Financing the Metropolitan Transportation Authority's

Proposed Capital Program for 2000 Through 2004

November 1999

H. Carl McCall

State Comptroller

Office of the State Deputy Comptroller for the City of New York

Report 9-2000

Contents

I. Executive Summary

II. The Proposed Financing Plan

   A. Intergovernmental Assistance

    B. Debt Restructuring Initiative

    C. Revenue Bond

III. Impact on the Operating Budget

IV. Projected Operating Budget Gaps

V. Balancing the Operating Budget

I. Executive Summary

The Metropolitan Transportation Authority (MTA) has proposed a five-year $17.5 billion capital program, 39 percent more than the program concluding on December 31, 1999. The proposal has been submitted for consideration to the Capital Program Review Board, which is comprised of representatives from the State Senate and Assembly, the Governor, and the Mayor of New York City. Approval requires unanimous acceptance by the review board.

The proposed capital program is commendable in many respects, but it has generated considerable controversy. A number of elected officials, civic and business leaders, and mass transit advocates have called for building a full-length Second Avenue subway from the Bronx to lower Manhattan. The MTA, however, has proposed constructing a much shorter line running from 125^th Street to 63^rd Street. South of that point, the subway would run along the existing N and R tracks.

The MTA's proposal for the Second Avenue subway would leave sections of the Lower East Side of Manhattan without subway service and would not reduce overcrowding on the Lexington Avenue subway line because the MTA's other major expansion project (East Side Access⁽¹⁾) would bring thousands of Long Island Rail Road commuters into Grand Central Station. Critics note that the MTA's estimated completion date for the subway is not until 2015--six years after the scheduled completion for the East Side Access project. Supporters of a full-length Second Avenue subway believe the two projects should be constructed simultaneously.

Also controversial is the MTA's plan to continue purchasing buses that run on diesel fuel. About 75 percent of the buses New York City Transit (NYCT) is scheduled to purchase over the next five years would run on diesel fuel. Emission from such buses is a leading source of air pollution in New York City and has been linked to cancer and asthma. Long Island Bus, another division of the MTA, no longer purchases buses that run on diesel fuel.

Whether the MTA's capital program goes far enough to meet the region's mass transit needs is open to debate. There is no doubt, however, that evaluating the adequacy of the capital program is hindered by the MTA's refusal to release an updated capital needs assessment that would quantify the level of investment needed over the next twenty years--not only to restore and maintain the regional mass transit system, but also to fund expansion projects.

Financing a capital program of the size proposed by the MTA would be difficult under most circumstances, but the challenge will be even greater in the absence of financial support from New York State. Since 1982, the level of support for the capital program from New York State has declined, requiring the MTA to finance an increasing portion of its capital needs with operating revenues.

While the MTA can reasonably count on about $6 billion of the $17.5 billion needed to finance the capital program, mostly from the Federal government and New York City, the remaining $11 billion is not yet in place.

The MTA intends to obtain $3 billion in new resources for the capital program by refinancing and restructuring more than $12 billion in outstanding debt. Nearly $2.1 billion would be obtained by extending the average life of the debt from 13.4 years to 20 years, which is more in line with the economic useful life of the assets being financed, and $900 million more would come from releasing most existing reserve funds. To be successful, the initiative would require not only approval from New York State, but also favorable interest rates and ratings from credit agencies.

The remaining $8.3 billion would come from issuing revenue bonds--an amount 60 percent larger than the level planned for the 1995-1999 capital program.

In total, the MTA intends to issue more than $20 billion in bonds over the next five years--about $13 billion in less than one year to restructure existing debt--an extraordinary amount in a relatively short period.

The impact on the operating budget could be dramatic. According to the MTA, debt service costs would rise rapidly over the next five years and would not level off until 2010. Such costs would grow from $600 million in 1998 to nearly $1.4 billion in 2004. The percentage of operating revenues dedicated to the capital program would more than double, from 11 percent in 1998 to 23 percent in 2004. Debt service costs would be lower if the debt restructuring and refinancing initiative were successfully implemented, but the MTA would not provide us with those debt service estimates.

Moreover, the proposed capital plan includes only a small portion of the resources that will be needed to complete major expansion projects. For example, the capital program includes $700 million to begin work on the Second Avenue subway, but that represents only 20 percent of the estimated cost of even the MTA's modest proposal, which will take 15 years to complete. Thus, the MTA should develop a long-term strategy to finance major expansion projects that would not compromise its efforts to restore the regional mass transportation system to a state of good repair.

