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May 4, 2005


MTA Can Manage Its Budget Through 2007 Without Planned Service Cuts, But Faces New Fiscal Challenges Beginning In 2008

The Metropolitan Transportation Authority (MTA) will be able to balance its 2006 operating budget without implementing previously planned service reductions and is on track to balance its 2007 budget as long as the agency remains committed to achieving savings from internal management improvements, according to a report issued today by State Comptroller Alan G. Hevesi.

In a report on the MTA’s financial outlook, Hevesi said that the MTA’s financial condition is expected to worsen beginning in 2008. He noted that new resources from the State are the main factor allowing the authority to fund its operating and capital budgets next year but that management must remain vigilant in making improvements to their operations.

“The riders and the taxpayers have done their part. It’s now up to the MTA to deliver on its promise to implement management improvements,” Hevesi said.

The Comptroller’s report noted that even after the recent fare increase, the latest four year financial plan projects gaps growing from $813 million in 2006 to $1.4 billion in 2008, and that capital funding constraints could push the target dates for achieving a state of good repair for the existing system further into the future. The report said that delays could greatly increase the cost of network expansion projects, noting that the cost of East Side Access has already grown from $4.3 billion to $6.3 billion.

The State authorized $3 billion in new resources for the MTA over the next five years to help fund the MTA’s operating and capital budgets. These resources would come from a 0.125 percent increase in the sales tax rate and a 20 percent increase in the mortgage recording tax rate in the 12-county MTA transportation district; higher motor vehicle fees; and a statewide transportation bond act, which would direct $1.45 billion to the MTA if approved by voters in November.

These new resources have allowed the MTA to amend its proposed capital program for 2005-2009. The amended five-year capital program totals $21.1 billion, which is $6.7 billion less than proposed by the MTA’s Board in September 2004 and $10.1 billion less than proposed by the MTA’s operating agencies. Although funded at reduced levels, the amended capital program will permit restoration, modernization, and network expansion projects to move forward. The portion of the capital program devoted to restoring and maintaining the existing system is funded at 93 percent of the level requested by the MTA, but there will be significant delays in planned network expansion projects. East Side Access, the Second Avenue Subway, and the JFK rail link to lower Manhattan were allocated $2.5 billion in the amended program, compared with $7.9 billion in the MTA’s September 2004 proposal.

The report noted that the MTA is expected to issue $9.3 billion in “new money” bonds to help finance the 2005-2009 capital program, which is more than issued in any previous capital program. Of this amount, $5.1 billion would come from bonds issued by the MTA and backed by new State-authorized sources of revenue. The remaining $4.2 billion would also come from MTA bonds, but these bonds would be backed by existing pledged revenues.

Debt service costs would nearly double from $848.1 million in 2004 to $1.6 billion in 2008, and then rise to $2.2 billion by 2015. The debt burden would rise from 11 percent in 2004 of revenues to 18.6 percent in 2008, and then to 23 percent in 2015.

“While the State’s contribution is larger than previous capital programs, the MTA continues to rely heavily on debt to finance its capital programs,” Hevesi said.

The Comptroller’s report found that there have been a number of positive developments since the beginning of the calendar year that should permit the MTA to end 2005 with a surplus of more than $500 million, compared with a projected surplus of $76 million in the MTA’s current financial plan. The MTA, however, will need these resources to help balance the 2006 budget.

Among the positive developments cited by the report include:

  • Calendar year 2004 ended with a cash balance that was $42 million higher than projected by the MTA and certain 2004 transactions will benefit 2005 by another $67 million.
  • The State Division of the Budget estimates that MTA tax revenues could be higher than projected in the MTA’s current financial plan by $497 million through 2007.
  • The current fiscal year is off to a good start. Despite rising interest rates, tax revenues from real estate transactions have exceeded expectations by $57 million during the first four months of the year. In addition, the Metropolitan Life Insurance Company Inc., recently announced agreements to sell real estate with a combined value of $2.5 billion, which could generate between $30 million to $45 million in tax revenue for the MTA. Overall, fare and toll collections were better than expected during the first quarter, but March collections, the first month of the fare increase, were less than anticipated.
  • Given the continued strength in the real estate market, it now appears likely that the MTA Board will rescind, pursuant to a MTA Board resolution, planned service reductions for 2006 by drawing upon a $200 million reserve. The reserve was established by the MTA board to offset a potential sharp drop in revenues from real estate transactions that could result from rising interest rates.
  • Pension contributions to the New York City Employee’s Retirement System could be $133 million less than assumed in the MTA’s current financial plan because the City Actuary has proposed changes in the actuarial assumptions and methodologies that are likely to be approved by the board of trustees.

