Less Money, More Problems

Why the MTA's finances are such a mess

By: Devjyot Ghoshal, Karim Lahlou, Rishi Iyengar, Irene Nwoye

The most profitable part of New York’s Metropolitan Transport Authority (MTA) doesn’t move.

The MTA’s seven bridges -- including the Triborough Bridge -- and two tunnels transport about 300 million vehicles each year. In turn, they generate over $1.6 billion in annual revenues, with a staff of only 1,545.

“It is definitely the most profitable component of the MTA,” said Rahul Jain, a research associate at the Citizens Budget Commission, a nonpartisan, nonprofit organization that monitors the finances and services of New York City and New York State government.

“Bridges and tunnels make money,” he explained in an interview last month, “There is more money being collected in tolls than there is to operate and maintain the bridge and tunnel system that the MTA has.”

But these nine buildings and tunnels are an anomaly in the MTA, one of the world’s largest transportation agencies with a daily ridership of over 5.5 million and annually transporting over a billion people.

Instead, the MTA is strapped for cash, with a substantial deficit between its total expenses and revenues, a burgeoning debt burden, a dysfunction -- though important -- bus system and an unwieldy fare structure.

Effectively, the very transportation system that moves millions across New York City and the surrounding suburbs everyday is hobbled. And if an analysis of its financial and ridership data is any indication, it’s unlikely to get better anytime soon.

MTA Budget:Breaking Down The Finances

Manpower Cost
Operational Expenses
Source: MTA

The big numbers are revealing. Between 2003 and 2013, the period for which financial data is publicly available, the MTA’s operating revenues increased by 69 percent. But during the same period, the authority’s operating expenses grew by 96 percent.

“That should tell you immediately that one is not keeping up with the other,” explained Jain, “In public finance, we call this a structural deficit.” Operating revenues and expenses represent the money an organization gains or loses as a result of performing its normal business operations. Part of the problem has to do with how the MTA is funded. “The way they’re funded is both complicated and simple,” said Gene Russianoff, a senior attorney at New York Public Interest Research Group’s Straphangers Campaign. “Virtually every sector that benefits from transit pays.”

One big chunk of revenues, about $5.5 billion in 2013, comes from fares, which has steadily increased since in the last decade on the back of growing ridership and two fare hikes. But it’s been nothing drastic.

Instead, the drama has come from the other major component for the MTA’s revenues: taxes, grants and subsidies that are routed through the city and state governments. In 2013, for instance, “grants, appropriation and taxes” brought in about $5.3 billion in revenues.

Large components of these revenues are linked to taxes levied on real-estate transactions in New York. The Mortgage Recording Tax is among the prime sources, collected in New York City and the seven other counties within the MTA’s service area. 30 cents per 100 dollars of recorded mortgages, and 0.25 of one percent of certain other mortgages, are paid into this.

“In 2005, before the great recession, it raised $1.3 billion. And in 2009, in the depths of the great depression, it raised $350 million. It’s hard running an agency, especially one so big, with such volatile revenue sources,” explained Russianoff. “The others don’t come close to the Mortgage Recording Tax but they have their volatility as well.”

Apart from real-estate taxes, the MTA also receives Urban Taxes, based on commercial activity within New York City, which has increased since the financial crisis ebbed in 2010. But perhaps the steadiest -- and most profitable source -- of revenues have been its bridges and tunnels, bringing in about $1.6 billion in 2013.

The bridges and tunnels are a successful venture because they lack the sort of manpower that MTA’s other agencies require. The organization’s vast transportation network absorbs much of the MTA’s 65,000-odd employees -- and costing the MTA more than half of its total expenses, through salaries, pensions and other benefits.

“They do, kind of miracles, like avoiding Sandy from completely destroying the subway system,” said Russianoff of MTA’s manpower, calling it a “miracle of daily service” for the way the transportation network is operated.

But the same manpower is also turned into a sort of liability, partly due to the MTA’s own doing.

“All the benefits have begun costing a lot and the MTA, for a long time, had a deal where they would basically give retirement benefits after 10 years,” explained Jain. “So people would go find other jobs, or they would retire and go find another job. And when the time comes, they’d be collecting retirement benefits.”

Other components -- such as electricity, fuel, maintenance and materials -- cost significantly little compared to manpower. But the proverbial elephant in the MTA’s room is a massive, and growing debt, component, that has become the one of the largest expenses for the transport authority.

“The MTA has done itself a disservice but it’s put a lot of weight on debt-service,” said Jain. “Basically, what you’re doing is kicking the expenses down the road just to make people happier today. And that bill is going to come due eventually.”

Rising debt: The only way out

Breaking even is not an objective, nor should it be,” said Steven Polan, an attorney who has worked as General Counsel for the MTA and who serves as co-chair of the Transportation committee of the Citizens Budget Commission, a non-partisan advisory organization for the city and state government of New York. As a public-benefit corporation, the MTA operates on a loss to provide an economic value that is critical to the infrastructure of New York City. By charging passengers less than the actual cost of the service, the MTA is subsidizing countless industries that rely on workers who are not able to live closer to their jobs. This is by no means unique to New York City, as most public mass-transit systems around the world make no profit.

