FY 2010 Budget Presentation
Fiscal 2010 Budget
Board of Directors
March 12, 2009
Mr. Chairman, Board members, General Manager, I am Jonathan Davis Deputy General Manager and Chief Financial Officer and will be presenting Item 13 requesting approval of the Fiscal 2010 Operating Budget.
In Fiscal 2010 the Authority will face its most daunting financial challenge since the start of forward funding. This financial reform, starting in 2000, placed the Authority on a dedicated revenue stream which is not subject to state appropriation. The dedicated revenue consists of a portion of the state sales tax receipts and city and town assessments paid by the communities in the Authority’s service district. This replaced Net Cost of Service under which it had been the Commonwealth’s obligation to cover the Authority’s costs and was unlimited.
Over the past several months we have struggled to put together a balanced budget. The Fiscal 2010 budget contains a historically high deficit of $160 million which is impossible for the Authority to fund with its limited revenue sources and its largely depleted reserve funds. The dramatic deterioration of the Authority’s financial stability began well before last year’s budget, though it has accelerated and we have finally run out of options. The fiscal 2009 budget originally contained a $75 million structural deficit requiring the authority to defer certain principal payments due in Fiscal 2009 and draw upon a significant portion of our reserve funds including the first draw from the capital maintenance fund to close an operating budget deficiency.
This structural deficit increased as a result of the July 7, 2008 labor arbitration award. To fund this component of the fiscal 2009 operating budget the Authority increased non-fare revenues and will need to make a further draw on the capital maintenance fund.
The Authority began the Fiscal 2010 budget process with largely depleted reserves and declining revenues.
With total revenues declining by $4 million and total expenses increasing by $114 million, the Authority considered several options to achieve a balanced budget: new revenue sources from the Commonwealth, a fare increase, service reductions, debt restructuring and the complete depletion of the capital maintenance fund and stabilization fund. The use of further draws on the capital maintenance fund to balance the operating budget will compromise desperately needed funds for state of good repair projects and is insignificant in light of the projected deficit. The use of the stabilization fund is not an option since the authority is statutorily precluded from using these funds to meet operating needs in the budget.
The fiscal 2010 budget, although balanced, relies on an additional dedicated revenue source from the Commonwealth of $160 million. While new revenue sources from the Commonwealth are by no means guaranteed, the authority has elected this option to close the identified budget deficiency and we are working closely with the Administration and the Legislature on the Transportation Reform and Revenue bills currently under consideration. However, the Authority has already begun making contingency plans for a combination of a fare increase and service cuts for the next fiscal year in the event of there being insufficient dedicated revenues.
The Authority has and will continue to explore ways of increasing non-fare revenues and implement productivity improvements and efficiencies to mitigate some of the growth in operating costs. However, the probability of the Authority solving its structural deficit in Fiscal 2010 and beyond will be difficult, if not impossible, without additional revenue sources, debt relief or significant service cuts.
The budget request builds upon investments in customer service, improved service reliability, improved productivity, enhanced system accessibility and continued infrastructure reinvestment and modernization of the transit system.
The Fiscal 2010 budget occurs during a time of unprecedented fiscal challenges and an uncertain economic environment.
Sales tax revenue, our largest source of revenue, has grown less than expected and has not met even the most pessimistic minimums assumed at the start of forward funding. Sales tax growth in the 10 years prior to the enactment of forward funding saw an average annual increase of 6.5%. Since 2001 it has averaged only 1% annually. This cumulative shortfall of $275 million in expected revenue has required more reliance on debt financing to fund a significant portion of the capital program as well as providing less revenue for the operating budget. The debt burden we carry is perhaps one of the highest in the industry. Total debt outstanding is over $5.2 billion. Annual principal and interest payments will consume almost 30% of revenues and will continue to grow without some type of relief. Left un-checked, the debt burden will limit our ability to provide the quality and quantity of service our customers want and expect.
Specifically, total revenue, without any new source of dedicated revenue, will decrease by $4 million.
Fare revenue, the one bright spot in the budget, is expected to grow by $4.5 million due to anticipated ridership growth. In fact nationwide 10.7 billion trips were taken on US Public transportation in 2008, the highest level in 52 years and ridership continued to increase as gas prices declined and jobs were lost.
Non-fare revenue will decrease by $17.5 million slightly off-set with an increase in parking income of $5.3 million. The Authority expects minimal property sales in Fiscal 2010. As circumstances allow, revenue from property sales will be applied to the capital maintenance fund to first fund environmental mitigation costs and secondly fund state of good repair projects. This is a departure from our past policy of applying these revenues to the operating budget. This is a small step toward reducing our reliance on debt financing for the capital program. However, there are further troubling signs from a deteriorating economy. There will be no bonus checks for the systemwide advertising program and the minimum annual guarantee from advertising contracts could be in jeopardy.
