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May 10, 2006

 

MTA's Short-Term Financial Condition Improves But Long-Term Fiscal Challenges Remain a Concern

The Metropolitan Transportation Authority (MTA) may be able to forego a five percent fare and toll increase in 2007 because of a series of favorable developments, according to a report released today by State Comptroller Alan G. Hevesi. The MTA estimates that a five percent fare and toll increase would generate $241 million in additional revenues in 2007. However, the Comptroller’s Office estimates that the MTA could end 2006 with a cash balance of $533 million, which is $316 million more than anticipated by the MTA in its current financial plan. Despite the good news, the MTA faces very large budget gaps beginning in 2008, and the State Comptroller urged the MTA to outline a strategy in its July financial plan to close the out-year gaps.

Better than expected revenues from taxes on real estate transactions are the biggest source of the MTA’s improved finances. Collections have already exceeded the MTA’s estimates by $55 million through the first four months of the calendar year. For the rest of 2006, the MTA’s financial plan projects a sharp decline in real estate tax revenues, but this is unlikely. The Comptroller’s Office estimates that collections from taxes on real estate transactions will exceed the MTA’s estimates by $200 million in 2006 and by $50 million in 2007. The MTA’s financial plan is clearly out of date. The MTA has not revised its tax forecast for 2006 since July 2005, while New York City has increased its own forecast of these collections three times since then. The State Comptroller urged the MTA to update its tax forecast in the July 2006 financial plan.

The MTA ended 2005 with $58 million more than it anticipated and those funds are now available for use in 2006. In addition, pension contributions are likely to be $101 million less than anticipated in calendar years 2006 and 2007 as a result of actuarial changes adopted by the trustees of the New York City Employees’ Retirement System, which covers transit workers. But those savings would be more than offset by higher contributions that will be required in 2008 and 2009. Moreover, in addition to the Comptroller’s estimate of unexpected resources, the MTA has an $80 million reserve in 2006 and has not yet committed the $50 million it set aside from last year’s surplus to fund a holiday fare discount program in 2006.

Despite these favorable developments, the report cites large out-year budget gaps, rapidly growing debt service, and unfunded post-retirement liabilities, including pensions and health care costs for retirees, as areas of serious concern. Spending, especially for debt service, is projected to grow far faster than revenues during the financial plan period, which covers calendar years 2006 through 2009.

On average, spending is projected to grow at an annual rate of 6.2 percent during the financial plan period, which is more than twice the projected regional inflation rate. In contrast, revenues are projected to grow at an average annual rate of only 1 percent. The divergent growth rates result in budget gaps of nearly $1.1 billion in 2008 and $1.5 billion in 2009. Gaps of this magnitude represent 11.9 percent of total revenues in 2008 and 16.3 percent of total revenues in 2009.

“Despite the improvement in the MTA’s short-term financial condition, the MTA still faces very large budget gaps beginning in 2008,” Hevesi cautioned. “These out-year gaps are formidable and the MTA should reduce them to manageable levels in the July plan,” he added.

The report finds that the major factor behind the MTA’s growing out-year budget gaps is the rapid rate of growth in debt service to fund its capital program. Specifically:

  • The MTA intends to issue $9.3 billion in new debt to finance the 2005-2009 capital program, more than any prior program. The issuance of this debt comes on top of large amounts of debt issued by the MTA to finance past capital programs to compensate for limited State and City contributions.
  • Outstanding debt grew from $13 billion in 2000 to $20 billion in 2005, and will reach $32 billion by 2010.
  • Debt service is projected to grow from $1 billion in 2005 to $1.8 billion by 2009, an increase of 78 percent.
  • The growth in debt service accounts for more than half of the $1.5 billion budget gap projected by the MTA for 2009.
  • Debt service has consumed about 12 percent of total revenues, on average, between 1996 and 2005, but is expected to consume 20 percent of revenues by 2009, an increase of 66 percent.

“The MTA’s remarkably heavy reliance on debt to fund its capital program is taking a toll on its operating budget,” Hevesi said. “In 2009, debt service will consume 35 cents of every dollar collected by the MTA from fares and tolls, up from 23 cents in 2005.”

The report also notes that:

  • The MTA ended 2005 with a cash balance of nearly $1.5 billion, the largest ever and far more than the $76 million projected at the beginning of the year. About half of the additional resources came from unexpectedly high tax collections on real estate transactions, and much of the balance came from higher State taxes and fees.
  • The Manhattan and Bronx Surface Transit Operating Authority (a subsidiary of the New York City Transit Authority) and the Long Island Rail Road have unfunded pension liabilities of about $2 billion. The MTA has set aside $450 million from the 2005 surplus in an interest-bearing account to pay down these liabilities, but has not yet made the transfer to the pension funds. Even after payment is made, the two pension funds will still have unfunded liabilities of more than $1.5 billion.
  • New accounting regulations require the MTA to calculate the value of post-retirement benefits other than pensions, such as health insurance. Based solely on the relative size of New York City’s personal services budget, the MTA’s obligation could total $10 billion. The MTA has hired an actuarial consulting firm to assist in preparing an estimate of its obligations. While the MTA presently has no plans to fund its liability, the State Comptroller suggests that the MTA consider allocating resources to a trust fund for this purpose, as New York City has done.
  • The MTA and the Transport Workers Union have not made progress toward reaching a new labor agreement to replace the contract that expired on December 15, 2005. Other transit employees are also working without contracts, or will be soon. About three-quarters of the employees at Metro-North and the Triborough Bridge and Tunnel Authority are currently working without contracts, and all of the contracts with the employees of the Long Island Rail Road will have expired by December 31, 2006.

The report also notes that management improvements should play a role in closing the out-year budget gaps. In prior reports, both the State Comptroller and the MTA have demonstrated that there is the potential for management actions to partially help balance the budget.

“While the MTA cannot be expected to close the budget gaps solely from savings generated by internal management improvements, each dollar saved is one less dollar that needs to come from commuters and taxpayers,” Hevesi said.

Click here for a copy of the report.

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