Over and over again, you hear pandering state politicians call for a “forensic audit” of the MTA, perhaps hoping that given the general level of corruption among the supposed truth telling professions in recent decades, if they paid for the audit the audit would absolve them. But for any other purpose, I can save them the money the audit would cost. The MTA is going broke for the same reason that the state’s Transportation Trust Fund, which is supposed to pay for road and bridge repairs, is going broke. The maintenance and normal replacement of the infrastructure is an ongoing expense, not a one time “capital” expense. Stop it, and your infrastructure deteriorates and eventually collapses. But rather than pay what that maintenance and normal replacement costs each year, or work to get the cost down while still getting the work done, the state decided to spend not just today’s money on today’s work, but tomorrow’s money on today’s work as well. Leaving no money for tomorrow, which is now today.
The short answer to the question “how can the MTA capital plan be funded” is that it should be funded with the dedicated tax revenues already authorized for the MTA. The MTA projects its debt service costs will rise toward $3 billion per year in the next few years – more than enough to pay for its ongoing capital needs if the debts were paid for otherwise. Particularly given my prior statement that subway and commuter rail riders should pay to purchase new rail cars on an ongoing basis as part of their fares, and federal aid is likely to remain available to purchase buses because buses are present everywhere in the U.S. So the real question isn’t how the capital program should be funded. The real question is how should all the illegitimate debt from the past be paid for, and should it be paid for at all? Because without that debt service and other costs from the past, the MTA would have all the money it ought to need.
The MTA produces a balance sheet that argues that its debt levels are reasonable, because the duration of its debts are equal to the expected life of its infrastructure. So even if it had so much debt that it neither maintain the infrastructure nor borrow more, the MTA could theoretically gradually shut down the transit system as it deteriorates and still pay the existing debts off. Thus there is no problem. This is the kind of accounting that is used by private corporations that could, in fact, go out of business with little collateral damage.
But the MTA can’t. It has an obligation to continue to provide transit service in the downstate region, at a loss, indefinitely. If it fails to do so, the economy of the downstate region will collapse, and with it the tax revenues that it is counting on to cover its debts. Yet nowhere on the MTA’s balance sheet do you find that obligation to provide ongoing service as a liability. If you did, it would be clear the MTA has been bankrupted. But the MTA is not in trouble due to bad accounting. Bad accounting has been used by a generation that has enriched itself at the expense of the future, to cover up the fact that it has done so, with the assumption of an eventual collapse of the transit system.
And now the future has arrived. Almost all of that ongoing revenue is being used for past capital spending, leaving none for spending in the future. And the proposed solution? Yet another MTA tax or toll or fee, to be paid into the indefinite future but borrowed against and spent, in its entirety, in just a few years. Leaving the same problem with no money and ongoing needs just a few years from now. Doing the same thing again, making it worse, just postponing collapse until the rest of Generation Greed can make it to Florida or the grave.
The fallacy of this kind of borrowing, unfortunately, has been repeated across our society. Why should a debtor pay a debt, and what money would be used to pay it? It used to be that debts were incurred to create assets, assets that either created ongoing income that could be used to pay the debts, or created ongoing savings that could be used to pay the debts. But the United States has been borrowing just to pay for excess consumption. The promise of today’s mortgage bonds, securitized credit card receipts, and municipal bonds is not a promise to share growing wealth and income with the bondholder. It is a promise by the debtor to live worse in the future, in exchange for living better right now. Only in the case of municipal bonds, it is a promise by older generations to themselves that other people — younger generations and those who don’t move away — will pay higher taxes for less in services to pay those older generations tax-free income.
Let’s focus on the MTA budget for a moment. In the operating budget, you’ll see a huge number called “reimbursable expenditures.” What does that mean? It means that money spent to provide subway and bus service today, if that service is provided anywhere near a “capital” project, gets charged to the capital project, and is not paid for by the operating budget. It “reimbursed” by the capital budget and is therefore borrowed for, to be paid off by someone else over 30 years. What qualifies as “reimbursable?” Just about everything they can get away with, because “capital money is less green” because no one pays for it right now.
Let’s say a train is delayed, and another train needs to leave going the other way. So the train operator and conductor are asked to work through lunch and take that second train out, eating the cab, and earning an extra hour pay plus one half hour overtime. Hmmm…let see. Are there any capital projects anywhere along the route? That must be the reason for the delay! Charge it to that project, and we make our operating cost numbers! Am I making this up? I worked for a few years as a capital budget analyst for New York City Transit. When hired I had expected to spend my time finding out why the cost being charged for capital projects by contractors was soaring to levels that the City of New York, based the total personal income of all its residents, could no longer afford. Instead, spent my years there fighting with other parts of the New York City Transit. Over, among other things, thousands of 1 ½ hour charges.
