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September 26, 2006


MTA Lacks Long-term Plan to Close
Large Out-year Budget Gaps

The Metropolitan Transportation Authority (MTA) should not cut services or raise fares and tolls again until it has developed a comprehensive plan to close the out-year budget gaps that can be fully debated, according to a report released today by State Comptroller Alan G. Hevesi that examines the MTA’s finances.

“The MTA has made significant gains since 1982 in restoring the regional mass transit system to a state of good repair and in improving services, but the MTA has failed to articulate a long-term strategy to finance its operating and capital budgets,” Hevesi said.

In May 2006, the State Comptroller predicted that favorable financial developments would permit the MTA to forgo a five percent fare and toll increase in 2007, which was expected to generate $240 million in that year. Although the Comptroller expressed concern for the size of the out-year budget gaps, he recommended that the MTA hold fares and tolls at current levels for as long as possible until it could develop a comprehensive long-term strategy to close the gaps. The Comptroller also cited recent fare increases and higher energy costs as reasons to delay any further increases.

In July 2006, the MTA released a revised financial plan that delayed the planned fare and toll increase by eight months until September 2007.

The Comptroller’s current report finds that the 2006 surplus could be $140 million higher than projected by the MTA in the July financial plan, mostly because collections from taxes on real estate transactions have exceeded the MTA’s expectations for the months of July through September. These additional resources, should they materialize, would be sufficient to delay the proposed fare and toll increase by another seven months until April 2008. In addition, the report finds that the MTA overestimated the likely growth in health insurance premiums for New York City Transit employees, which could save $17 million in 2007 and another $126 million over the balance of the financial plan period. On September 20, 2006, five days after a draft of the Comptroller’s report was sent to the MTA, the MTA Chairman announced that he would oppose service cuts or fare increases in 2007 because revenue collections have been better than expected.

“These additional resources should give the MTA and a new administration one year to develop a comprehensive plan to close the out-year budget gaps,” Hevesi said. “While that plan may include higher fares and tolls, it should be the last piece of the puzzle, not the first piece as the MTA had proposed.”

Although the MTA’s short-term financial outlook continues to improve, the authority projects budget gaps of $1.3 billion for 2008, $1.8 billion for 2009, and $2.2 billion for 2010 because expenditures, particularly debt service and health insurance, are growing faster than recurring revenues. Since 2005, debt service is projected to increase by 86 percent, and the growth accounts for more than 40 percent of the projected budget gaps. These gap estimates, moreover, are virtually the same size as those projected by the MTA 18 months ago despite an increase in State aid because new spending needs have not been contained or offset with cost savings from management improvements.

The report also finds that the cost reduction programs for 2005 and 2006 fell 30 percent short of their targets. While some of the slippage was beyond the MTA’s direct control, it did not substitute alternative actions so that the savings target could be met. In addition, the proposed cost-reduction program for 2007 is modest and relies heavily on service reductions.

In October 2004, the State Comptroller released a report that demonstrated the potential for administrative savings and the MTA itself has acknowledged that many finance, human resource, procurement, and technology functions at the agency level were duplicative. Since then, very little in this area has been accomplished. The MTA did, however, pay a consultant more than $1 million last year to develop a feasibility study on sharing administrative and other services, and intends to spend another $9 million for a consultant to develop an implementation study. The July financial plan counts on savings of $5 million in 2008, $10 million in 2009, and $15 million in 2010 from eliminating administrative redundancies, but the MTA acknowledges that these estimates are placeholders based on the consultant’s earlier work.

“Savings from management improvements alone will not solve the MTA’s financial problems, but every dollar saved is one less that has to come from the riders or the taxpayers,” Hevesi said.

In addition, the report finds that, in total, the MTA’s July financial plan assumes the outcome of a number of policy choices that could affect the availability of $1.1 billion for the operating budget during 2006 and 2007. Some decisions are in the hands of the MTA Board, while others must be made by the State or the unions that represent the authority’s employees.

“The MTA assumes the outcome of a number of policy decisions that could affect the availability of $1.1 billion for the operating budget, including paying down debt and other unfunded liabilities. While these are appropriate uses of operating budget resources, they may not be the best uses in the continued absence of a comprehensive plan to balance the operating budget,” Hevesi said.

The policy choices include:

  • 2005 Surplus: The MTA set aside $450 million of the 2005 surplus to pay down unfunded pension liabilities, which would have generated recurring savings of $42 million. While this was a far better choice than using these resources to construct a platform over the eastern portion of the West Side Rail Yard as the MTA had first proposed, the resources were not transferred as planned on January 1, 2006 and remain in an off-budget interest-bearing account.
  • State Operating Assistance: The July plan assumes that the State will effectively withhold $307 million in operating assistance from the MTA in 2007. Rather than permitting the resources in the Metropolitan Mass Transportation Operating Assistance account, which is funded with dedicated taxes, to flow directly to the MTA, the State is expected to divert $135 million to fund capital projects in Lower Manhattan and to substitute $171.9 million from this account to meet its statutory obligation to provide operating assistance to the MTA. Prior to SFY 1995-1996, these statutory obligations were paid directly from the general fund. A return to this practice would aid the MTA operating budget by $687.6 million during the 2007-2010 period.
  • Pension Savings: The MTA proposes to dedicate $152 million in pension savings to pay down unfunded post-employment liabilities, such as health insurance. New accounting rules (GASB45) require the MTA to calculate and report its obligations to current and future retirees for post-employment benefits other than pensions. Although the MTA is under no obligation to fund this liability, the credit rating agencies will undoubtedly take into account the size of these obligations and how they are funded when making credit ratings. In past reports, the State Comptroller has suggested that the MTA consider setting aside operating budget resources for this purpose as New York City has done, but this suggestion was made when calling on the MTA to develop an overall plan to close the out-year budget gaps.
  • Anticipated Health Insurance Savings: The July plan assumes that MTA employees will agree to contribute 1.5 percent of their wages to pay down post-employment liabilities for both current and future retirees rather than to mitigate the impact of growth in the cost of their health insurance premiums on the operating budget as agreed to under the tentative labor agreement reached between the MTA and the Transport Workers Union.

The MTA’s capital program also faces serious challenges. The MTA’s reliance on debt to finance its capital program is placing extraordinary pressure on the operating budget and it is the primary reason for the out-year budget gaps. Debt service has consumed about 12 percent of total revenues, on average, between 1996 and 2005, but is expected to consume 21 percent of revenues by 2010, an increase of 75 percent. Similarly, debt service will consume 37 percent of fare and toll revenue by 2010, up from 21 percent in 2005.

In addition, a number of capital projects are over budget and behind schedule. The East Side Access project is over budget by $2.4 billion and four years behind schedule; the Fulton Street Transit project is already $94 million over budget and 18 months behind schedule; the South Ferry Terminal project is $52 million, or more than 13 percent, over budget; and the Second Avenue Subway project is one year behind schedule. In addition, the MTA has not even begun the design of the second phase of its capital security program, and the first phase is significantly behind schedule and over budget.

“Debt service will rise from $1 billion in 2005 to $1.8 billion in 2010, and will keep on increasing to $2.1 billion by 2012 just to fund the current and past capital programs,” Hevesi said. “Financing the MTA’s capital needs is another area that needs attention because debt service is placing extraordinary pressure on the operating budget.”

Click here for a copy of the report

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