“The MTA will have to manage its budget carefully, but should be able to balance its budget through 2007 without resorting to service reductions,” Hevesi said.

Despite these positive developments, the report projects that the MTA will again face serious fiscal challenges beginning in 2008 because the new sources of revenue approved by the State are insufficient beyond 2007 to close the budget gaps projected in the MTA’s financial plan, which are largely driven by borrowing for the 2000-2004 capital program, and to fund the debt service on the bonds to be issued to help finance the 2005-2009 capital program.

The Comptroller’s report also identified the following budget risks:

  • The $2.9 billion statewide transportation bond act, which would allocate $1.45 billion to the MTA’s capital program, requires voter approval. If the act is rejected by voters in November, the MTA may have to increase planned borrowing or further defer planned network expansion projects.
  • The labor agreements between the MTA and its unions begin to expire in December 2005. The financial plan assumes that future labor agreements will be funded at the projected inflation rate.
  • A significant shortfall from the MTA’s target of $1 billion in proceeds from the sale of assets may necessitate an increase in planned borrowing or scaling back the capital program. While the MTA unanimously approved the sale of the air rights over the western rail yard to the New York Jets for $250 million, the transaction is the subject of numerous lawsuits.
  • During the course of the four-year plan period the economic recovery could stall and there could be a downturn in regional employment. Such developments would adversely affect projections of tax revenues and fare and toll collections.
  • Energy costs increased by 13.7 percent in 2004, and remain volatile.
  • The new capital program counts on $6.6 billion in federal funding, but these resources are subject to annual appropriation.
  • The City of New York fully funded the estimated cost of extending the No. 7 subway line, but the MTA could be responsible for all or part of any cost overruns.

“While there remain significant budget risks, the immediate crisis is over. The MTA should use this opportunity to get a head start on addressing the structural imbalance between revenues and expenditures caused in large part by the MTA’s heavy reliance on debt to finance its capital programs,” Hevesi said.

Even after raising fares in May 2003 and again in March 2005, the MTA’s latest four-year financial plan projects gaps of $813 million in 2006, $1.1 billion in 2007, and $1.4 billion in 2008. To narrow these budget gaps, the MTA proposed draconian service cuts beginning in 2006, such as eliminating 33 bus routes, abandoning certain Long Island Rail Road branches and removing the tracks, and reducing late-night subway and bus service. It also proposed a 5 percent increase in fare and toll revenue in 2007. Even assuming implementation of these actions, the MTA’s current financial plan projects remaining budget gaps of $607 million in 2006, $689 million in 2007, and $991 million in 2008.

An October 2004 report by the State Comptroller concluded that the fiscal crisis was brought on by past decisions to borrow beyond its means to help finance its capital program, and identified numerous ways the MTA could reduce costs without adversely affecting services.

The report recognized the efforts of Executive Director Katie Lapp to institute budget reforms and steps she has taken since October, 2004 to reduce costs, including:

  • In January 2005, the MTA Executive Director imposed a hiring freeze for nonsafety and noncritical operating positions, and also directed the presidents of the operating agencies to reduce nonpersonnel-related expenses.
  • The MTA Board approved a 90-day $832,283 contract with Booz Allen Hamilton Inc., to identify cost savings in the areas of finance, human resources, procurement, and information technology. MTA officials are hopeful that this “shared services” initiative will generate substantial savings by 2007 from consolidating and eliminating duplicative services.
  • The MTA has hired, on a commission basis, Civic Entertainment Group LLC, and Octagon Worldwide Inc., to identify opportunities for corporate sponsorship of MTA assets.
  • On April 18, 2005, the Executive Director instructed the operating agencies to generate savings of $50 million in 2006 and $100 million in 2007 from internal management actions for inclusion in the July 2005 financial plan.

Click here for a copy of the report.



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