However, the difference between the MTA and other mass-transit systems lies in the funding mechanisms that allow it to operate. “The London system is heavily subsidized by the national government. The Paris system is heavily subsidized by the national government. Not true here,” said Polan.

Over the past 15 years, the MTA has sought to relieve the pressure of debt service by refinancing its debt by negotiating lower interest rates than what previous debts carried. In practice this has provided momentary relief as short-term payments became smaller. Nevertheless, rising labor costs and capital programs, such as the 2nd Avenue subway and the East Side Access required new debt, which began taking up a larger portion of the annual budget and necessitated cutbacks in service, repairs, and restoration.

The MTA’s current debt of $33.4 billion rivals that of the national debt of Egypt. While payments have remained steady over the years, they have stagnated with respect to mounting debt. With a new capital program poised to begin next year, it is likely that bonds will be issued for more debt.

Debt Dilemma
Changing Rates
Source: MTA

For every debt the MTA takes, it assesses that loan’s ‘True Interest Cost’, which, in addition to the interest rate set on the loan, takes into account the fees and service charges associated with the loan. Despite spikes during the dot-com bubble of 2000 and the financial crisis of 2008, the MTA has enjoyed a downward trend in the interest rate it pays on its loans, and it is expected to continue doing so. However, lower interest rates mean little when considering the staggering amounts the MTA is forced to borrow in order to remain operational.

While the MTA does receive certain federal subsidies for capital programs, which are broken into five-year chunks (the current one is ending this year), they are often too small to be significant. In securing resources to fund these capital programs, the MTA is forced to put pressure on the fare box, using portions of the income stream to secure debt. Though Polan agrees that rising fares may be unfair to some passengers, the alternative would be far worse.“If you have a choice between raising debt or letting the system be run into the ground as it was in the 1970s, I think it’s the right decision,” said Polan.

Citing dysfunction in Washington and imbalances between federal subsidies for highways and mass-transit systems, Polan doubts that any significant change will occur, making fare increases and service reduction, especially for its bus network, an inevitable reality as both a short and long-term solution to a persistent problem.

The Bus Conundrum

In 2013, the Metropolitan Transit Authority (MTA) transported a total of 1.78 billion people, the highest annual ridership in 65 years.

But New York City’s bus system tells a different story. Bus ridership is on the decline, and the gap between how much it costs to run the largest bus network in North America and the revenue its riders generate for the MTA continues to widen.

As the charts below indicate, the subway system is highly efficient both in terms of ridership and cost-effectiveness. It is the biggest contributor in all three categories, but its percentage contribution to fare revenues is actually consistently greater than its operating expenses. The commuter rail lines — Connecticut’s Metro North and the Long Island Rail Road — contribute just over 3% to ridership. Although they are certainly expensive to run, they actually justify that cost by making up a greater share of the MTA’s farebox revenues than they do of operating expenses. The buses, on the other hand, do not.

Of the various agencies operated by the MTA, buses put the greatest strain on the organization's finances. They contribute around 30% of ridership and a little over 34% of operating expenses. However, their contribution to fare revenues has never exceeded 24%, and has been consistently decreasing over the past four years. As a matter of fact, so has ridership.

The sudden increase, in 2006, of all three metrics listed below is due to the establishment of the MTA Bus Company. Separate from the New York City Transit bus agency, it was created in 2004 when the MTA took over several lines in Brooklyn and The Bronx that had hitherto been run by private companies. However, while the initial spikes in ridership and fare revenues resulting from this move have gradually tapered off, the operating expenses have remained almost the same.

What NYC's Buses Contribute To The MTA
Source: MTA, National Transit Database


“2.5 million people ride the buses on an average weekday, compared to 4.5 in the subway, so it’s really substantial,” said Russianoff. “And it’s bad.”

Russianoff explained that by definition, buses are not very conducive to generating fare revenue. “In simple terms, a train could have two employees — a conductor and a train operator — and move 2,000 people. A bus is crammed and packed, you get 60 people on it and one driver,” he said.

A key metric that reveals exactly how beneficial each agency is to the MTA financially, is something called farebox recovery ratio.

The farebox recovery ratio is the fraction of operating expenses met by the fares paid by passengers.

Computing the farebox recovery ratio for the MTA's agencies reveals that not only do buses have the lowest rate of recovery among the four agencies, but their rate of recovery has been consistently declining over the past 10 years.

Source: National Transit Database


Russianoff said the figures for recovery rate are much lower for many bus lines, and people often use that as a justification for putting them out of service. But that is often easier said than done. “The MTA’s not going to be able to say ‘We’re going to be more efficient’ and close 60 routes,” said Russianoff, citing the example of a neighborhood in Staten Island called Grymes Hill. A single shuttle bus was the only way to get off the hill for someone who didn’t have a car, and the MTA’s move to close the shuttle and merge it into the S66 line caused uproar. “They tried that in 2010 and they got such pushback from all over the city,” Russianoff said.