In addition, the proposed operating budget may not be based on realistic assumptions. For example, the MTA would not disclose whether the five-year operating budget includes a reserve for collective bargaining. The labor agreement with the Transport Workers Union, which represents most transit workers, is scheduled to expire on December 15, 1999. This type of ambiguity is not found in the four-year financial plan prepared by New York City.

With only a few months before the beginning of the new fiscal year, the MTA was unwilling to explain how it would balance next year's $356 million budget. One possible source of funding is a larger-than-projected budget surplus in the current year.

Over the next five years, the MTA is projecting a cumulative budget gap of more than $4.4 billion. To close the gap, the MTA is relying on mostly unspecified initiatives. For example, the MTA is counting on $2.4 billion from as yet unnamed sources, possibly New York State. New York City, in contrast, presents--at least six months before the beginning of the new fiscal year--a detailed program to balance the budget and to narrow the out-year budget gaps. While the MTA deserves credit for successfully reducing costs in the past, the budget gaps are now larger than previously projected. Inadequate planning could force the MTA to scale back the capital program or implement service reductions and fare hikes.

In conclusion, the proposed $17.5 billion capital program for 2000-2004 is laudable because it furthers the process of restoring the regional mass transit system to a state of good repair and begins several expansion projects critical to the region's continued economic growth. Whether it goes far enough to address the region's needs is debatable. There is no question, however, that the financing program is not yet in place and may not be realistic. Clearly, the MTA has not demonstrated that the operating budget can absorb large increases in debt service without adversely affecting services or increasing fares. Thus, the Capital Program Review Board should not act on the proposed capital program until the MTA releases the capital needs assessment, makes available information needed to evaluate the reasonableness of the assumptions underlying the operating budget, and states unequivocally the program's expected impact on services and fares.

II. The Proposed Financing Plan

The MTA has presented a plan to finance its proposed $17.5 billion capital program for 2000-2004. As shown in Table 1 and discussed below, the financing plan relies heavily on three sources of funding: intergovernmental capital grants (mostly Federal); a debt restructuring initiative; and proceeds from bonds supported by operating budget revenues, such as fares and tolls, dedicated taxes, and intergovernmental aid.

Table 1

Sources of Funding

($ in millions)

Source: Metropolitan Transportation Authority

A. Intergovernmental Assistance

Federal funding for mass transit capital projects is expected to increase significantly over the next few years. The recently enacted Transportation Equity Act for the 21^st Century (TEA-21) will authorize a record $218 billion for highways, bridges, and transit nationwide during the six-year period Federal FY 1998-2003. One major change in TEA-21 compared to the previous Federal surface transportation act (ISTEA) is the creation of a guaranteed level of authorized spending--which is expected to be accomplished by segregating Federal gas tax revenues within the Federal budget. This is supposed to ensure that new Federal gas tax revenues will be spent on transportation.

The MTA capital program anticipates receiving the full amount of authorized Federal funding, with the exception of funding for the East Side Access project. Under ISTEA, however, Congress appropriated only 76 percent of the authorized transit funds. While 88 percent of the transit authorization is guaranteed under TEA-21, there is still the potential for a significant shortfall from the level anticipated by the MTA. In addition, the MTA is assuming that Federal funding will be maintained at current levels after TEA-21 expires in 2003.

Another source of intergovernmental assistance is New York City. The MTA's financing plan assumes that New York City will contribute about $106 million annually, or $530 million over the next five years, and these amounts are reflected in the City's current capital plan. In sharp contrast, no direct funding from New York State is included in the MTA's capital plan.

B. Debt Restructuring Initiative

About $3 billion in funding would also come from refinancing and restructuring more than $12 billion in outstanding debt. Nearly $2.1 billion in new resources would be obtained by extending the average life of the debt from 13.4 years to 20 years, which is more in line with the economic useful life of the assets being financed, and $900 million would come from releasing most existing reserve funds.

The MTA's proposal rests on a number of key assumptions. Besides requiring changes in State statutes and new bond resolutions, the plan assumes that New York State will agree to extend current service-contract payments from 2018 to 2030 and will release existing service-contract reserves to the MTA. Even if these steps were taken, the MTA would still require favorable interest rates and ratings from credit agencies to successfully implement the debt restructuring initiative.

C. Revenue Bonds

As shown in earlier reports,⁽²⁾ financial support from the public sector has been in decline for some time. The public sector directly funded about 58 percent of the capital programs authorized for 1982 through 1996 but only 40 percent of the 1995-1999 capital program⁽³⁾ (see Graph 1).

