PART 3: Transit Rail Agencies Prepare for Revenue Shortfalls, Service Cuts — and Whatever Else May Come Their Way

By Angela Cotey, Associate Editor

Weird. Uncertain. Ironic. Those are just a few of the words transit execs used to describe the state of the transit industry heading into 2009.

The weird: Ridership continues to climb, despite the recent drop in gasoline prices that caused new riders to flock to transit systems in the first place. The uncertain: Most agencies rely on sales tax revenue and/or allocations from state and local entities to help cover operating and capital costs; as economic conditions continue to deteriorate, those revenues are sure to decline, although it’s hard to say to what extent. The ironic: Some agencies are facing massive service cuts, even though more people than ever rely on them.

“It’s a strange paradox, though things are always difficult,” says Charlotte Area Transit System (CATS) Chief Executive Officer Keith Parker.

That’s why some transit officials, like Parker, are taking the concerns about the year ahead in stride. Others paint a far gloomier picture, as the economic downturn puts an additional burden on already-strained state and county budgets and sales tax revenue. At least one thing is certain: The recession will impact all transit agencies. For now, they’re figuring out how to best prepare for — and handle— the tough months ahead while continuing to embrace the swelling support for their services.

“We only have so much control over our revenue, and in many cases we’re reacting to or anticipating what may happen in an economy that we don’t have much influence on,” says Dallas Area Rapid Transit (DART) President and Executive Director Gary Thomas. “But it’s not the first time we’ve gone through this, either.”

Like many transit agencies, DART struggled with budget issues resulting from a sluggish economy back in 2002 and 2003. Now, officials are waiting to see just how much the current economic downfall will affect their FY2009 and FY2010 budgets. As of press time, DART officials were expecting to receive sales tax revenue figures for October, the first month of the agency’s fiscal year.

“One month does not make a trend, but it will give us some idea of where we stand heading into next year,” says Thomas.

Paring back

In the meantime, the agency already has lowered its sales tax projections for 2009 and assembled a cost-savings team made up of managers from throughout the organization. The team is looking at hiring freezes and other belt-tightening measures that could be quickly implemented if sales tax revenue drops lower than expected.

The Los Angeles County Metropolitan Transportation Authority (LACMTA) is seeking ways to cut back on expenses, as well. The agency is not only receiving less sales tax revenue than it has in recent years, but the state of California also might cut funding for the agency by up to $200 million.

“We’re scrambling — using up some of our reserves, money to fund future transportation improvements, and paring back some capital programs,” says CEO Roger Snoble.

Service cuts are off the table in FY2009 because the agency won’t have enough time to go through the public hearing process, says Snoble. However, all bets are off for FY2010, which “looks pretty bad, too,” he says.

“It’s just terribly ironic, because we have a lot of people looking for transportation alternatives, but now we might not be able to sustain service levels,” says Snoble.

CATS officials are implementing a hiring freeze and may have to postpone proposed service expansions because sales tax revenue for FY2009 — which the agency had projected would increase by about 5 percent — is beginning to decline.

CATS also is rethinking the way it’ll approach its capital program. The agency had expected to advance three projects next year — an extension of its existing light-rail line, a new commuter-rail line and a streetcar project.

“We were anticipating receiving some level of funding from the state or federal government on all those projects, but if the economy continues in its nebulous trend, those projects become more difficult to get built,” says CATS’ Parker. “We may have to delay our recommendations to advance these projects. We’ll just have to continually adapt to what’s happening on the state and federal level.”

A gloomier forecast

At other transit agencies, the 2009 outlook is even more dismal. The recession is putting more strain on fiscal crises that existed well before the economy took a nosedive in states such as Ohio and Florida.

Officials at the Greater Cleveland Regional Transit Authority (GCRTA) are concerned that both ridership and revenue will decline next year because several large Cleveland businesses are considering layoffs and another major corporation is moving from downtown Cleveland to the suburbs.

