I swore off suggesting solutions to New York’s state and local public policy problems some time ago, on the grounds that there is not chance that any of those suggestions would be implemented. Let’s face it, most of those in charge don’t actually think there is a problem, because things are working out very nicely for themselves and those who help keep them in office, and the damage to others is irrelevant as long as it can be deferred or blamed on someone else. And when things get really bad they can always do what con artists always do – take their pensions and skip town.
But what the hell. The financial situation of the MTA is something I happen to know a great deal about, and I don’t want to remain silent in the face of the propaganda and rationalizations that everyone in New York politics is determined to make. They should not be allowed to pretend it isn’t happening. And they shouldn’t be allowed to pretend, even now, that nothing could be done about it. So here it goes.
First, let’s diagnose the problem. The larger part of the problem is that the MTA has borrowed $billions for mere maintenance, and has reached the point where so much money is going to interest that maintenance can no longer be paid for. By maintenance I mean the ongoing normal replacement portion of the capital program, and the “state of good repair” part (which is really ongoing normal replacement that takes place after deterioration rather than on schedule).
A real capital expenditure, one that might reasonably be funded by debt, leads to either higher revenues or lower costs. Those higher revenues or savings can be used to pay the debt off. Brand new expansions such as the Second Avenue Subway or the Flushing line expansion can support economic and population growth. But ongoing normal replacement is what is required to merely prevent economic and quality of life decline. It needs to be done on an ongoing basis, not just once, and thus needs to be funded by ongoing revenues. Or else debt service eventually eats up all the existing revenue streams, maintenance stops, and the system declines.
The smaller part of the problem for transit (but a bigger part of the problem for other public services such as education) is unfunded and retroactively enhanced retirement benefits. It is a smaller part of the problem for transit only because the TWU strike to force the city and state to allow transit workers to retire at age 50 after just 20 years of work – rather than 25/55 – failed. The state legislature had passed a change to 20/50 more than once, without any “no” votes, but it was vetoed (too bad Spitzer didn’t do the same for the massive pension deal for NYC teachers that will re-destroy the schools). The huge increase in cost associated with such a change would have wrecked the transit system just as it did in the 1970s, after older workers received a 20/50 pension. In fact, as for the teacher deal it would have been even more costly, because people are living longer.
But MTA workers did benefit from the retroactive pension enhancements of 2000, adding a cost of living increase that was not part of what they were promised when hired, eliminating their pension contributions after ten years of work, and bringing back overtime (and for management promotion) related pension spiking – which is a particular practice on the commuter railroads. And during the stock market bubble (or should I say the 2000 bubble, as opposed to the 2007 and current bubbles), the MTA wasn’t even contributing enough to pay for the pensions the workers had been promised when hired, like other public agencies in New York and elsewhere.
So where did the money go that should have been going to ongoing normal replacement and pension contributions? Some of it is now going to soaring pension costs, made necessary by past underfunding and retroactive enhancements. Some of it went to whatever the State and City of New York did with it when they cut off cash support for the MTA capital plan. Some of it went to inflated prices paid for capital improvements, because no one has to be sacrificed to pay for things when the money is borrowed, and borrowed money is never spent as efficiently. And some of it went to much lower fares for New York City Transit, as a result of “one city one fare” free transfers and Metrocard discounts.
There are no “hidden billions” sitting around as a result of two sets of books. The reality is the second set of books, the honest one, would have shown a deficit after deficit year after year at the time when the MTA was claiming “surpluses.” If all those “hidden surpluses” asserted by the Straphangers Campaign, various Comptrollers, and state legislators actually existed, the MTA wouldn’t be deep in debt with an underfunded pension plan. But these folks have convinced people that there is no need for anyone to sacrifice, that there is plenty of money, that everything can be explained by “waste fraud and abuse.” Ronald Reagan’s “magic asterisk” used to pay for his tax cuts, beloved by all members of Generation Greed regardless of their alleged political differences.
So what now? I see two courses of action.
The first is bankruptcy. The state could seize all the MTA’s “dedicated” tax dollars and demand that the MTA pay for itself with the fictional money from the other set of books. The MTA could allow its cash position to dwindle and, and then shut down when it could no longer make payroll. Rather than cut services, services could then be added from a base of zero. Starting with a shrunken down subway system capable of covering its operating costs, including enough basic maintenance to keep it going. Perhaps the MTA could abandon the subways to the City of New York, which paid to build them (aside from the few extensions added since 1968) and still owns them.
After a few months without a transit system, with the economy in a freefall, people and businesses moving away, tax revenues plunging, property values collapsing, and therefore other public employee unions seeing their jobs in jeopardy, all the MTA employees laid off and their unemployment insurance about to run out, capital contracts cancelled, retiree health care cancelled, and pensions in jeopardy — perhaps then the riders, the unions, the business community, and even suburban politicians will be compelled to drop the “two sets of books” fantasy. Taking the medicine now would certainly make life better 20 years from now, by making Generation Greed take some of the pain while they are still here, and allowing a turnaround rather than ongoing decay.
The second course of action would require a long series of steps. I’ll state them below, and perhaps (if I have the energy) explain them in order afterward.
1) Break up the MTA transit monopoly and settle the payroll tax controversy by turning the bus systems, and the payroll tax/taxi surcharge revenues, over to New York City and the counties. The MTA would no longer operate buses. If the suburban counties don’t want to keep the surcharge, fine. If they don’t want to have buses, fine. These new transit systems would not inherit the work rules and contracts of the old ones. Just the vehicles and depots.