Most of the reduction stems from a sharp cut back in New York State's contribution. In total, the State contribution, including both its direct contribution and proceeds from bonds supported by State-authorized dedicated taxes, declined from an average of 19 percent during the first two capital programs to 7 percent in the 1995-1999 program. For the 2000-2004 capital plan, the public sector is expected to contribute only 32 percent of the needed resources. The Federal government has authorized a generous increase in funding, but New York City's contribution would decline. Moreover, the capital plan does not include any funding from New York State.

Due to diminished financial support from the public sector for capital projects, the MTA has had to rely more heavily on operating budget revenues to finance its capital programs. Revenue bonds financed 31 percent of the approved capital programs during 1982-1996 and rose to 42 percent of the 1995-1999 capital program. Greater reliance on the operating budget to finance the capital program means fewer resources for services, fare discounts, and new labor agreements. Even if the MTA were to achieve its debt restructuring initiative, $8.3 billion in revenue bonds would be necessary to provide 47 percent of the funding needed for the 2000-2004 capital program, an unprecedented level.

In total, the MTA intends to issue more than $20 billion in bonds over the next five years to finance the capital program and to restructure its outstanding debt. Of this amount, about $13 billion would be issued in less than one year.

III. Impact on the Operating Budget

In its five-year operating plan, the MTA assumes that it will issue $10.9 billion in revenue bonds to help finance the capital program. The MTA estimates that if this strategy were pursued, debt service costs for NYCT and the commuter railroads would more than double, from $600 million in 1998 to nearly $1.4 billion in 2004, placing enormous pressure on the operating budget (see Graph 2). Such costs have grown in recent years because the MTA has financed an increasing portion of the capital program with revenue bonds. Debt service costs would continue to grow in succeeding years and would not level off until 2010.

If the debt restructuring and refinancing initiative were successfully implemented, the MTA would be able to reduce its planned borrowing to $8.3 billion, still far more than the $5.2 billion planned for the 1995-1999 capital plan. Regrettably, the MTA would not provide us with its estimate of annual debt service costs assuming the debt restructuring initiative were implemented.

We estimate that the debt service burden (i.e., debt service costs divided by total revenues) would more than double, from 11 percent in 1998 to 23 percent in 2004 (see Graph 3). Thus, twice as much of the MTA's revenues would be devoted to debt service, leaving fewer resources for other operating budget purposes. The debt service burden would be reduced if the debt restructuring initiative were achieved and new resources were obtained for the operating budget.

The MTA's debt service estimates may even be low, since planned borrowing may have to increase to make up for shortfalls in anticipated Federal assistance. In addition, debt service costs beyond 2004 could be considerably higher than currently estimated by the MTA because the capital financing plan includes only a small portion of the resources that ultimately will be needed to complete major expansion projects. For example, the capital financing plan includes $700 million, or 20 percent, of the $3.4 billion that will be needed to complete even the MTA's limited Second Avenue subway project by 2015. As discussed in our report titled A Guide for Evaluating the Metropolitan Transportation Authority's Proposed Capital Program for 2000 Through 2004 (Report 7-2000, September 1999), the MTA should develop a long-term strategy to finance major expansion projects that would not compromise its efforts to restore the regional mass transportation system to a state of good repair.

IV. Projected Operating Budget Gaps

The MTA projects a cumulative operating deficit of $6.1 billion for NYCT and the commuter railroads during 2000-2004 (see Graph 4).⁽⁴⁾ The projection assumes no increase in fares or tolls, and no new operating assistance from either New York State or New York City. Overall, expenditures are projected to grow much faster than revenues: expenditures would grow by 4.5 percent and revenues by 1.2 percent.

As shown in Table 2 and discussed below, the cumulative operating deficit projected by the MTA reflects the following trends:

• Debt service costs are projected by the MTA to more than double for NYCT and the commuter railroads between 1999 and 2004, since its capital financing plan relies heavily on revenue bonds.⁽⁵⁾ Such costs are projected to grow by more than 20 percent in 2000 and again in 2001--and to grow at an average annual rate of 17.7 percent during the 2000-2004 period. The MTA's debt service estimates are based on an interest rate assumption of about 5.5 percent, which may be low given current and rising interest rates.