But the Straphangers’ legal advocate does have a solution, something he said New York has been relatively late in implementing — Bus Rapid Transit (BRT). Cities around the world have used the BRT system to great effect, and with benefits such as dedicated bus lanes, more frequent stops and the option of off-board fare payment, something that Russianoff feels New York could hugely benefit from.

“These traditionally serve neighborhoods that are transit deserts, that get awful service and have the longest commutes in America,” he said. “I think the future is in BRTs.”

And the city has begun moving towards a more efficient bus system with the introduction in 2008 of the Select Bus Service. The MTA currently operates seven Select Bus lines across the city, and Russianoff said de Blasio plans to expand that to 20 by the end of “what he hopes will be his second term.”

But it remains to be seen whether Select Bus Service will solve the MTA bus system’s ridership problems, and more importantly, whether it will bridge the gap in fare revenues.

The Unwieldy Farebox Revenue

Steeped in decades of debt, the MTA has tried to cope by relying on straphangers. Since the 1960s when it was created under Governor Nelson Rockefeller, the transit system has tried to sustain itself through fare revenues, dedicated taxes (e.g. real estate), revenue bonds, and state and local subsidies. Fare revenues have made a significant portion of the MTA’s total revenue, about 40 percent currently. In March 2013, fares were raised for the fourth time in five years; the base fare went up by 11 percent from $2.25 to $2.5.

Over one billion people swipe through 3,289 turnstiles in 468 subway stations every year. And they have paid a greater burden for the MTA’s maintenance through constant fare hikes over time. Fares have risen 14 times since 1953 and the percentage increase has varied over time.

Source: MTA

MTA officials have justified the hikes, claiming that the increases are done based on annual inflation. According to Gene Russianoff, staff attorney for the Straphangers Campaign, “Constant fare hikes will overburden riders, discourage use of mass transit, and cannot be sustained over time.”

Russianoff also points out that when it comes to who determines the fare prices, there is a lot of politics involved. Rahul Jain, a researcher with the Citizens Budget Commission, also believes a major factor behind the fare prices is the labor costs. “The MTA has to spend on pension, healthcare and salaries for its staff…In so me other countries a lot of these services are automated.”

For a transit system that runs 24 hours a day—an oddity, anywhere in the world—and moves 1.6 billion people across the five boroughs of New York City, it remains to be seen, what alternative sources of funding the MTA is considering to emancipate itself from its staggering debt.

Source: MTA

In 2012, it made over $95 million from the revenue source and while this seems like a fragment compared to the billions the MTA makes in farebox revenue, it still means a lot to a company drowning in years of accumulated debt.

But the future looks bleak for this income source. In March last year, the MTA imposed a $1 fee for each MetroCard purchased instead of the older option that prevented riders from reusing their cards. Now, cards can be used until they expire (which is from 30 days prior to the expiration date until a year after the date.)

This move has a ripple effect for the MTA: fewer people are buying MetroCards now, they [the MTA] will have to make budget adjustments to the number of cards printed, but on the plus side, the MTA is offsetting the money lost from fare media liability through the $1 surcharge. Between August 2013 and March 2013 (when the fee was instituted), the MTA made slightly over $10 million from the fee and it is expected to make $28 million this year.

The transit agency also hopes to continue to make money from its usual unredeemed sources, however small. According to a report from the Independent Budget Commission, the MTA’s tactics for providing discounts allows it to continue to do so. The MTA “provides a 5 percent bonus when riders put $5 or more on pay-per-ride MetroCards, but that $5 only gets you 25 cents more on the card,” the report said. An amount is actually short of the $2.50 required for a ride. “You need to put at least $50 on the card before the bonus will net a bus or subway ride.”

Russianoff said the MTA’s strategy “is not unlike the olden days when people would lose their tokens in their sock drawer.”

“25 percent of people who buy 30-day cards don’t use them enough to make them worthwhile,” he said. “They like the convenience of it maybe or they are bad at math…but the MTA is getting all this unused value from it.”

Riders may feel shortchanged about the MTA’s revenue schemes, but, as with everything else, politics plays a huge role in how the MTA runs. Fares depend on "who's mayor, who's governor and what the climate is economically," Russianoff said.

Rahul Jain with the CBC adds that the MTA only has control over two things: fare and toll hikes, and advertising. “Those are the ways that they can get money. If they want to get a new tax, they have to go to the state legislature and get it approved.”

The MTA had sought other forms of revenue such as congestion pricing (i.e. charging more during peak hours) in 2007. The city council approved it but it was turned down when it went to the state. “There are a lot of state senators in Westchester or Long Island who are more passionate about making sure their folks don't pay to take the bridge to Manhattan,” Jain said.

The transit agency may want to make innovative adjustments to how it funds itself like the zoning system in the United Kingdom, but as Russianoff said the state legislature is more likely “to send a man to Mars” than approve such a thing.

With the MTA’s longstanding debt, it is clear that depending on fares has not and will not alleviate the burden. Perhaps it is time for a more serious government intervention.