SlideShow: 2007 Final Proposed Budget and the Four-Year Financial Plan for 2007-2010
I am transmitting for your consideration the 2007 Final Proposed Budget and the Four-Year Financial Plan for 2007-2010, which reflects developments that have occurred since the last Plan was issued in July 2006.
As has been reported over the last months, real estate revenue allocated to the MTA from the mortgage recording taxes in the service region and the urban tax on commercial real estate transactions in the City, have continued to perform well despite reports of a slow down in the real estate market. In fact, the City in its financial plan update released earlier this month increased its projections for these tax revenues for the current year and the subsequent years in its financial plan. Underlying the City’s reforecast is an increase this year based on actual experience and an assumption that future declines will be less steep than previously forecast, notably in tax revenue derived from commercial transactions.
Using actual MTA receipts through October and incorporating the City’s current methodology, the November Plan still projects that these revenues will decline in 2007 compared with this year, but less so than the forecast contained in the July Plan. The resulting baseline forecast now reflects additional real estate tax receipts of $176 million in 2006 and approximately $200 million annually in 2007 through 2010, which totals just over $1 billion over the life of the financial plan. This significant positive change affecting our financial outlook is offset by the elimination of some key assumptions contained in previous Plans, specifically fare/toll increases and service adjustments.
The July Plan projected 5% increases in farebox and toll revenue yields for both 2007 and 2009. These alternate year fare/toll increases were included, consistent with earlier financial plans, as a means to offset normal inflationary expense growth in our operating budget, and to assist in addressing projected out-year deficits. This Plan, at the direction of the MTA Chairman, does not include those actions, which cumulatively over the plan period were expected to yield additional revenues of $1.3 billion, and instead presents a financial picture that excludes any projection of fare/toll increase. Moreover, in response to public comments and direction from the Board, the November Plan does not include bus and subway off-peak service adjustments that had been included in the July Plan’s gap-closing measures beginning in 2007. These measures were expected to yield savings of $175 million between 2007 and 2010.
Since the July Plan, there have been other developments, mainly based on recent economic trends, which have resulted in revenue and expense re-estimates. Fuel prices have recently dropped, and we have adjusted fuel costs accordingly. However, our traction and propulsion power providers have indicated that rate increases over the next several years will be higher than we previously expected. Thus, net energy costs in 2006 will be $3 million lower than we projected, but $7 million higher in 2007, growing to an increase of $57 million in 2010. In addition, we are awaiting completion of recent pension valuations by our independent actuary. Preliminary indications are that pension costs will increase by approximately $40 million annually as a result of changing demographics and projected overtime usage. On the positive side, recent rate projections by major health care providers, are lower than was forecasted in July, resulting in savings of $28 million in 2007 and growing to $49 million by 2010. Based on recent ridership trends and projected employment levels, farebox revenues are now forecast to increase over the July Plan, but are still significantly less than the levels projected in the February Plan.
In view of the above, I am proposing that $142 million of $378 million of the increased real estate revenue for 2006 and 2007 be used to (1) offset the $78 million of lost revenue expected in 2007 from the previously proposed September 2007 fare/toll increase; (2) offset the $22 million savings in 2007 that would have been generated by service adjustments in off-peak bus and subway service; and (3) cover the net increases in 2006 and 2007 in baseline Agency budgets including increased energy, actuarial pensions and other net changes to the July Plan.
With regard to the remaining $236 million in real estate revenues, the Plan proposes the following uses:
$25 million for Security Training
Last year, the MTA engaged Kroll Associates to review the safety/security training curriculum utilized by NYCT, Metro-North and LIRR for its operating personnel. Kroll recently provided recommendations for enhancements to existing training modules. In view thereof, it is proposed that $25 million be set aside over the next four years ($6.2 million annually, beginning in 2007) to offset the costs associated with providing enhanced training to designated operating personnel. In order to ensure consistency in this training and to coordinate efforts to determine content and delivery of the training, the MTA Director of Interagency Preparedness will chair a task force comprised of training and security representatives of the Operating Agencies, which will develop training modules, prepare schedules for training sessions and coordinate the training among the agencies.
