outwardly, there’s been very little effort to get them under control, and project costs inch higher and higher with each passing year. Securing the dollars is a fight, and the money goes further everywhere else in the world. Government regulations, interest group politics, local NIMBYism, bad labor practices and plain old corruption seem to all play into the MTA’s costs, but no agency officials have claimed to lose money on capital expansion projects.

Ultimately, then, it seems that the MTA cares about money only around the margins. Usually, they don’t; sometimes, they do. And those times seem to implicate benefits for riders. This strikes me as a rather uneven response from an agency with so many customers that should be trying to attract more. If anything, it’s hypocritical and exhausting.

A Transit Hall and other improvements are a part of One Vanderbilt’s $210 million package. (Via KPF)

Since my office is now across the street from Grand Central, I’ve had a front-row view of the work at 1 Vanderbilt. In a way, it’s a peek into the potential future of MTA financing. As the old building goes down and a new skyscraper takes its place, we should ask if this model of value-capture is sufficient and sustainable. The new developers of the new building will guarantee at least $210 million in upgrades for the Grand Central subway stop, but is this truly a model that the city can replicate on a grand scale while addressing the needs of growing demand for transit?

The idea behind the funding for the transit improvements at 1 Vanderbilt is simple: In exchange for permission to construct the 68-story tower, SL Green will contribute a few hundred million to fancy up the Grand Central subway station. The dank Lexington Ave. line will see improved street level access, more platform space and a larger mezzanine. Ideally, these changes will help the station better handle both current passenger loads and anticipated increases in ridership brought about by the new building, the East Side rezoning and the eventual opening of the East Side Access project.

Transit advocates seem to like the idea. On Friday, Gene Russianoff of the Straphangers and John Raskin of the Riders Alliance published an Op-Ed in the Daily News calling upon the city to pursue this type of funding on a wider scale. They write:

Over time, especially with systematic disinvestment from the federal government, we’ll need more funds to fill the gap. One promising source is sitting right there in underdeveloped land near the subway. Think of it as a kind of “value capture”: Landowners seek permission for large-scale bonuses to how big they can build. In return, they must offer transit improvements. In the past, many of the changes have been modest, as anyone stuck at the bottom of a non-working private escalator in the subways can tell you. We must be more demanding…

If we extend it to far more projects, the One Vanderbilt model could eventually bring in hundreds of millions of dollars as the city considers a new generation of super skyscrapers. (It’s true that real estate does pay citywide taxes that fund transit. But these are like the broad-based transit taxes on drivers, corporations and consumers — not tied to specific improvements.)

Many communities around New York City owe their existence to our number one capital asset — our subways. How fitting that desperately-needed subway aid should come from our number one home town industry, real estate.

In theory, it’s hard to oppose this deal. Mega-towers will likely tax the subways around them, and the MTA shouldn’t be left holding the bag as developers walk away with millions of dollars from these new towers. But in practice, I’m not yet convinced it’s a sustainable model for MTA funding.

The problem concerns, as Raskin and Russianoff put it, “underdeveloped land near the subway.” Is there enough underdeveloped land to generate enough revenue for the MTA to build multi-billion-dollar subway extensions? The land, for instance, around the Triboro RX line isn’t zoned for developments big enough to help offset anything more than a token amount of the costs, and asking developers in corridors with lower value than Midtown Manhattan may not be a fruitful exercise. This may work in Manhattan — and could help parts of additional phases of the Second Ave. Subway — but beyond that, I’m skeptical.

The MTA’s problems regard cost and sustainability. Can the MTA get a handle on its absurd capital costs? And is there a geographically neutral way to fund transit that doesn’t simply lead to more money for Manhattan and less for growing Outer Borough areas equally as overburdened? The 1 Vanderbilt model is a component to a capital funding plan, but it’s unlikely to be a panacea without significant other pieces.

At $1.4 billion, the Fulton St. Transit Center cost far more than it should have. Can the MTA find a way to control its costs? (Photo: Benjamin Kabak)

In addition to a lack of political support from Albany, the highest barrier to MTA expansion efforts concerns costs. The one-stop 7 line extension clocked in at $2.3 billion, and the only subway expansion effort in the world that’s more costly is the first phase of the Second Ave. Subway. The MTA is spending nearly as much to rebuild the South Ferry station as it did to construct it, and the East Side Access price tag is comically high and ever increasing.

In a vacuum, the probably isn’t just the costs alone. We know everything costs so much, but we do not know why. Over the years, observers and experts have blamed everything from stringent federal regulations regarding emergency access, a costly and litigious environmental review process, corruption in the construction industry and the uncertainties of digging up old New York City streets. To me, this reeks again of New York City exceptionalism as these are issues facing most developed nations. Somehow, some way, other countries aren’t spending $2.7 billion per new subway mile.

In the latest issue of Capital New York’s monthly magazine, Dana Rubinstein went in depth on the cost issue. For long-time readers of my site (or infrequent and new readers), Rubinstein’s piece is a succinct look at an issue that New York City must solve if it is to meet the demands of its population. Without a handle on costs, the money to expand nets fewer and fewer improvements.

