Metro is $150 million in the hole every year in the future

As Matt Johnson wrote earlier, Metro’s financial position for FY 2010, which ends in June, has gotten significantly worse, according to new figures discussed yesterday at the WMATA Board meeting.

Matt covered the $4 million in proposed service cuts. This post looks into the various funding shortfalls that are building up in Metro’s budget.

To avoid greater fare increases or service cuts, the budget, like last year’s, takes some money away from future obligations. Borrowing from the future could stave off cuts that reduce ridership further and force more people to drive, but it also creates a bigger hole later than Metro must then dig itself out of. The longer the bad budget years persist, the bigger the hole.

One of Metro’s proposals is to defer additional preventive maintenance and move more capital funds over to operating expenses. WMATA Board member Peter Benjamin of Maryland argued that cuts in preventive maintenance and diverted capital spending are typically permanent, and feared that the impact would last for a decade. He asked staff to point out what specific capital improvements they would cut to fund this.

Assuming the 2011 budget doesn’t have any more cost increases or revenue reductions compared to 2010, here are all the holes they’ll be in:

• Deferred maintenance: $30.7M from the FY2010 approved budget and an additional $10M proposed yesterday.
• Retiree health liability: $4M from FY2010 approved budget, which Metro will have to pay in future years.
• Money diverted from the capital fund: $12M proposed yesterday.
• Insurance payoff from the 6/22 crash: $6M realized as operating funds, when most should probably go to replacing damaged/destroyed railcars and fixing equipment rather than paying to keep fares and subsidies low.
• 2010 service cuts: $14M based on annualizing the proposed $4M in cuts.
• Stimulus: Metro used $200M in one-time stimulus money to pay for their 2010 capital program, freeing up local money for operating expenses. That won’t be an option again in future years.
• The reserve fund: They are taking $18.6M from their reserve, of which $13M was previously approved in the FY2010 budget and an additional $5.6M proposed yesterday.

There may be additional holes. They did plug one last year, the $36M in additional one-time fare revenue they created by approving a 18-month fare increase that was applied only to 12 months worth of budget. However, in reality, Metro faces some probable revenue declines:

• Long-term reduction of advertising revenue: The current advertising contract is a big money-loser for the company that bid high during a roaring ad market. The next contract will probably yield about $5M/year less, estimating a 10% reduction in revenue.
• Pass migration to SmarTrip: Many people will start using passes once they’re part of SmarTrip. Metro hasn’t quantified the expected cost. I estiamte $5M based on 5% of off-peak rail trips becoming free.
• Elimination of paper transfers: Staff assumed Metro would gain $3M in revenue during last year’s budget process, but the Board asked them to budget $10M. It ended up being closer to $6M.

And some probable cost increases:

• MetroAccess: Based on current trends, Metroaccess costs will probably increase at least $15M/year more.
• Employee compensation: Combining the arbitrator-mandated 3% raise with more increases in health care costs, step and longevity increases, assume a 5% increase in employee compensation, or $10M.
• Valuable staff: Assuming just 20% of the 300+ positions Metro eliminated in 2009-2011 actually did something we would like them to continue to do, like handle customer complaints, supervise service, plan service (Metro cut half its planners in 2010), make maps, or maintain vehicles, we’d probably like to hire them back. Assume $5M for that.

All of this adds up to a big structural deficit looming in future years. Just as Metro identified about $8 billion in capital funding needs over the next 10 years just to run the service we already have, this list sums to about $150M in operating subsidy increases that Metro will need soon just to continue operating the service we had in 2009. And that doesn’t include the cost of improving service based on more people moving here and using transit.