In the past two weeks the State Comptroller released the office’s annual review of the Metropolitan Transportation Authority’s (MTA) financial outlook and the New York Times’ “Room for Debate” featured four contributions addressing “Is there any hope for NYC Transit?” The mix of fact and opinion in these writings may leave many readers more confused than enlightened; some clarification of two issues is called for:

1. What is the financial condition of the MTA?
2. What should be done to improve it?

Financial Condition – Bad and Getting Worse

The Comptroller’s report sowed confusion on this issue. It painted a rosy picture by highlighting that, “Since February 2013 the MTA has identified $1.9 billion in new resources,”  that “The 2014 budget gap has been eliminated and the out-year gaps have been reduced to a cumulative total of $240 million,” and overall that “The MTA’s financial outlook is much improved compared to just seven months ago.”

Nicole Gelinas’ Times contribution gives an informed antidote to the Comptroller’s portrait by highlighting two large financial risks. First, the MTA financial plan assumes the current expired labor contracts will be settled with no net pay increase for three years and with future increases at the rate of inflation. A more generous settlement or arbitration ruling could add hundreds of million to MTA costs. Second, the MTA plan makes limited provisions to cover the cost of capital investment needs during the post-2014 period. In the five-year period from 2015-2019  the MTA estimates it needs $26.6 billion to cover “core” capital needs related to state-of-good-repair and regular replacement of rolling stock. New borrowing on a large scale is likely to be necessary to fund these needs, but the associated debt service costs are not budgeted in the latest financial plan.      

But both Gelinas and the Comptroller miss a more fundamental point - the MTA’s budget framework which relies on cash basis accounting, is not a sound basis for judging the agency’s financial condition. The more meaningful picture comes from using Generally Accepted Accounting Principles (GAAP), which the MTA is required to do in its audited statements but not its budget documents. Using GAAP, the MTA is running a $2.8 billion dollar deficit this year and will have deficits ranging from $3.0 billion to nearly $3.4 billion annually in each of the next four years even ignoring the risks identified by Gelinas. The difference between the GAAP figures and the cash figures arises because the cash budget leaves out large unfunded liabilities for the cost of retired employees’ health insurance and relies on borrowing instead of current revenues to meet the capital spending needs that are the equivalent of depreciation. For example, the MTA borrows to replace aged buses and subway cars rather than setting aside planned amounts in the operating budget for these regular replacement nesoueds.  

In brief, the MTA is getting deeper and deeper into debt because it is not covering its full operating costs with current revenues. Modest unexpected cash flow gains in recent months do not change this grim picture.

How to Balance the Budget – the “50-25-25” Solution

Debt addiction, like most addictions, requires as a first step to a cure that the patient acknowledge the problem. John Petro’s Times contribution makes this point, identifying state elected leaders as the ones refusing to acknowledge the MTA’s problem. He points to their raiding part of the MTA cash surplus and their refusal to consider new revenue options such as congestion pricing as evidence of ignoring the problem rather than dealing with it.

What should responsible public officials do? Before answering this question, it helps to explain the flaws in the recommendations of two Times contributors - Andrew Moore and Roger Toussaint. Moore argues that riders should pay the full cost of operating mass transit even though it “would mean a doubling of fares, perhaps a bit more.” This defies economic logic. Mass transit provides what economist call “positive externalities,” meaning benefits to third parties other than the supplier and consumer of the service. Employers, property owners and many others benefit from the availability and use of transit services. This means the full value cannot be captured in the price charged for use, and some public subsidy is justified. Reasonable people can argue over the degree of subsidy that is warranted, but nobody should expect the subway to operate without some subsidy.

Toussaint also ignores economic realities. He argues that the MTA should balance its budget in large part by lowering debt service costs “through negotiations with the creditors, namely the region’s financial institutions.” In fact the MTA recently refinanced several billion dollars of its outstanding debt to take advantage of low interest rates. Toussaint seems to be calling for a politically pressured deal to make the banks give the MTA terms well below those in the market. Bashing bankers has a lot of popular appeal, but his approach would be counterproductive. The MTA will need to borrow in the future, and a forced squeeze of financial institutions now will only lead to worse terms for future bonds.

The Comptroller’s report has one good, and one bad, suggestion for helping the MTA’s finances. The good idea is to put renewed energy into cost reduction efforts. He notes that in 2009 and 2010 the MTA launched measures intended to achieve savings of $1.3 billion annually by 2017, but adds, “Since then, cost-reduction initiatives outside of the paratransit program have been modest, generating only $67 million annually by 2017.” The bad idea is to consider using the alleged surplus resources to permit the planned fare increases in 2015 and 2107 to be lowered or postponed. While this may have popular appeal, given the realities of the fiscal situation it is not sound financial management.

A better long-term strategy was presented by the Citizens Budget Commission in its 2012 report, A Better Way to Pay for the MTA. It calls for fares to cover 50 percent of full operating costs, a tax subsidy to cover 25 percent, and a cross-subsidy from auto users (via tolls or other fees) to cover another 25 percent. The mix has an inherent fairness: riders will pay because they benefit directly from the service and linking fares to cost keeps pressure on management to keep costs down; the tax subsidy is warranted to make possible the broader benefits to employers and others benefitting from the extensive labor market transit makes possible, and auto users contribute in recognition of their benefits from the reduced traffic congestion that subways and buses facilitate.

Current policy deviates from the CBC prescription in two ways. First, revenues now are not covering all the costs. As noted earlier, deficits are now papered over with borrowing and deferred payments. Second the mix of revenues differs from the “50-25-25” formula because fares fall somewhat short of 50 percent, taxes slightly exceed 25 percent, and the auto cross-subsidy falls well below 25 percent. Thus the solution is to continue moderate (but regular) fare increases, keep existing tax subsidies, and enact new forms of auto-cross subsidy for major new funding. Prime possibilities for the latter are higher bridge and tunnel tolls, higher motor vehicle registration anned drivers license fees, a gas tax increase, and new East River Bridge tolls or some form of congestion pricing.            

Financing the vital services provided by the MTA is a complex topic that deserves continuing analysis and debate. But interested citizens should make no mistake:  the MTA has a long-term need for enhanced funding, and the most sensible new sources are continued fare increases and major initiatives to draw a bigger contribution from auto users.