Remarks of Elliot G. Sander
Executive Director and Chief Executive Officer
Metropolitan Transportation Authority
NYS Joint Legislative Fiscal Committee
February 15, 2007
I want to thank you for inviting me here today to share with you my thoughts on the MTA’s Financial and Capital Plans. Before I brief you on those matters, I want to give you a sense of what I’ve observed in my first six weeks. From my visit to MTA Bridges and Tunnels toll plazas, to my tour of the South Ferry project, to my time spent with a customer service agent at the 241st Station in the Bronx where I helped sell my first Metrocard, to my visit to the Hempstead Bus Depot at LI Bus, from my conversations with the staff at the Croton, North White Plains, and Grand Central Station staff from Metro North, and to my visit to the JFK and Rockaway Bus Depots that are part of our newly created MTA Bus Company, I have had an extraordinary opportunity to observe the commitment, energy, and intelligence of the people who make these organizations work. I am also a daily commuter on the Long Island Railroad, and that has provided me with a regular window through which to view the great contribution that property makes to the life of Long Island and the New York metropolitan region.
In short, I’ve toured, I’ve met people, I’ve listened and I’ve learned. On a daily basis I’ve been briefed on the major issues confronting the Authority. With a family of agencies that covers 14 counties and that delivers 8 million subway, commuter rail, bus and bridge and tunnel trips each weekday, needless to say those issues are many and they are complex.
But there is one overriding conclusion that I want to share with you all. We have an incredible workforce, 66,000 strong, men and women who are up to whatever challenges lie ahead. I know this based on the accomplishments they have achieved over the years. And these have been achieved without significant increases in costs, as I will explain later in my testimony.
First, let’s start with ridership. MTA ridership has soared, increasing by 38% since 1996. We now provide 600 million more transit trips than we did ten years ago and have, of course, increased service to support this demand. We’ve also seen a 16% increase in B&T crossings over the same time frame. These ridership increases are due in no small measure to both the introduction of MetroCard and EZ Pass and their associated discounts. Customers today are paying less to ride our subways and buses than they were over 10 years ago. And customers can count on more reliable service from all of our agencies. LIRR has seen a 70% increase in mean distance between failures since 2001, NYCT a 45% increase and MNR a 35% increase. This means trains are traveling greater and greater distances before breaking down. We are not only serving our customers more reliably, but we are also serving them more safely. Customer injuries have been reduced by 33% since 1996 and employee injuries by 59% over that time period thanks to the implementation of an MTA-wide best practices employee safety campaign. This then provided the context for MTA’s takeover of the private buses from the City. Everyone recognized that the level of service provided by MTA promised significant improvements to the customers of the private bus lines.
Finally, and most importantly, all of this underscores the role MTA plays in the economic vitality of the region. The regional growth that has fueled the economy could not have been possible without MTA services. And MTA will be the force behind the growth anticipated over the next 30 years.
Achieving this level of success in the future, of course, depends on
addressing the challenges we face in our operating and capital budgets.
Meeting this challenge is going to take the best efforts of not only
my family-wide workforce, but all of you as well.
Now let me talk to you about the Executive Budget and its impact on MTA’s finances. Proposed appropriations in the Executive Budget for MTA total $2.5 billion in operating assistance, and another $1 billion is provided to pay the annual debt service costs related to State general obligation bonds and service contracts that we use to help finance the capital plan.
The Executive Budget appropriates $2.2 billion from the dedicated taxes and $250 million from the 18-b and other State programs. The appropriation reflects an increase of $48 million in operating aid as compared to what was in the Financial Plan adopted by the MTA Board in December. This level of support is adequate to meet the MTA’s needs in 2007.
The Governor’s Budget also proposes to shift about $20 million from the “Long Lines” tax, levied primarily on transmission companies, from the MTA to provide funding for upstate mass transit. This is the only tax source that has been collected statewide but has not been used to support upstate needs.
The appropriations from the Executive Budget are a component of MTA’s overall Financial Plan. Recognizing that the plan will change and be updated in July, I want to share with you a summary of what was adopted by the MTA Board last December, along with the status of the approved capital plan.
In summary, the MTA has a $10 billion annual operating budget, 40% of which is driven by costs beyond our control. Of the remaining 60% of annual expenses, 90% pays for service delivery (operations, maintenance and security). Revenues to pay these expenses are flattening. The result of these two forces--uncontrollable costs and flattening revenues--is large gaps beginning next year.
The news on the capital side is not much better. The $21 billion Capital Program is threatened by bid escalation on many of our projects, a situation mirrored region-wide and throughout the nation.
