The Boston MBTA, the city’s public transportation agency which operates public ferries, buses, the subway, and commuter trains, is broke. The agency’s budget for last year was patched by a one-time payment of $160 million funded by a state sales tax increase, and the agency has over $8.5 billion dollars in outstanding debt. In addition, the system is falling into disrepair. The agency estimates they’d have to spend over $3 billion just to bring the subway up to a “state of good repair.” In FY 2010, $543 million in safety-critical maintenance projects were not funded.

Of course, transit watchers know despite record ridership in recent years, two other of the nation’s other large, old transit systems are in equally dire straights — Chicago and New York. Although some of the problems are similar, I wanted to know the causes of the crisis in Boston. A recent report by a gubernatorial-appointed commission laid out the stark facts. The report, completed by a group headed by former finance industry executive David F. D’Alessandro, was published in November. This post relies largely on this recent report, readers with alternative perspectives are welcome to post comments below.

In 1999, the Massachusetts state legislature dedicated 20% of the State’s sales tax collection, excluding meals taxes, to the MBTA. Starting in July 1, 2000 this “forward funding” plan meant the MBTA would have a regular revenue source going forward. The agency adopted a financial plan for a balanced budget for the years 2001 through 2008. In the words of the report, “The Forward Funding Finance Plan proved unrealistic in many of its assumptions and nine years later can be deemed a failure.” The authors conclude the main driver of why the plan failed was “unavoidable cost explosions.”

• Fuel and utilities: cost $256 million more than anticipated due to increasing energy costs for the agency’s vehicles. The agency buys huge amounts of fuel and electricity for buses and trains.
• Payroll and employee benefits: $113 million more than anticipated. Wage increases were comparable to the 3.5% rate of inflation, but health care costs increased by 73%.
• The Ride (a federally mandated door-to-door paratransit service for disabled riders): $95 million more than planned.
• Sales tax revenue: $150 million less than expected. The forward funding plan projected an annual growth of 3%, it has actually only increased at around 1%

The only categories where there was good news was Commuter Rail ($37 million under budget) and nontax revenues were $95 million higher than expected. The report concludes the additional revenue is the result of three fare increases, the report authors observer “the last (2007) fare hike actually exceeded the Plan’s target, in part because ridership grew despite the fare hike.”

The cumulative total across the eight years? A $558 million deficit. The report concludes, “A private sector firm faced with this mountain of red ink would likely fold or seek bankruptcy.” In short, to keep operating the agency balanced their budget by pushing off debt, restructuring $238 million in the last three years alone. They also neglected maintenance. Among 56 maintenance projects with a “10” — the highest — on an internal safety rating, only 6 were funded last year. The authors conclude the agency tool other steps to control costs:

Contrary to not trying, we found evidence that the MBTA did make some hard expense choices. Across-the-board cuts were routinely made to departmental budgets. Periodic layoffs and hiring freezes restrained the headcount. Individual managers took pride in eliminating inefficiencies and redundancies, while embracing a new organizational ethic of customer service. Yet in the end, they could not pare staff below the number needed to move hundreds of thousands of riders across hundreds of routes each workday. Add the complexity and cost of sustaining the system’s aging infrastructure, and it became evident that the cost inflation and savings assumptions in the Finance Plan were never tested against the daily grind.

Against such a bleak picture, finding a “solution” seems like an insurmountable task. However, if any urban institution is “too important to fail” it’s the MBTA. I haven’t done a financial analysis, but the list below presents some steps that could be taken to improve the agency’s solvency.

1. Higher Fares, Pegged to Inflation
There are two general philosophies related to transit fares. One is to support transit from sales taxes or other general taxes, and keep fares low. (Transit as a public good) The other is to use fares to cover a much higher proportion of the actual cost of running the agency. (Transit as a private good) Massachusetts, like most places, has taken the first approach. However, as we have seen, this introduces problems with general tax revenues increase too slowely, and it restricts the agency’s ability to adjust fares to cover the increasing real costs of the inputs to transit (worker benefits, electricity, etc). I’ve struggled with this issue, and concluded I think fares should be increased, and at the very least pegged to inflation. In order to mitigate the equity effects, special subsidies could be implemented for low-income riders. Although I believe in the principle of transit as a public good, Americans generally don’t support the level of taxation to support high quality transit. Using fares for a larger proportion of revenue also means increasing ridership will increase revenues. (By raising the cost of transportation it can also have interesting land-use effects – something for another post.)

2. Debt Relief
The agency needs a large, one-time injection to pay off its sizable debt, some of which was “given” to the agency as part of the costs of the Big Dig. Paying it off now will save taxpayers money in the long run.

3. Federal Funds for Maintenance and Capital Costs
Lots of interests are already lining up for funding from the federal government’s next transportation bill. It should contain a revenue source for transportation infrastructure maintenance and improvement that can be used by agencies like the MBTA. The MBTA Review report describes how a huge proportion of the agency’s rolling stock of buses and trains will need to be upgraded or replaced in the coming years, with no funds in sight to pay for it.

4. Greater Rider Awareness
As I ride the T daily, I often wonder whether the other riders know about the agency’s shaky finances and massive maintenance backlog. I suspect most take the system for granted. Transit advocates — and perhaps the agency itself — should explain in clear terms why the numbers aren’t adding up. This work is as necessary as the others to create the political will for painful, long term solutions. Doing nothing means the discussion about solution will occur in response to a crisis such as an accident or strike. Crises can produce quick fixes, but rarely the type of long-term solutions that are needed.

How do you think the MBTA’s finances can be improved?

> MBTA Review Report (November 2009)
> U.S. PIRG Report – Derailed by Debt (October 2007)