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February 24, 2005

 

Executive Budget Offers MTA Some Short-Term Help
& Long-Term Pain

The State’s Executive Budget proposal for 2005-06 provides the Metropolitan Transportation Authority (MTA) with some state assistance that helps balance its budget through 2007 and makes a down payment on a new five-year capital program. These planned expenditures still require the MTA to reduce services, raise fares by 5 percent in 2007 and borrow billions more to pay for repairs and replacement of the regions mass transportation system. After 2007, the Authority will still face growing budget gaps, according to a report on the MTA’s budget released today by State Comptroller Alan G. Hevesi.

The Executive Budget proposes a $19.2 billion five-year capital program for the MTA, which is 31 percent less than the program approved by the MTA Board. It would also require the MTA to borrow $9.7 billion, thus relying even more heavily on new debt than ever before. Hevesi noted that it was the excessive borrowing during the previous capital program that created the severe financial problems that the MTA now faces.

“The Governor’s proposal improves the MTA’s short-term financial condition, but does not address the MTA’s long-term operating and capital needs,” Hevesi said. “The MTA borrowed more than it could afford to pay for past capital programs, and it looks like the MTA is on track to repeat this mistake.”

The Executive Budget would increase State support for the MTA by about $200 million annually. The new resources would pay for the cost of up to $3 billion in debt to help finance the 2005-2009 capital program, but the MTA would still have to borrow another $6.7 billion to fully finance the capital program. The debt service on these bonds would double the debt service burden to 23.4 percent of revenues by 2015. For the 2000-2004 capital program, the MTA is expected to borrow $7.9 billion in new money bonds.

These new resources are insufficient to fund both the debt service on the new bonds and the rising debt service costs associated with the 2000-2004 capital program. Consequently, the MTA could face large and rapidly growing budget gaps beginning in 2008. Even if the MTA implements planned service reductions in 2006 and raises fare and toll revenue by five percent in 2007, it could still face a budget gap of $459 million in 2008. In the absence of management improvements that reduce waste, closing a gap of this magnitude could require another eight percent increase in fare and toll revenue in 2008.

The budget gaps would grow even more rapidly in subsequent years as the operating budget is hit with the full impact of borrowing for the 2000-2004 capital program and begins to feel the impact of new debt issued to finance the 2005-2009 capital program. The report estimates that the budget gaps could total $834 million in 2009 and nearly $1.1 billion in 2010, beginning a new cycle of large funding gaps.

“Without a comprehensive, multi-year strategy to restore fiscal stability, and internal management improvements that reduce waste and improve efficiency, the MTA may have little choice but to balance its budget through fare and toll increases and service reductions,” Hevesi said. “This would only continue the cycle of fare increases and service reductions that the riders have experienced over the past three years.”

The Governor is also counting on the MTA obtaining savings of $360 million over three years from corporate restructuring and from issuing pension obligation bonds. These two proposals are controversial and if these savings are not realized, the MTA would have to implement alternative management actions or further increase fares and reduce services.

The Governor has proposed legislation that would authorize the MTA to issue pension obligation bonds to cover $1.9 billion in unfunded liabilities in the MTA’s pension funds. Pension obligation bonds are another form of debt, but in this case the proceeds would be used to fund the operating budget. Borrowing to pay for operating expenses violates the fundamental rules of financial management. In addition, pension obligation bonds are risky. In effect, the MTA would play the stock market with fare and toll revenue in the hope of earning more than the interest rate on the pension obligation bonds.

“Gambling with fare and toll revenue is inappropriate and ill-advised,” Hevesi said. “Borrowing to pay for operating expenses is how New York City got into trouble. This is even worse, because it adds the risk of gambling to the already irresponsible borrowing for operating expenses.”

The Comptroller’s Office report finds:

  • The Executive Budget includes actions that would help the MTA balance its operating budget through 2007 and finance a new five-year capital program.
  • Raise the mortgage-recording tax rate by 40 percent for borrowers in the MTA 12-county transportation district. This would generate about $100 million annually.
    Increase several types of motor vehicle fees, which would generate another $100 million annually.
  • Eliminate the $200 million reserve created by the MTA against a sharp drop-off in real estate-related transaction taxes.
  • Increase the MTA’s tax forecasts based on less conservative assumptions.
  • Permit the MTA to reorganize its subway, bus and commuter railroad operations. The proposal, however, would eliminate certain civil service protections for new MTA employees, which is opposed by the Transport Workers Union and others. The State Division of Budget (DOB) has set a savings target of $210 million over a three-year period from this initiative, but has not produced a detailed roadmap to achieve the savings.
  • Allow the MTA to issue pension obligation bonds. DOB estimates that this would save $150 million over a three-year period. This initiative entails significant risk and is inappropriate.

The Executive Budget proposes a $19.2 billion capital program for the MTA.

  • The capital program would be 31 percent smaller than the $27.8 billion program approved by the MTA board. A scaled-down capital program would require the MTA to re-prioritize and slow down planned maintenance and expansion projects, which will likely increase the overall cost of the projects, adversely affect services, and inconvenience commuters.
  • The core capital program, which is designed to restore the regional mass transit system to a “state of good repair,” would total $14.6 billion, which is $2.6 billion smaller than the one approved by the MTA board.
  • In December 2004, the MTA Board approved a $17.2 billion core capital program, which was already $8.9 billion less than recommended by the MTA’s operating agencies.
  • Funding for network expansion projects would total $4 billion, which is $5.9 billion less than the MTA proposed.
  • The MTA may be responsible for funding any cost overruns associated with the extension of the No. 7 Subway Line.

The MTA faces budget gaps that will grow significantly in 2009 and 2010. The Executive Budget proposes actions that would help close the MTA’s budget gaps through 2007.

  • Even if the MTA implements its proposals to reduce services in 2006 and to raise fares and tolls by five percent in 2007, the MTA would still face a budget gap of $459 million in 2008, $834 million in 2009 and $1.1 billion in 2010.
  • These estimates assume that the MTA obtains legislative approval for its controversial reorganization plan and that it actually achieves planned savings of $210 million over three years. It also assumes that the MTA obtains legislative authorization to issue pension obligation bonds and that it achieves savings of $150 million over three years.

Click here for a copy of the report


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