All non-fare revenue in Fiscal 2010 is programmed to yield $96 million, a 77% increase since the start of forward funding. The revenue recovery ratio is projected to be 46.5%, slightly under the Transportation Finance Commission’s target of 50%.
Dedicated revenues, our largest source of revenue, will increase slightly with Assessments up $3.7 million and no increase in sales tax due to a decline in state sales tax receipts of 3% in calendar 2008. Prospects for an increase in sales tax any time soon are bleak. January sales tax was 7.8% less than last January and February was down almost 9%. Moody’s Economy.com is reporting that there may not be any real growth in sales tax for the foreseeable future. Due to an aging population, the “Baby Boomers” buying less and the continued federal pre-emption on charging sales tax on internet sales, sales tax is expected to grow less than inflation.
Operating expenses will increase by $36.8 million. The Fiscal 2010 Budget request funds little more than increases to the commuter rail fixed price service contract, historically high paratransit ridership, and implementation of the final year of the labor arbitration award which are all beyond our ability to control at current service levels. Although expenses are up discretionary spending is either greatly reduced or eliminated. A number of departments in Fiscal 2010 level-funded or reduced their budgets. The resources requested in this budget will go towards system security, improved service reliability, increased service capacity, enhanced system accessibility and improved customer service.
The Fiscal 2010 budget contains a dramatic jump in principal and interest payments as the bill on the Authority’s $5.2 billion in debt comes due. 68% of the total budget increase is due to higher interest and principal payments owed during fiscal 2010. This debt originates from three sources: legacy debt inherited by the MBTA at the onset of Forward Funding, costs of projects required to be built as legal commitments associated with the central Artery permitting process and the authority’s desire to act as a good steward of the system and fund $470 million per year in state of good repair projects which still leaves the deferred maintenance backlog at $2.7 billion. The Authority’s share of the capital investment program continues to be drawn from bond funds due to the persistent lack of growth in sales tax revenues and the corresponding scarcity of available pay-go-capital.
Principal and interest payments will increase by $77 million with debt service consuming almost 30% of all revenues. In other words for each dollar we collect 30 cents goes to paying debt service not transit services. A continued rise in debt service costs will compromise the authority’s ability to provide the current quantity and quality of service that our customers enjoy today. This again points to the need for additional revenues or some form of debt relief.
The Authority must reduce its reliance on debt financing and generate sufficient excess revenues each year to fund the capital program on a pay as you go basis. The day of reckoning is here. In today’s capital markets restructuring debt to fix a structural deficit will come at an unaffordable cost and delay the inevitable. The Authority could decide to curtail the Capital Investment Program. However, since the majority of the debt has been issued, this would provide very little relief in the short term. In addition, disinvestment in the system’s infrastructure and modernization would result in a deterioration of service reliability, non-compliance with legal commitments, slower progress in making the system more accessible and maybe most importantly, loss of ridership. The Authority therefore has made a commitment to spend a minimum of $470 million annually and to allocate at least 90% of the Capital Investment Program toward state of good repair projects.
Fiscal 2010 will again be an extremely difficult and challenging year. Faced with no increase in our current revenue sources, a dramatic rise in debt service costs and no available “rainy day” funds to draw upon highlights the fact that the Authority can no longer dig its way out of its current and future deficits without new revenues. It is difficult to predict what future budgets will look like. The budget as proposed with new dedicated revenues will maintain current service but leaves open the extent to which fare increases and service cuts may become necessary in the future should the authority fail to receive stable revenue streams. The Authority will proceed over the next several months with planning for a contingency of fare increases and service cuts should the proposed new dedicated revenue source be insufficient to produce a balanced budget.
This budget request along with the Capital Investment Program, to be presented next month, builds upon our commitment to continued improvements in service delivery and service reliability.
As the American Public Transportation Association has said “Public transportation takes us there”:
Public transportation stimulates the economy and creates green jobs. Every $1 billion invested in federally aided projects supports approximately 30,000 jobs.
Public transportation reduces our dependence on foreign oil saving the equivalent of 900,000 automobile fill-ups every day.
Public transportation helps protect our environment saving 37 million metric tons of carbon dioxide emissions annually.
Public transportation enhances our quality of life and provides mobility for people of all abilities.
It is recommended that the Board approve the Fiscal 2010 budget in the amount of 1 billion 627 million dollars.