• Personnel costs are projected by the MTA to grow by $728 million, an average annual rate of 3.8 percent, during the 2000-2004 period. Such costs are projected to grow by 5.9 percent in 2000, but the MTA would not disclose assumptions regarding changes in staffing levels at NYCT, health insurance premiums, or reserves for collective bargaining. The labor agreement with the Transport Workers Union, which represents most transit workers, is scheduled to expire on December 15, 1999.

• Fare and other operating revenues, such as toll revenue, are projected by the MTA to grow at an average annual rate of 1.3 percent. The MTA anticipates modest increases in ridership and does not assume an economic downturn during the next five years.

• Revenue from New York State dedicated taxes, the second-largest source of revenue, is projected by the MTA to grow at an annual rate of 1.8 percent. The MTA's estimates are conservative but make no provision for an economic downturn during the next five years.

• The surplus from the Triborough Bridge and Tunnel Authority, which is used to subsidize the operating budgets of NYCT and the commuter railroads, is projected by the MTA to decline slightly during the 2000-2004 period as a result of costs, which the MTA expects will rise.

Table 2

Operating Budget Projections

for New York City Transit and Commuter Railroads

($ in millions)

Source: Metropolitan Transportation Authority data; OSDC analysis

V. Balancing the Operating Budget

After taking into account certain technical adjustments--such as for depreciation and cash flow--the MTA estimates that the cumulative $6.1 billion operating deficit for 2000-2004 would be reduced to $4.4 billion. With only a few months to go before the beginning of the new fiscal year, the MTA was unwilling to explain in detail the steps it would take to close next year's $356 million budget gap. One possible source of funds is a larger-than-projected year-end surplus in the current year. The MTA also allocated a $113 million reserve for services at about $23 million annually through 2004. These resources could be used to help balance the budget in 2000, but at the expense of enlarging the budget gaps for 2001-2004 by an equal amount.

To close the cumulative $4.4 billion budget gap for the next five years, the MTA is relying on mostly unspecified initiatives (see Table 3). For example, the MTA is counting on nearly $2.4 billion from as yet unnamed sources. In contrast, New York City presents--at least six months before the beginning of the new fiscal year--a detailed program to balance the budget and to narrow the out-year budget gaps. It is expected that New York City will submit to the New York State Financial Control Board, on behalf of NYCT, a four-year financial plan in the coming weeks.⁽⁶⁾

Table 3

Balancing the Budget

($ in millions)

Source: Metropolitan Transportation Authority
The MTA's program to close the cumulative $4.4 billion budget gap rests on the following initiatives:

• Nearly $2.4 billion would come from unspecified governmental assistance and MTA sources. New York City's four-year financial plan does not include an increase in operating assistance to the MTA, and the Federal government no longer provides operating assistance for mass transit. In the absence of additional financial aid from New York State, the MTA would have no choice but to increase fares and tolls.

• Another $1.2 billion would come from the MTA's debt restructuring initiative and asset management, but the MTA has provided few details about these potential revenue sources.

• The remaining $912 million would come from non-service related budget cuts and revised revenue estimates. MTA officials have stated that these resources, when annualized, would represent about 2.5 percent of NYCT's budget and 3.5 percent of the budgets for the commuter railroads. The MTA has released the budgets for the commuter railroads, which include the actions to be taken, and is scheduled to release the budget for NYCT later this month. In light of the success the MTA has had in the past in meeting similar goals, these estimates may be reasonable.

1. The East Side Access project would connect the Long Island Rail Road to Grand Central Station at an estimated cost of $4.3 billion and is scheduled for completion in 2009. Return

2. Review of the Operating and Capital Plans for New York City Transit and the Commuter Railroads, Report 6-96, March 29, 1996 and A Guide for Evaluating the Metropolitan Transportation Authority's Proposed Capital Program for 2000 Through 2004, Report 7-2000, September 1999. Return

3. The MTA terminated the 1992 through 1996 capital program at the end of 1994 and incorporated the last two years of that program into an extension of the capital program covering 1995 through 1999. This revision relieved the MTA from having to prepare at that time a new five-year capital program for the 1997 through 2001 period. Return

4. This deficit is despite the fact that the MTA projects large surpluses for the Triborough Bridge and Tunnel Authority that have been allocated to NYCT and the commuter railroads. Return

5. The Triborough Bridge and Tunnel Authority issues bonds, in part, for its own purposes, but mostly to help finance the capital needs of NYCT and the commuter railroads. The debt service on these bonds is projected to average about $300 million annually during the 2000-2004 period. Return

6. NYCT is an organization covered by the New York State Financial Emergency Act. Return