$50 million for Capital Security
The July Plan had earmarked $100 million for additional security initiatives from the 2006 cash balance. These include new programs such as installation of intercoms in 75’ subway cars as well as currently identified initiatives in the Capital Program. As part of the November Plan, I am recommending that an additional $50 million be set aside for emerging Capital Program security contingencies, including an upgrade of MTA police radios.
$81 million for Downsizing Costs
While the forecast for 2007 has improved, the budget deficits for 2008 through 2010, as discussed in more detail below, are significant. It is clear that the MTA will need to embark on an aggressive strategy to become more efficient while reducing head count and expenses. We are already assessing options for implementing a shared service model in the areas of finance, human resources and information technology, across the MTA and its operating agencies, and our consultants have indicated that savings will be phased in over several years, but should yield significant headcount reductions. In addition, like the July Plan, we continue to include savings that would result from statutory changes to enable a reorganization of the MTA that would reconfigure the existing agencies. Together, shared services and the reorganization are estimated to yield savings of $11 million in 2008, $41 million in 2009 and $55 million in 2010. However, MTA will need to incur costs to achieve the resultant downsizing of the workforce. The November Plan therefore includes $81 million to be set aside in 2007 to cover the costs associated with the anticipated workforce reductions.
$80 million for GASB Fund
We continue to assume that recent non-recurring NYCERS pension savings and anticipated employee health & welfare contributions will be deposited in a special Government Accounting Standards Board (GASB) fund to account for post-retirement liabilities of “Other Than Pension Benefits” (OTPB) in compliance with new standards requiring governmental agencies to account for these liabilities in their financial statements. The July Plan assumed that $535 million would be set aside in this fund by the end of 2010. Using the same methodology as July to calculate GASB costs, the November Plan’s contribution to GASB would total $497 million. Although an assessment by our independent auditors has not yet been completed to determine what the full extent of MTA’s liabilities for OTPB will be, this amount is well short of the likely exposure. I am, therefore, recommending that an additional $80 million be set aside in the GASB fund, bringing the total GASB contribution to $577 million.
The real estate tax improvements noted above represent yields generated by our base revenue forecast. As has been reported, the biggest commercial real estate deal in history occurred this month – the sale of Peter Stuyvesant Town and Peter Cooper Village. Pending unforeseen complications, this transaction is expected to generate $52 million in property transfer revenue for NYCT. I am recommending that this one-shot revenue windfall be used to fund NYCT station painting. The proposal would provide operating budget funding during the plan period at an estimated cost of $8.8 million annually that would grow with inflation. Over a ten-year period, 350 stations would be painted through the operating budget program, with the remaining 118 stations (about 12 per year) funded through the Capital Program. The estimated $52 million from this sale would be enough to fund approximately 200 of the 350 stations included in the operating budget program during the plan period.
The July Plan, including the 2006 carryover surplus of $711 million, forecasted a $36 million closing cash balance in 2007. The November Plan reflects positive closing cash balances, including recommended policy and gap closing actions, of $938 million in 2006 and $272 million in 2007. The 2008 gap has dropped $100 million from the July Plan to $805 million, still a substantial challenge that will need to be addressed next spring so that a balanced Preliminary 2008 Budget can be presented to the Board in July 2007. Moreover, the outyear gaps have worsened since July, notably due to the absence of the 2007 and 2009 fare/toll increases, to $1,465 million in 2009 (an increase of $329 million) and $1,793 million (an increase of $305 million) in 2010.
Clearly challenges are ahead for the MTA to identify methods to reduce expenditures to address looming deficits while meeting ridership demands and maintaining fares/tolls at affordable levels. The next twelve-month period will be critical for the MTA as it moves closer to 2008.
Katherine N. Lapp
Executive Director