Let’s talk about these issues in more detail. I will begin with a discussion of revenues as presented in MTA’s Financial Plan adopted by the MTA Board in December 2006. In 2007, MTA expects to generate $5.4 billion, or 60%, of its total $9.2 billion in operating revenues primarily from fares and tolls. This is a phenomenally high farebox return, significantly higher than any other system in the country. The remaining revenues come from subsidies: 34% come from dedicated taxes, such as sales tax, corporate franchise tax, petroleum business tax, urban tax, and Mortgage Recording Tax, and 7% comes from the State General Fund and local subsidies.
The Financial Plan, which projects revenues over the next few years assuming no fare increases, identifies some worrisome trends. Not only are fares leveling off, but so too are subsidies, which until now had shown extraordinary growth. Real estate tax revenues, which grew considerably through 2006, defying experts, are expected to decline in 2007 and then show modest annual increases through 2010. This component of our subsidies can no longer be counted on to generate the kind of revenue it has afforded us to date, it can no longer be counted on to mask the structural deficit.
Expenses, totaling $9.9 billion in 2007, are made up of two categories, controllable expenses and uncontrollable expenses. Most of our expenses, 60%, are driven by cost of service: operations, maintenance and security. The rest, 40%, are expenses largely out of our direct control. They include, among other things, health and welfare costs, debt service and pensions. I want to talk about each of these parts of the pie separately.
Delivering reliable, safe service every day is a costly endeavor. And you rarely hear calls for less service. In fact, with all of the recent conversations in the region about anticipated growth by 2030 and the key role transit plays in keeping a growing region mobile, we can expect calls for more and more service, new and different service, bigger and better service. We share that vision and our commitment to it is visible in the expansion projects, planned Bus Rapid Transit, and the new fleet with its clear announcements, electronic strip maps and high reliability.
MTA has spent years trying to maintain and expand its services while simultaneously keeping tight reins on cost. From 2004-2010, these expenses are expected to grow by 26%. This largely reflects growth in CPI, which alone would have accounted for a 16.4% increase. Beyond CPI, as I mentioned to you in my opening, the MTA has had to respond to enormous increases in demand for reliable service. In addition to service, the growth shown in this six year period has been driven by security needs, particularly higher levels of police patrols beyond what had ever been contemplated pre-9/11, and maintenance of modern and complex equipment, which has made our environment progressively more customer friendly.
I firmly believe that significant changes in controllable expenses can only be achieved by taking a hard look at the way we do business. In my first six weeks, I have already started a review of these issues. I have been briefed on and will lead our evaluation of opportunities for shared services across the seven agencies. I believe there is the potential for savings from a business service center that handles all of the day to day human resource, payroll and financial transactions currently performed seven times over by each of our agencies. I am taking a reasoned, thoughtful look at the potential value, both financial and operational, of merging the three bus systems. I am launching a blue ribbon panel of construction industry leaders to partner with MTA’s chief engineers and capital program staff to make sure we’re using all the best practices available to reduce our capital construction costs. And I am initiating an organizational assessment across the family of agencies with the primary goal of identifying weaknesses and threats that stand in the way of realizing this vision. The recommendations of this initiative will allow the organization to readily adapt to these, or other, new ways of doing business.
But even with this aggressive agenda designed to identify ways to do our business more effectively and efficiently, there is still an enormous component of costs that are beyond the best efforts of any of us. These uncontrollable costs are expected to grow by 98% between 2004 and 2010. That is correct, they are expected to double! Let’s look at what makes up these costs. First, foremost on everyone’s mind, is debt service. Our years of reliance on bonds to fund the investments in our infrastructure are catching up with us. Debt service is expected to grow by more than 122% over this six year period. While we can look to stem this growth in the future by committing to “Pay as you go” capital funding, that will not take care of the current problem.
MTA is not alone in facing significant increases moving forward in health and welfare costs (79% increases between 2004 and 2010) and pension costs (expected to grow by 71% over the same period of time). Energy costs and insurance are other costs beyond our control that are expected to see extraordinary increases as well (80% and 180% respectively from 2004 to 2010). And I would be remiss if I didn’t mention the costs of unfunded mandates. In particular, the cost of Paratransit, which is an invaluable service to the disability community, but one that was added to the responsibilities of transit agencies without adequate funding. Paratransit costs are expected to grow by 163%, from 2004 to 2010, largely due to Federal requirements for service.
So where does all of this leave us. It is anticipated in the December Financial Plan that the combination of flat revenues and increasing costs will deplete prior year cash balances and create future year deficits. We are forecast to end 2007 with $272 million, which reduces the 2008 deficit to $805 million, with deficits of $1.465 billion looming in 2009 and $1.793 billion in 2010.
We all have our work cut out for us in crafting a path forward. This process will begin in July when we update the Four Year Financial Plan, including a reassessment of revenues and spending. Just as I am working with the MTA family at looking at new ways to do our business, I expect to work with each of you on strategies for doing our business differently to overcome these deficits.
