FOR RELEASE:

MTA BUDGET GAPS COULD BE LARGER THAN IT PROJECTED,
SPENDING GROWING MUCH FASTER THAN REVENUES
Financial Reporting Improved, But Problems Remain

Only six months after the largest fare hike in its history, the Metropolitan Transportation Authority (MTA) is projecting budget gaps of $840 million in 2005, $1.3 billion in 2006, and $1.5 billion in 2007. But because the MTA is counting on risky resources, the gaps could be substantially larger, as much as $2.1 billion by 2007, which would be a staggering 29 percent of revenues that year, according to a report on the MTA’s October Financial Plan issued today by State Comptroller Alan G. Hevesi.

“Since the MTA is doing a better job of reporting on its finances, we can now see that the agency has very serious financial problems that must be addressed. The MTA faces huge and growing budget gaps. Spending is growing much faster than revenues, in large part because the State is no longer helping to pay for its large capital spending plan,” Hevesi said.

The MTA’s risky assumptions include the following:

• Each of the agencies that make up the MTA has projected that fare and toll revenue will increase based on reasonable economic projections. But the MTA’s central office then added an additional five percent increase in 2005 and 2006 and 10 percent in 2007. That amounts to $227 million in 2005, $229 million in 2006 and $475 million in 2007. Since these additional growth estimates are arbitrary, they must be considered risks. In fact, it’s clear the MTA itself is not confident about these revenues, because it says it may have to reduce fare discounts to produce this additional revenue.
  “The MTA has effectively budgeted a fare increase for 2005 without admitting that it has, since reducing discounts will increase the cost of commuting,” Hevesi said.
• The MTA projects savings of $80.1 million in 2005, $129 million in 2006, and $174.4 million by 2007, but has not specified how it will actually achieve these savings.
• There are additional budget risks from unspecified savings from a proposed corporate restructuring and from debt service costs that are likely to be higher than projected.

When these risks are taken into account, the projected gaps total $1.2 billion in 2005, $1.7 billion in 2006, and $2.1 billion in 2007. The gaps are the result of a large and growing imbalance between recurring revenues and expenses. MTA spending is projected to grow an average 6.9 percent a year during 2005 through 2007, while recurring revenues grow just 0.2 percent each year. This imbalance has been masked in recent years because the MTA was able to use surpluses from prior years, one-shots and a debt restructuring which pushed debt costs into future years.

Debt service costs are projected to more than double, from $797.2 million in 2003 to $1.7 billion in 2007, due to a reliance on debt to finance the current five-year capital program in response to a lack of State support. By 2014, annual debt service costs are projected to reach $2.5 billion—more than three times the 2003 level. Pension costs are projected to also double during the financial plan period, rising from $317.8 million in 2003 to $763.6 million in 2007.

Even if the MTA reduces discounts in 2005, by its own projections it would be left with a gap of at least $840 million. To close that gap, the MTA has said it will seek ways to reduce costs and hopes to obtain additional aid from the State and the City, probably in the form of a tax increase. Unless these actions are successful, the MTA would need to raise base fares and tolls in 2005.

The report notes that there is some good news for the MTA this year. In 2003, tax and toll revenues are likely to be $50 million more than anticipated in the October Plan. Pension fund investment performance is likely to be better than anticipated this year, which could reduce pension contributions beginning in 2004. These additional resources will be needed in 2004 because the MTA is expecting $121 million in additional governmental aid, which seems unlikely given the budget gaps faced by the state and the city.

In April, the Office of the State Comptroller issued a report that revealed that the MTA shifted $512.5 million from 2002 into calendar years 2003 and 2004 without informing the public in order to make its 2002 surplus appear smaller. Since then the MTA has made a serious effort to make its finances more transparent. The State Comptroller has proposed regulations that would ensure transparency by requiring the MTA to present, document, and report on its budget estimates in a manner that is consistent with well-established and prudent budgetary practices.

“In October the MTA provided a four-year financial plan and it clearly shows why four-year plans are so important. If the MTA had provided a four-year plan rather than a two-year plan when the fare increase was under consideration, it would have changed the nature of the debate,” Hevesi said.

Though the October Plan is a significant improvement over past plans and the MTA cooperated fully with the Comptroller’s budget review, several notable deficiencies remain in the MTA’s financial reporting:

• The agencies that are part of the MTA still prepare their financial plans using different formats, creating inconsistencies in their presentations.
• The MTA does not disclose the sources of nonrecurring resources, even though legislation it proposed last June would have required such a disclosure.
• The MTA still does not clearly identify transactions that shift resources from one year to another.
• The October Plan fails to disclose that the temporary State franchise tax surcharge, which generates about $450 million annually for the MTA, is scheduled to expire on December 31, 2004. While it is not unreasonable for the MTA to assume that the State will renew this temporary tax, as it has done eight times since 1982, the MTA should have disclosed this assumption because there is always a risk that it might not be renewed.
• The October Plan also does not address the Mayor’s proposal that the MTA assume the operational and financial responsibility for the seven private bus companies currently subsidized by the City at an annual cost of $150 million.

For the first time and to its credit, the MTA has included in its debt service projections the cost of funding the next five-year capital program, which would cover calendar years 2005 through 2009. The October Plan assumes that the 2005-2009 capital program will total $26.6 billion, 40 percent larger than the current capital program for 2000-2004. The 2005-2009 capital program would include $9.3 billion for East Side Access and the Second Avenue Subway, but the October Plan assumes that New York City will finance the extension of the No.7 subway line to the Javits Convention Center.

While the October Plan defines the source of almost $20 billion for the capital program, it is silent on the source of the final $6.7 billion that would be needed to fully fund the proposed capital program. Since the October Plan already relies on optimistic assumptions about federal and City contributions, the MTA would most likely look to the State for additional assistance. Unless the MTA obtains additional outside assistance, it will be forced to either rely more heavily on its own bonds, which would further strain the operating budget, or cut the size of the proposed capital budget.

The State Comptroller’s review also found that the MTA will reach its debt ceiling of $16.5 billion during 2005 and, unless the ceiling is raised by the State, the MTA may not be able to finance $1.7 billion, or 9 percent, of the current capital program for 2000-2004.

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