MBTA Budget Approved

On March 6th, the MBTA Board of Directors voted to approve the proposed MBTA budget for Fiscal Year 2009, and forward it to the MBTA Advisory Board for its consideration. The following presentation was made prior to the vote taken by the Board of Directors.

Mr. Chairman, Board members, General Manager, I am Jonathan Davis Deputy General Manager and Chief Financial Officer and will be presenting Item 14 requesting approval of the Fiscal 2009 Operating Budget.

In Fiscal 2009 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 which had been unlimited.

Over the past several months we have struggled to put together a balanced budget. The Fiscal 2009 Budget, although balanced, relies in part on debt restructuring and will require the use of the entire deficiency fund and the first draw from the capital maintenance fund for operating purposes to close a structural deficiency of $75 million in expenses exceeding revenues. This will deplete our rainy day funds by more than a third, leaving limited funds for other potential unforeseen events.

The Authority will continue to explore ways of maximizing revenue and containing operating expenses in order to minimize the need to draw upon the deficiency and capital maintenance funds. However, the probability of the Authority solving its structural deficit in Fiscal 2009 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 budget maintains the current fare structure.

The Fiscal 2009 budget occurs during a time of unprecedented fiscal challenges.

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 1.6%. A shortfall of $200 million 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 billion. Annual principal and interest payments consume more than 26% 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 expect.

Specifically, fare revenue will grow slightly due to anticipated ridership growth and continued improvements in fare collection.

In non-fare revenue we continue to cope with a lower guaranteed advertising program due to changed market conditions. However, the expansion of this program, primarily to commuter rail stations, is anticipated to provide $2 million more than the annual guarantee. The Authority expects lower property sales in Fiscal 2009. 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.

It needs to be noted that we seek other ways to increase non-fare revenue through non-traditional type advertising, structured lease transactions yielding an up-front benefit to the Authority and annual rental payments from real estate assets. We have again challenged ourselves to find other non-fare revenue by including $6 million in the budget for new initiatives. Non-fare revenue in Fiscal 2009 is programmed to yield $84 million, a 55% increase since the start of forward funding.

Operating expenses will increase by $49 million or 4.8%. The Fiscal 2009 Budget request funds little more than increases to the commuter rail fixed price service contract, paratransit ridership, energy and healthcare costs which are all beyond our control at current service levels. Even as we speak energy costs continue to increase at an historic rate that was not anticipated in the budget. Although expenses are up discretionary spending is either greatly reduced or non-existent. Offsetting the increases are cost reductions in ongoing operations of $5.5 million. A number of departments in Fiscal 2009 level-funded or reduced their budgets. Still yet to be determined and not included in the budget is the impact of a new collective bargaining agreement which is currently in arbitration. The resources requested in this budget will go towards system security, improved service reliability, increased service capacity, enhanced system accessibility and improved customer service.

Principal and interest payments will increase by $48 million. This rise could not be supported with the minimal increase in revenues and therefore the Authority had to resort to restructuring a component of its outstanding debt, which increases long term costs and does not address the structural deficit in future years. These measures account for almost $50 million in reductions to the Fiscal 2009 Budget. This again points to the need for additional revenues or 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 and not be as dependent on debt management strategies, which are more costly, to mitigate the growth in principal and interest payments.

Fiscal 2009 will again be an extremely difficult and challenging year. Faced with increases in health care costs, unpredictable fuel and energy prices, contractual increases in the commuter rail service contract, and paratransit costs, it once again becomes necessary for the Authority not only to tap into the deficiency fund but to deplete this fund and for the first time dip into the capital maintenance fund for operating revenues. The planned debt restructuring cannot be replicated indefinitely and while the sale of high value surplus properties and leveraged lease transactions can provide a one-time revenue source, the Authority’s remaining modest reserves are not enough to compensate for future deficits as long as sales tax under performs expectations.

Perhaps the greatest challenge facing the Authority is the expected rise in principal and interest costs over the next several years. With the continued slow growth in the dedicated sales tax revenue, these costs will consume an ever increasing amount of revenue each year. Unless corrected or mitigated, this will compromise the Authority’s ability to continue to provide the service levels funded in the Fiscal 2009 budget in future years. 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.

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.

It is recommended that the Board approve the Fiscal 2009 budget in the amount of 1 billion 455 million dollars.