Now I want to turn your attention to MTA’s $21 billion 2005-2009 Capital Program and the challenges that lie ahead for us there. This program is the largest in MTA’s history and the largest public transit investment program in the nation. Over 75% of the investment is dedicated to the core program for each of MTA’s operating agencies. By core program, I mean the things customers see every day, like railcars , stations and bridges, as well as the vast network of invisible infrastructure that make the system run, like pumps, fans, track, signals and power. This invisible infrastructure surpasses that of many cities: NYCT’s 301 pump rooms pump 17 million gallons of water each day, more than the City of White Plains’ peak daily usage. Similarly, the systems 524 power substations use enough power annually to light the city of Buffalo.
As a small sampling of core investments, the program anticipates purchasing 959 new subway cars, 299 commuter rail cars, including new M-8’s for the New Haven line, and 1360 new buses, mostly our most environmentally sound hybrid electrics. We will rehabilitate 44 transit stations and 35 rail stations, including completing work at Atlantic Terminal and Jamaica Station. And we will rehabilitate countless pumps and signals. Taking care of the core does not only apply to transit. We must keep our bridges and tunnels in good shape as well. To that end, Bridges and Tunnels will rehabilitate and/or replace the decks on five of its bridges: the Bronx-Whitestone, Henry Hudson, Robert F. Kennedy, Throgs Neck and Verrazano.
In addition to the enormity of the $16 billion investment in the core, the MTA also included $2.3 billion (including $900 million from the State Transportation Bond Act) to move forward with the first major expansions of the system since the 1940’s— Second Avenue Subway and East Side Access. Both of these projects promise to bring significant congestion relief and travel time reductions to our customers. Both projects recently got a significant boost from the Federal government: Second Avenue Subway (SAS) recently received an Early Systems Work Agreement, which allows SAS to move forward with construction. This is a precursor to a $1.3 billion full funding grant agreement expected by the end of 2007. And East Side Access received a full funding grant agreement, positioning the project to receive a total of $2.6 billion in federal funds.
The first major construction contract is about to be awarded for SAS to begin tunneling from 96th Street to 63rd Street for Phase I of this $3.8 billion project, which is expected to be completed by 2013. Major tunneling work is already underway in Manhattan and Queens for the $6.3 billion East Side Access project, which will bring Long Island Railroad customers into Grand Central Terminal in 2013.
The Capital Construction Company will also be building the $2.1 billion extension to the Number 7 line, funded by New York City, to facilitate the redevelopment of the west side of Manhattan. We expect to award the first tunneling contract for this project sometime this year.
Work is well underway on the two Federally funded lower Manhattan projects—South Ferry Station and Fulton Street Transit Center. All contracts have been awarded for the $489 million South Ferry Station project, which is expected to be finished in August 2008 and will rectify track conditions that had significantly limited operational flexibility and frustrated customers along the #1 Line. This project rivals all others in its complexity, lying below a spaghetti-like network of utilities and other underground infrastructure. The final contract for the $888 million Fulton Street Transit Center is expected to be awarded this year, promising to rationalize the maze of connections to the 13 subway lines served by this station by 2009.
Finally, MTA’s Capital Construction Company is leading the enormously challenging effort to retrofit a 100 year old system to meet the security concerns of the twenty-first century. This runs the gamut from hardening infrastructure, such as bridges and tunnels, to implementing a system-wide camera and emergency command structure to rethinking vulnerabilities in every aspect of our environment.
Funds from this and past capital programs support over $16 billion of work now underway. Over the past five years, the MTA has awarded an average of $3.4 billion and completed $3.1 billion a year. But to accomplish the work I just described, in 2007 MTA plans to award over $4.1 billion in core program investments and over $3.4 billion for ESA, SAS and the #7 Line.
So now that I’ve given you a flavor for the investments included within the Capital Program and the work ahead of us, I want to turn your attention to the challenges ahead, especially in terms of cost escalation and the volume of work being done in the region. Recent press articles have pointed to the potential impact on the capital program from higher project costs. While we have seen some program erosion due to cost escalation to date, it is not uniform across all of our agencies or across all projects. Recent discussions with the City confirm that they are experiencing similarly mixed results. This situation will become more complicated because of the enormous amount of work underway throughout the region between now and 2009. This unprecedented volume of work increases concerns about the capacity of available contractors and the availability of necessary trades. We are taking this issue very seriously. As I mentioned earlier, I have established a blue ribbon panel made up of construction industry experts to partner with the Chief Engineers at our agencies to analyze the situation and make recommendations with the goal of minimizing erosion and maximizing the delivery of the investments promised by the Program.
So, let me wrap up. I have shared with you my understanding of the enormous challenges ahead for the MTA in its Financial Plan and its Capital Program. I now look forward to working with the exceptional staff at the MTA and all of you to develop a strategic plan to overcome these challenges. I know the men and women of the MTA are up to this. And I know I can count on each and every one of you. Thank you.
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