“A significant portion of these businesses’ employees are public transit riders,” says GCRTA General Manager Joseph Calabrese. “And as unemployment goes up and businesses move out, our sales tax suffers.”

Earlier this year, GCRTA officials developed a tax budget to see where they stood for FY2009, which begins Jan. 1. The budget showed the agency was facing a potential $20 million deficit, so GCRTA cut jobs, imposed travel restrictions, reduced overtime and cancelled some projects. In fall, the authority implemented a 25-cent fuel surcharge and cut some bus service.

“This will help us out heading into 2009, knowing that our revenue might decline,” says Calabrese.

The authority also is seeking additional dedicated funding from the state of Ohio, which provided temporary funding in September to help GCRTA avoid a 50-cent fuel surcharge and drastic service cuts. However, if the state does not approve dedicated funding in its 2009 budget, GCRTA will have to resort to the previously proposed cuts.

“There are just a lot of uncertainties,” says Calabrese.

So, too, for the South Florida Regional Transportation Authority (SFRTA), which relies on allocations from Palm Beach, Broward and Miami-Dade counties to fund its Tri-Rail commuter-rail operations. Last year, the state legislature passed a bill that altered the property tax structure, reducing the counties’ revenue. As a result, Tri-Rail had to cut its FY2009 budget by $2.7 million to $59 million. Now, the tanking real estate market is taking a further toll on the counties.

“One county is projecting shortfalls of over $50 million, and another has told us that 70 percent of their property sales have been foreclosures or short sales, so there’s a tremendous loss of revenue,” says SFRTA Executive Director Joe Giulietti. “They’ve put us on notice that we have to get our own dedicated funding this coming legislative session because they aren’t going to be able to fund us at current levels.”

Not that SFRTA officials haven’t been trying. The authority has been proposing that the state legislature shift a $2 car rental fee from the state trust fund to SFRTA. Two years ago, the measure passed the House and Senate, but was rejected by then-Gov. Jeb Bush. Last year, the proposal passed the House 114-0 but was not taken up in the Senate.

If the legislature doesn’t pass a rental car fee or another source of dedicated funding in the coming year, the agency could be facing drastic service cuts in FY2010, which begins in July 2009.

“Right now, we’re trying to figure out how to get through the next year if our funding remains flat — or worse, if the counties fund us at the minimum amount they’re required to,” says Giulietti. “That would cut another $18 million from our budget, and we’d be looking at cutting half of our service.”

In it together

Scores of other transit agencies are facing budget woes in the coming year, too, including New York’s Metropolitan Transportation Authority, which is projecting a $1.4 billion deficit in 2009; St. Louis Metro, which plans to raise fares and cut service after a ballot measure to provide additional dedicated revenue failed at the polls last month; and the Chicago Transit Authority and Metra, which are desperately in need of capital funding.

“You’ve got major systems throughout the country talking about this [funding crisis] right now,” says Giulietti. “There may have been a time where you might see one or two systems talking about issues in a given area, but right now, everybody is talking about how to get by.”

The financial crisis is trickling down to transit agencies in other ways, too. After its September collapse, American Insurance Group (AIG) received a reduced credit rating that put 31 transit agencies in “technical default” on leaseback agreements that had been guaranteed by AIG. Under the agreements, known as Sale-In/Lease-Out and Lease-In/Lease-Out (SILO/LILO), transit agencies sold assets to a bank, which then leased them back to the agency. To secure the transactions, sale proceeds in the form of treasury securities were placed into an account that insurers such as AIG guaranteed. However, the deals required the insurer to maintain a AAA credit rating.

Last month, Belgian bank KBC Group announced it was seeking $43 million from the Washington Metropolitan Area Transit Authority (WMATA) for being in default of their agreement. After three days of discussions in federal court, WMATA reached a settlement with the bank. However, as of press time, 30 other transit agencies still were in default of their leasing agreements and could be required to collectively pay more than $2 billion in fees.