In reality, even the cost paid to contractors on capital projects should not be borrowed for, with the possible exception of entirely new infrastructure that only needs to be built once – the Second Avenue Subway and East Side Access for example. Those big projects account for a tiny fraction of the MTA capital plan.
More typical is the need to replace the signals on my home subway line, the Culver Line (F in Brooklyn). NYCT engineers put the average useful life of a well-maintained signal system at 50 years. Since the majority of the original subway system was completed and reconstruction began in the 1950s, the signal systems have been replaced at about a 60-year rate – except for the 1970s fiscal crisis during which the replacements stopped. As a result of that stoppage, however, many of the signal systems are more than 75 years old, the point at which the engineers claim they begin to fail, leading to ongoing disruption, soaring emergency maintenance costs, and perhaps an eventual shut down.
So should more money be borrowed to replace the signals on the Culver Line? Replacing those signals would not increase MTA tax revenues, ridership or toll revenues. It would simply accommodate the rail service that already exists, to areas that are already developed. In theory CBTC signals, which allow the train to drive itself, could allow the train operator to assume the conductor’s duties and allow the conductor to be eliminated, saving money. But the Transit Worker’s Union contract evidently precludes this, in perpetuity, according to court decisions – no productivity gains allowed. And Siemens is charging so much extra and taking so much longer to install CBTC that the conductors might be cheaper in any event.
So rather than creating more revenues or saving cost, any money used to pay debts incurred to replace the signals on the Culver Line would have to come out of existing revenues. But then, what money would be used to replace the signals on the Fulton Street line in the other part of Brooklyn a few years from now? In fact, the initial second generation signals, installed on the oldest sections of the IRT, are now approaching 60 years old and coming up for replacement.
The practice of borrowing for ongoing normal replacement has another negative effect – it causes the prices charged by contractors to soar. Let’s imagine this year’s signal project had to be paid for by this year’s money. Engineers would call for more bells and whistles. Siemens and the other contractors would try to charge much more money. But there would be pushback on the other side, since the total pot of money would be limited. Taxpayers, farepayers, even the Transit Worker’s Union looking for higher wages, would be fighting over the same dollars, providing a pushback for the contractors. (Well actually the TWU want to just eliminate capital spending and have the system collapse as its members grab rich pensions and move away, based on their demand that capital funds money be used for the operating budget). With higher costs funded by borrowing, however, there is no such immediate pushback to higher costs, because there is no immediate loser, and no one else seems worried about the future. That’s why “capital money is less green.”
Even the bidding process inflates costs. The MTA estimates the cost of projects as part of the capital plan approval process. The bidders see what the MTA expects to pay, and work their way up from there, either by having all of them bid more, or by winning the bid and getting the contract and then getting lots of cost inflating change orders. The MTA always backs down in conflicts with contractors, or is forced to do so by the courts because individuals and businesses have rights and community and the future have none.
And when cost overruns mean the amount of money the MTA is authorized to borrow is insufficient, needed projects are simply deferred to the future, when there will be even less money to pay for them. So ongoing normal replacement, which is really maintenance, falls behind. The MTA then incorporates the higher costs from the last plan into its estimates for the next one, and costs ratchet up again. Per track mile and per interlocking, the contractors nearly doubled the cost of signal projects over 25 years, working through the same legal and political processes of the public employee unions.
If this city, this downstate region, this state is to have a future, the ongoing normal replacement portion of the capital plan, virtually all of it, has to be paid for with ongoing revenues. None of it can be funded by debt. And ongoing normal replacement, though perhaps not at the aggressive rate engineers would prefer, would have to occur steadily. “Reimbursable expenditures” have to be classified as operating expenditures, as they were before the early 1990s (when expedient measures were taken to get through a budget crisis – and then extended in perpetuity). Rail riders need to pay for the ongoing purchase of new cars, as discussed in a previous post. And otherwise, the MTA has the revenues already – if it isn’t burdened by the past. It is the debts, the unfunded pension deals, and unfunded retiree health insurance that needs to be paid for some other way.
With the capital plan limited to a fixed, ongoing pool, a contractor cost crackdown is required to ensure the necessary work is done for the amount of work available – instead of having more project deferrals the more the construction industry elects to charge. The crackdown is far in excess of what has already occurred. The bidding process should change. I recommend slashing the expected cost of MTA projects back to what they were 18 to 30 years ago, plus inflation. And rather than taking the lowest bidder, the MTA would put out a preliminary design and what it was willing to pay – and wait until a qualified contractor came forward with a proposal to do it for that amount of money. The best proposal and the best past record of delivering would be chosen, if multiple contractors accepted the MTA price. But the MTA would wait years, if necessary, if no contractor came forward. And taking work in house should be considered if the TWU is prepared to rip off the MTA less than the contractors – with accrued pension costs included.