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October 28, 2004

 

MTA Board Responsible For Its Financial Crisis,
Has No Effective Plan To Fix It

The Metropolitan Transportation Authority’s financial crisis is real and growing, but the primary causes of this crisis are the Authority’s own actions -- borrowing beyond its means and other bad management decisions, according to a report on the MTA budget released today by New York State Comptroller Alan G. Hevesi. In addition, the MTA does not have an adequate plan to fix the problem.

The report finds that because the MTA stopped producing legally required five-year financial plans between September 1999 and October 2003, the public and its elected officials were prevented from seeing the ramifications of its huge borrowing. Even during the debate over the 2003 fare hike, the MTA never released projections beyond 2004, which would have shown that the 2003 increase was just a one-year solution. The Board was continuing to hide just how serious its problems were.

“Since she took office, MTA Executive Director Katie Lapp has made important improvements, instituting a financial planning process similar to New York City’s, increasing the transparency of the MTA’s finances, and moving to clean up the 2 Broadway corruption mess. But there is much more to be done,” Hevesi said.

“The economic health of the New York metro area requires that more people use mass transit. If the only solution is constantly rising fares and constantly declining service, the result will be fewer riders and less revenue. That’s a prescription for disaster,” Hevesi said.

“For years, millions of commuters will be paying the price for the MTA’s failure to disclose and confront its financial problems sooner,” Hevesi said. “Now, everyone, including the business community and labor, will have to contribute to keep the system running and expanding. Since we can’t turn back the clock, the MTA Board must come to terms with the consequences of its past decisions and put forward a credible multi-year strategy to achieve fiscal stability. That strategy must include larger savings from internal management improvements.”

The Comptroller’s Office report finds:

The MTA faces huge and rapidly growing budget gaps:

  • The 2005 gap is $745 million.
  • The gap doubles in 2006 to $1.4 billion, which is 19 percent of revenues.
  • The gap increases another 50 percent by 2008 to $2.1 billion, or 27 percent of total revenues.
  • The MTA has a long-term structural problem. From 2006 through 2008, revenues increase 1.5 percent a year while spending grows 5.5 percent.

The MTA’s own decisions over the years are a primary cause of its financial crisis:

  • The MTA Board has a fiduciary responsibility to live within its means, but it borrowed enormous sums of money, well beyond what it could afford in the face of declining State contributions and ever-larger capital programs. That has loaded the system with huge and rapidly growing debt payments that are the major source of the current financial crunch. Annual debt payments will nearly double from 2004 to 2008 to $1.7 billion, which is 21 percent of revenues.
  • Between September 1999 and October 2003, the MTA stopped producing legally required five-year plans, which prevented the public and its elected officials from seeing the financial ramifications of its decisions beyond 2004.
  • If the MTA had prepared five-year plans earlier, it could have begun to address the problem sooner, easing or possibly averting the crisis it faces today.
  • The 2 Broadway project, which was to cost $140 million, so far will cost $449 million as a result of gross mismanagement and corruption. The unanticipated additional cost of $300 million is not available to buy new buses or subway cars or otherwise maintain the system.
  • The MTA borrowed to pay for the 2 Broadway project, so the total cost, including interest on the bonds, is $845 million.
  • Meanwhile, the MTA has dropped plans to consolidate personnel at 2 Broadway and sell its midtown headquarters, which could produce funds for capital spending and reduce the need to borrow.
  • The MTA implemented a debt restructuring initiative in 2002 that has produced short-term savings, but increased future costs by $8.6 billion. Consequently, the MTA has locked itself into a very high level of debt through 2031, which will make borrowing for future capital programs even more difficult.
  • The MTA was very slow to modernize some of its pension plans, which saved money then but put off costs that must now be paid with interest. These liabilities, which are costing the MTA $162 million each year, would have been fully funded by now if the MTA had begun funding them when it assumed the obligation decades ago.

The MTA’s current solution will set back mass transit:

  • The MTA Board proposes a never-ending series of fare increases even though MTA riders already pay a higher percentage of costs than any other large mass transit system. This is a regressive tax increase that falls most heavily on those who can least afford it and most need to use mass transit.
  • The Board proposes cuts in service that will reduce ridership and revenue.
  • It proposes to defer maintenance, which risks worse service now and higher costs to fix things later. For example, LIRR proposes to reduce track maintenance and to eliminate two of its four air conditioning repair crews.
  • The service cuts will mean 53.5 million fewer riders per year and push more people onto already overcrowded roads, which will increase congestion and air pollution. Increasing the time it takes to travel or deliver goods will reduce productivity and increase costs by millions of dollars for businesses throughout the region.

