Stabilizing the MTA’s Rocky Finances in 2019 and Beyond

New York’s colossal and crumbling mass transit system is headed toward another cliff.

This one is financial.

The MTA’s just-adopted budget says it will have a $500 million deficit in 2020 and the deficit will rise to about $1 billion a year by 2022, even with two fare and toll hikes, in 2019 and 2021. The authority’s summary of its situation actually says it is running deficits right now (2018 and 2019), which are being addressed by using all of its reserve funds, drawing down its inventory, and other methods of scraping cash together.

Its expenses already exceed its revenues.

This is not actually a revelation.

In February 2018, the MTA publicly reported these problems and its bond rating was dropped by Standard & Poor’s. Information about the problem has been public for several years. MTA budgets passed in July 2016 and November 2017, both public documents, presented the gloomy outlooks, as quoted in these MTA Board excerpts:

The ability of the MTA to sustain its operations is contingent on securing revenue sources beginning in 2020 and beyond. The budget adopted in December 2018 forecasts through 2022 and reports the MTA will issue $12 billion in bonds to pay for asset replacements, like tracks, signals,trains, and buses, and continue the Expansion Projects, like East Side Access and Second Avenue Subway. Paying the interest on these bonds will cost the MTA an extra $500 million a year by the end of 2022. The MTA also projects that, by the end of 2022 its labor costs will rise by 10%, from $10 billion a year to $11 billion a year, including pension and health care for retirees.

Although the Governor and the Legislature added a tax on certain rides in for-hire vehicles, including traditional taxis, in the 2018 budget, to take effect on January 1st, 2019, these funds will be going directly into the Subway Action Plan to sustain maintenance improvements to reverse the deterioration of basic service (and that charge has at least been temporarily blocked by a judge). The separate long-term financial deterioration of the MTA was not addressed in either 2017 or 2018 by neither the Governor nor the Legislature.

At the time of budget adoption in April 2018, the MTA Sustainability Advisory Workgroup was created, consisting of appointees of the Governor, the Mayor, the Assembly, the Senate, and others. The mission of the group was to advise the State’s political leadership on critical choices and offer policy guidance. The group, chaired by Partnership for New York City President & CEO Kathryn Wylde, an appointee of the Governor, issued its report on December 17, 2018.

The Workgroup had many thoughful recommendations, including supporting congestion pricing as the immediate revenue priority. Governor Cuomo’s support for congestion pricing is well-known, and the Assembly and Senate appointees also endorsed congestion pricing, but of course those recommendations are not binding on the members of those two institutions. Neither the Assembly, nor the Senate, have ever taken a vote on congestion pricing, not even in a committee.

The Workgroup report confirmed that the MTA still has not fully costed out, or provided a detailed plan, for its Advanced Technology Fast Forward Plan, or the next phase of capital construction, the 2020-24 Capital Plan, estimated to cost somewhere between $40 and $60 billion. The sums of money involved still have no clear overlap between MTA New York City Transit President Andy Byford’s Fast Forward Plan and the new MTA Capital Plan.

At the end of the legislative session in 2018, the State Assembly passed a bill to require the MTA to advance the release of the 2020-24 Capital Plan – due under current law in October 2019 – to January 2019, in an effort to have the Capital Plan become contemporaneous with the State budget, but the then Republican-controlled State Senate did not pass it. It is now possible the Capital Plan and the Fast Forward Plan will not be available to act on during the 2019 Albany legislative session.

The Workgroup suggested the state should proceed with congestion pricing despite the lack of information about future costs, because of the obvious need for immediate revenue; the Workgroup also said the capital planning process might be better aligned if it moved to a ten-year plan like the Port Authority- a useful idea for the future while the existing plan’s shortfalls get addressed.

The MTA’s current 15-19 Plan is seriously incomplete. To date, the MTA has received only $7 billion of the $33 billion cost of the plan, and the huge deficits reveal new revenue is needed to continue. Providing the MTA a revenue source for its 2022 deficit- an extra $1 billion a year- will provide the money for the $12 billion borrowing and address the operating deficits. Federal funds and bridge and tunnel bonds are still available sources that can feed into the pipeline for current plan, leaving it about two-thirds funded through 2022, if the agency gets that extra $1 billion a year in a timely fashion–meaning now.