2) Require the subway system, the Long Island Railroad and MetroNorth to cover their costs on an “auto-equivalent” basis, with riders paying for the ongoing purchase, maintenance and operation of railcars and the collection of fares through fare revenues. The maintenance and rehabilitation of the tracks and stations would be funded otherwise, as streets and parks and libraries are. (Ie. for New York City Transit, the departments of Car Equipment, Rapid Transit Operations, and Metrocard Operations, and subway car capital purchases would be paid for by fares). If NYC wanted to keep free bus to subway transfers, they would count as subway revenues for local buses since the subway would be required to be self supporting, and would be split for express and “Select” bus services.
A higher minimum wage would be imposed in Manhattan south of 110th Street to allow the most powerless workers to offset the higher fares. Local governments would be allowed to purchase fares at full price and sell them at a discount to select populations if they wanted, and as bus operators could set whatever fare with whatever subsidy they wanted, if they chose.
3) Impose congestion pricing south of 110th Street. Use the net toll and congestion pricing revenues, and state aid, to pay for the maintenance of tracks and related power and signal infrastructure, and major transfer stations such as Grand Central and Times Square. Consider the congestion pricing revenues “rent” paid to transit riders by motor vehicles in exchange for the transit riders giving up use of the scarce street space. Note that motor-vehicle related revenues like tolls and gas taxes go to highways and bridges, not streets.
4) Require NYC and other localities to pay for a share of station maintenance, and any station agents not needed for fare collection purposes. If the city wants a second station agent in a station, it should pay for that station agent. The city and counties would be allowed to substitute their own station maintenance workforces, with their own rules, for NYCT workers. Perhaps New York City workers would agree to work outside the booth and do some light cleaning.
5) Set the employer contribution for transit pensions to what they should have cost absent all the retroactive enhancements and games of the past 18 years, which I calculate to be 13.2% of payroll for physically demanding jobs legitimately entitled to an early retirement, and 8.8% of payroll for other jobs. If less than that was contributed in the past 18 years, it would be made up with a reasonable interest rate – not the 8.0% fantasy rate of return from the peak of the stock market bubble. At the MTA and in other agencies, the cut in taxpayer pension contributions that occurred during the stock market bubble would never be allowed to occur again.
6) Make the employees and retirees pay the rest. The employees through higher pension contributions legislated by the state – their contributions would vary over time, rising in recessions when they were lucky to have a job and falling in economic booms when they have other options. The retirees who cashed in and moved out could be required to pay something back though payments for their health insurance, negotiated with the unions in exchange for having the health insurance savings on retirees count for some of the higher worker contributions. The goal would be to get the pension systems out of the hole within 12 years, based on reasonable rate of return assumptions, and with the employees paying for all the retroactive pension enhancements of the past 18 years (at an alleged cost of zero) and all the pension spiking. After that point, the employee share of pension costs would fall to whatever was required. (This works for all public services, not just transit).
7) Clarify the state law that sets the parameters for arbitration of disputes for public employee contracts to empower the arbitrators to weigh the effect of the contract on the quality and extent of public services, and not just what taxpayers can supposedly pay, and what the unions think they deserve. And empower arbitrators to shift money among workers hired at different times and doing different jobs in different conditions, to provide equity and improve public services.
8) Stop borrowing for ongoing normal replacement, and only do the work that can be paid for in cash. Eliminate “reimbursable” operating expenditures. Those are operating expenditures to be paid for with ongoing revenues, not capital expenditures to be paid for with debt.
9) Change the MTA’s bidding practices by adjusting the expected cost of capital projects to what they were 18 to 30 years ago plus inflation, and paying no more. Work would only proceed if and when a qualified contractor stepped forward to meet that cost and do the job. Work would proceed on a design-build basis after preliminary design, to avoid change orders. The best design and work plan at equal prices would be chosen. The MTA would shut down lines for months if that is what was needed to save money, and get the work done faster.
10) Impose a “Generation Greed Surcharge” on all MTA fares, tolls, and taxes to pay for non-employee catch up pension funding from the past (above the 13.2% and 8.8% described earlier), retiree health care benefits (also unfunded and paid in exchange for past services), and debts run up for anything other than entirely new infrastructure (ie. East Side Access and the Second Avenue Subway). For example, instead of buying a Metrocard and getting more value on the card than what was paid as a bonus, riders would get less on the card than what they paid – plus a Generation Greed Surcharge. This would allow everyone who pays for the MTA to see how much of their money is being sucked away by the past, with nothing in exchange. This policy would also work for other fees and taxes, not just at the MTA.
11) Once the Generation Greed surcharge has been imposed and people have had the cost of the past in front of their faces, start taxing retirement and Social Security income in excess of $20,000 to help pay off debts and the taxpayer share of unfunded pension and retiree health care costs. If the public employee unions successfully challenge the taxation of their pensions in court, maintain the taxation of Social Security and private retirement income, and take away the $20,000 exemption from public employees, while increasing the share of retiree health care public employees must fund further. Again, this policy could apply, and the added state and local income tax revenues could be used, for other debts and unfunded pension liabilities in addition to MTA debts and unfunded pension liabilities.
12) Provide the minimum transit fare discount to senior citizens allowed by federal law. I believe the discount could be removed during rush hours.
Nearly four typed pages already and all I have is a list. Clearly this will have to be a series of posts if I am going to include arguments as well as statements. Those will follow when I get up the motivation, given that what is likely to happen is the exact opposite of what I would suggest – and a continuation of the selling out of our future by the same people and groups who have brought us to where we are now.