    “Some of the service cuts make no sense, such as eliminating LIRR service to Belmont, which will cost two times more in lost revenue than is anticipated in savings,” Hevesi said.

The MTA has not done enough to reduce costs without affecting riders:

  • A cursory examination of staffing levels found that the MTA has 698 people in human resources; 443 in legal services while spending $10 million on outside law firms; 444 in public relations, marketing and its call center; 359 in budget and accounting and 166 in labor relations.
  • A report to the MTA Audit Committee reveals that many finance, procurement, technology and human resource functions are duplicative. While the MTA has budgeted $708.9 million for these functions, the financial plan does not include any savings from consolidating these services.
  • The Triborough Bridge and Tunnel Authority, with a $356 million budget, identified only $140,000 in savings, including cutting one vacant secretarial position.
  • Long Island Bus, with a budget of $100 million, identified no savings from management improvements.
  • The 2006 gap-closing program relies almost entirely on savings from service reductions and other actions that affect riders.
  • Even if the MTA fully implements its gap-closing programs for 2005 and 2006, which entail fare and toll increases and service reductions, the MTA still projects a budget gap of $695 million in 2006.
  • The MTA’s financial plan does not include savings from management improvements to help balance the budget during calendar years 2006 through 2008.

There are still serious problems with the MTA’s capital program:

  • The MTA is years behind schedule in restoring many important capital assets. Four years ago, it said power stations would be restored by 2006. Now, that’s fallen back to 2015. Subway stations will not be restored until 2027.
  • The East Side Access project is three years behind schedule and the cost has grown by $1.9 billion from $4.4 billion to $6.3 billion.
  • The MTA has proposed a $27.8 billion capital program for 2005-2009 with a $16.2 billion funding gap. The Comptroller’s report identifies sources of capital funding that would reduce the funding gap to $10 billion, but concludes that the shortfall is still too large for the MTA to finance without assistance.
  • The MTA has acknowledged that while it anticipates $1 billion from the sale of assets to help fund the proposed capital program, the estimate is “merely a placeholder at this time and that there has not been an identification of specific assets.” The report urges the MTA to be more aggressive in identifying assets for sale and to reconsider its decision not to sell its mid-town properties.
  • Capital spending was allocated to the MTA’s agencies not based on an analysis of need, but based on the same share they received in the past. New York City Transit had 73 percent of its budget request funded but the commuter railroads had only half of their capital needs funded.
  • The MTA could not realistically have funded all of the agencies’ budget requests, but the Capital Program Review Board and the public should know the trade-offs and compromises that were made in producing the capital program.
  • The MTA’s agencies identified capital needs of $73 billion for the 2010-2024 period and the MTA has either begun or has plans to begin expansion projects valued at $33 billion. Thus, the need for a long-term capital financing strategy.

New budget regulations imposed by the State Comptroller won’t allow the MTA to hide what it’s doing again:

  • We now know how serious the problem is only because a State Comptroller’s Office April 2003 report found that the MTA misled the public about its financial condition during the debate over the 2003 fare hike. The MTA began reforms after that and further improved its reporting in response to the Comptroller’s budget regulations that became effective in January 2004.
  • The Comptroller’s budget regulations require the MTA to present, document, and report on its budget and financial plan in a manner that is consistent with well-established and prudent budgeting practices.
  • The regulations also require each financial plan to be accompanied by a debt affordability statement showing the impact of planned borrowings on the operating budget and a certification from the Executive Director that the financial plan is based on reasonable assumptions and methods of estimation.

“In the 1980s, everyone came together to fix the mass transit system, and it was successfully restored. What has happened since demonstrates the dangers of unmonitored public authorities and why we must have reform. The mass transit system was restored and operates well, but its finances have fallen into disrepair. Part of any long-term plan must include increased accountability and monitoring, especially controls over debt and outside monitoring of contracting and procurement,” Hevesi said.

Click here for a copy of the Comptroller's report.

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