The projected October 2019 MTA submission of its 2020-24 Capital Plan, which presumably will incorporate the Fast Forward Plan, at least some version of it, presents an even more severe political test for the state’s governing authorities than congestion pricing itself. That is because MTA investments that cost $40-$60 billion will require revenue sources that bring several billion additional dollars a year to the agency beyond congestion pricing.

Moving to a ten-year capital planning cycle could allow the Governor and the Legislature to separate the additional billions in revenue needed to pay for such mammoth expenses into two five-year phases to avoid excessive tax hikes for the unpopular agency. But the difficulty of finding such a new level of revenue could bring about the return of the divisive regional conflict between funding the New York City Transit Authority and the suburban commuter rail systems.

The conflict was presaged by Governor Cuomo demanding that New York City and State split the MTA’s shortfalls 50/50 in both 2017 and 2018. He followed up on that demand during his campaign this fall, when the Governor co-signed a pledge with Long Island Democratic State Senate candidates that they would force New York City to bear the cost of the New York City Transit system’s new capital needs. Mayor De Blasio and Assembly Democrats had resisted the Governor’s demand on this point in the 2018 legislative session.

These Long Island political newcomers may not realize that the Long Island Rail Road’s (LIRR) operating costs are the most heavily subsidized, on a proportional basis, of the three MTA transit systems, far more so than New York City Transit or Metro North. The MTA’s poster child for cost overruns is East Side Access, the giant construction program to link LIRR commuters to Grand Central Station at a final cost of $11 billion– by far the largest drain on the capital budget. A pushback demand from New York City and Metro North legislators to force Long Island residents to pay their true share of LIRR costs could become an unpleasant regional counterpoint to add more political stalemate, not less, to the legislative process, enabling each constitutent piece of the MTA system to drown separately, rather than keep everybody in the lifeboat and make progress.

Let me offer a few suggestions to provide a disciplined approach to this total mess:

1. Stabilize the MTA’s immediate funding crisis with the adoption of a $1 billion-per-year plan for congestion pricing:  This will keep the capital and operating budgets in balance through 2022 and is the most logical and efficient way to address the immediate crisis and offers some relief for Manhattan’s horrible traffic too. If the Legislature could do this by budget time, April 2019, the system could hopefully be in operation within a year. To avoid disruption to the construction program from implementation delays, the state and city could provide the MTA cash from reserves or short-term borrowings, and even get repaid. A component of congestion pricing could serve as the source for the State’s unfunded $7 billion obligation to the current 2015-19 Capital Plan, triggering New York City’s $2.5 billion matching obligation, and bring the current plan to about three-quarters funded.
2. Do a Capital Program Ten-Year Restart: Require the MTA to integrate Fast Forward, the unfunded balances of the current plan, the Expansion Projects, and other essential investments, into a 10-Year Plan, 2020-2030, with two five-year cycles. The first five-year cycle would have a linkage to the revenue requirement necessary to proceed. The 2015-19 plan elements funded from congestion pricing would be recognized in the cycle. This was a concept advanced by the Workgroup.
3.  Use the cash windfall to businesses from the 2018 40% Federal Corporate Income Tax cut: A divisive regional confrontation is unwise and potentially politically catastrophic for all involved. The most efficacious revenue on the horizon is a restructuring of the state’s corporate income tax in the metropolitan region to capture a portion of the multi-billion cash windfall to corporate New York from a 40% cut in their Federal corporate income tax rates. The Legislature could exempt smaller businesses and still find $1 billion a year as a recurring source of revenue from the windfall. (I wrote more about this in a prior column).  Corporate taxes, unlike income taxes, remain fully deductible as a business expense, and avoid more damage to New York from the Federal government’s severe cap on the deductibility of income taxes from Federal taxes. Further revenue sources would probably still be needed, but the vehicle-for-hire surcharges could be enhanced for the app-based services like Uber and Lyft and further differentiated from traditional taxis. Charges for for-hire vehicles in the outer boroughs and suburbs, which were excluded from the first round of this tax, could be brought into the system and linked to transit improvement.
4. Overhaul the MTA’s Capital Construction Program:  A plan to cut its costs 20-25% remains a challenge that can be taken up with a Capital Plan realignment into a ten-year cycle. A separate, new construction agency with aggressive powers to cut costs and innovate may be necessary.