Those agencies were waiting to hear if Congress would approve their proposal that the U.S. Department of the Treasury assume the role of AIG and other insurers in SILO/LILO transactions to prevent banks from collecting the fees. The treasury department essentially would be backing its own securities, with no financial risk to the federal government, according to the agencies.

“Thirty-one of the nation’s largest transit systems, including MARTA, would be financially crippled in the coming months if nothing is done to resolve this crisis,” American Public Transportation Association (APTA) Chairman and Metropolitan Atlanta Rapid Transit Authority General Manager Beverly Scott told congressional leaders last month.

On the bright side...

But for all the budget woes and other impacts the poor economy is having on the transit industry, the near-term outlook isn’t all doom and gloom, execs say. If agencies can weather the current storm, officials are confident there’ll be happier times ahead.

In November, voters approved 23 or 32 public transit-related ballot initiatives in 16 states, which will infuse tens of billions of dollars into the transit industry (see page 6). For example, voters in Los Angeles County signed off on Measure R, a half-cent sales tax that will provide $40 billion during the next 30 years for transit and road projects, which has LACMTA’s Snoble feeling a little bit better about the year ahead.

“We won’t see the money for over a year yet, and we have to deal with the catastrophe at hand, but Measure R has been a big psychological shot in the arm,” he says.

At DART, officials are looking forward to continuing their large-scale expansion plans — which call for doubling the current 45-mile light-rail system by 2013 — in spite of the potential revenue shortfalls.

“There are two things we’re protective of — service and our expansion — and we’ll do anything we can to make sure we don’t touch those areas,” says DART’s Thomas.

In addition, transit execs throughout the country are feeling pretty good about the steady stream of new riders they’ve been attracting for more than a year. Although ridership traditionally declines when gas prices dip, there aren’t any signs that the current ridership renaissance is over just yet.

“Even though the economy is going down, all of us are experiencing tremendous surges in ridership; in three years, [SFRTA’s] ridership is up over 100 percent,” says Giulietti. “That makes me optimistic that we’ll have more groundswell support.”

Turning ridership gains into funding gains

The ridership gains could work in transit agencies’ favor when it comes time for states to determine which programs to fund and which ones to slash during budget season. And it’ll certainly be a sticking point with Congress when it comes time to discuss a new surface transportation authorization bill, transit officials believe.

APTA is calling on Congress to include $123 billion for transit in the new transportation bill, or two-and-a-half times higher than what was included in the Safe, Accountable, Flexible and Efficient Transportation Equity Act: A Legacy for Users, which is set to expire in 2009, says Thomas.

Those who run in public transit circles believe it’s not a far-fetched hope. In 2008, vehicle miles traveled declined for the first time ever, while transit ridership grew to its highest level in 50 years.

“Depending on your perspective, I think this [reauthorization] is coming at a good time,” says Thomas. “We recognize there needs to be some changes, and we’re aware of our dependency on foreign oil, air quality and the movement of goods and people.”

The bigger question is not necessarily how much money will be provided for transit-rail projects, but where the money will come from.

“There is a desire to develop a nice plan and make some big changes, but it will be very difficult for the federal government to put more money into it,” says LACMTA’s Snoble.

At the very least, transit officials expect that the Obama Administration, incoming Congress and yet-to-be-named transportation secretary will have a more favorable view of public transit than the outgoing Administration, which could translate to more support — and funding — for transit-rail projects. The leadership changes also could go a long way toward helping to restore confidence in the economy.

“I’m optimistic things will calm down when the new Administration is in place,” says Thomas. “People just want a little stability right now.”

Although next year likely will have its fair share of weirdness, uncertainty and irony, stability could come in the form of more ridership success stories, better-than-expected sales tax revenue and new dedicated funding for some agencies. In the meantime, transit execs will try to keep an even keel as they steer their agencies along the bumpy road ahead.

“The economy will bounce back; we just have to be prepared for that,” says Snoble. “If we play our cards right, keep clear heads, stay focused and get through the next couple of years here, we’ll be in good shape.”