Rubinstein frames her piece around the idea that transit agencies have a rich history of low-balling costs to get money to start a project only to return, cap in hand, for more to finish. Robert Moses deployed this strategy to great effect throughout the city, and the MTA and Port Authority have essentially done the same with their recent construction binges. Think, after all, on how Phase 1 of the Second Ave. Subway should have cost $3.5 billion or how the Port Authority WTC station was originally budgeted at under $2 billion. Once shovels are in the ground, it’s hard to stop, especially if federal grants are involved, and local politicians are forced to fork over the dollars.

What I found even more intriguing though was this excerpt that shows how few people are engaged in this issue:

How New York City’s megaprojects compare in cost to those in similarly developed countries around the world is a question that is, somehow, very rarely studied. Stringer’s spokesman said the comptroller relied for his numbers, in part, on a mathematician named Alon Levy, who’s now completing his post-doc at the Royal Institute of Technology, and who notes, in his blog Pedestrian Observations, that, mass transit is a “side interest” for him and “entirely unrelated to my work.”

The experts at the Regional Plan Association, who are looking into the problem of megaproject cost overruns as part of their latest survey of regional infrastructure, directed Capital to a blog post by Levy, too. The post, from 2011, reported that the Toei Oedo Line in Japan cost $560 million per mile. The Berlin U55 cost $400 million per mile. The Paris Metro Line 14 cost $368 million per mile. New York’s construction costs blew all of that away, the study found. The Second Avenue Subway is coming in at $2.7 billion per mile. The 7 train extension to the far West Side? $2.1 billion per mile.

David Schleicher, an associate professor at George Mason University School of Law, has analyzed Levy’s numbers and says that his analysis basically confirms Levy’s. Barone, of Regional Plan Association, said, “The question is always why, why, why is it so expensive?” said Barone. The answer always seems to come back to a limited universe of issues, in varying combination: labor costs, work rules, managerial incompetence, the spaghetti of infrastructure tangled beneath Manhattan’s streets, a political firmament without incentive to tackle hard issues.

I’ve never met anyone who’s had reason to doubt Alon’s numbers (and you can read the post in question right here on his site). What’s surprising is how few comparative studies have been done to highlight these cost disparities. For its part, the MTA talks about a design-build process that’s supposed to mitigate costs, but working hand-in-hand with the parties responsible for the high costs (that is, the contractors) won’t lead to meaningful reform.

Meanwhile, it’s Chris Ward, a former head of the Port Authority, who has seized on this issue. “It is time to recognize that the delivery model for big projects is broken and fiddling on the margins will not build the kind of projects the region needs,” he said to Rubinstein. Without a better handle on costs, the MTA’s request for $15 billion in capital funding is a tough one to stomach, and future megaprojects are doomed to an expensive limbo at a time when the city and its current and future residents need them the most.

When I read New York State Comptroller Thomas DiNapoli’s release about his latest report on the MTA, I rolled my eyes a bit. DiNapoli, picking up on the MTA’s $15 billion capital funding gap, noted that while the MTA’s finances are better, the riders could wind up shouldering a huge portion of the next five-year plan, and the Comptroller said, riders shouldn’t be expected to pay for everything.

We could debate for hours whether or not that last statement is true, but DiNapoli’s point isn’t a new one. “The MTA is in better financial condition thanks to its own efforts and a stronger economy,” DiNapoli said yet again. “Over the coming months, the MTA will have to work closely with its funding partners to close the $15 billion gap in its capital program. Additional borrowing could increase pressure on fares and tolls, and while the MTA should look for opportunities for savings, deep cuts could affect the future reliability of the transit system and jeopardize expansion projects.”

Overall, DiNapoli’s report regurgitates MTA talking points. He notes that subway ridership has hit highs not seen since the late 1940s and that the MTA’s debt burden will continue to increase for the foreseeable future. He highlighted the new labor deals, unfunded pension obligations and steep fare hikes. It’s basically a summary of the last six months’ worth of news. (You can read it here as a PDF if you need a primer.)

Despite the mundane nature of DiNapoli’s report, one part is worth a deeper dive. His report “cautions that every $1 billion borrowed would increase debt service by an amount comparable to a 1 percent increase in fares and tolls.” Thus, if the MTA needs to borrow that $15 billion to cover its capital funding costs, it could do so simply by raising fares by an additional 15 percent. That’s a big fare hike. The MTA’s current plan for 2015 — once it gets released some time after Gov. Cuomo’s upcoming Election Day — calls for only a 4 percent hike, down from an originally planned 8 percent.

So while it’s easy to dismiss DiNapoli’s report for being nothing more than a news aggregator, the point he makes about the fares is a political chit for the MTA. If no one steps up with a different funding scheme and the MTA is serious about this $30 billion plan, the riders will be footing the bill for a substantial portion of it. Maybe that’s OK; maybe the people who use the system should pay for more of it. But now we know it’s a choice that Albany will make willingly. Is it the right one? I don’t think so.