The 2008 to 2013 MTA Capital Plan: Is There A Way Out?

People who have worked the system to get, shall we say, very good deals for themselves have left us with a potentially diminished future. They have done so by taking away future revenues, and shifting past costs forward, all in order to live in way they feel entitled to with the diminished effort they felt like making. And not just through the MTA. In a way, the region’s transportation system never recovered from the deferred maintenance of the 1950s, 1960s, and 1970s. At first, through the work and sacrifices of many people, the transit system, police and other services partially recovered from the years of high taxes with essentially nothing in return. But then subsequent generations merely substituted a greater financial hole, through debts and public employee pension enrichments unmatched by adequate contributions, for a reduced level of physical deterioration. Meanwhile, a third bond issue has been passed for the Second Avenue Subway, and yet the proposed capital plan does not even have the money to finish three stations. If the state legislature wanted to do the right thing, is there still a way out? I think there is, although the MTA and legislature are unlikely to approve it.

The MTA’s situation is the product, in part, of the “everybody wins” pandering of the past 16 years, the willingness to hand out short-term benefits regardless of long-term costs that seems to have outlasted Day One. Everyone with political influence seems to have realized that if they didn’t seize additional benefits and privileges for themselves at the expense of the future, someone else would, so they all did as fast as the could. State and local funding for the MTA (and other transportation systems) was cut off so taxes could be decreased, and spending on more political powerful interests increased. Pensions were enhanced, and employee pension contributions cut. Contractors have charged the MTA more and more money. Fare discounts mean transit riders pay far less than they used to, despite a decade of inflation. And drivers, at least those represented by the New York State legislature, believe they have the right to occupy a large share of scarce space in Manhattan without paying anything. At least if they have parking placard.

The way out means that everyone who was grabbing in the past will have to put something back in the future, with interest. But some owe more than others.

Two things are clear. First, no matter what the MTA never again should be permitted to engage in deferred maintenance, and then serve its political masters by lying to the public and saying everything is OK. That’s what the MTA Capital Plan press release and presentation seem to do -- gloss over the reality presented in the detailed plan itself while talking about more promises for 40 years from now, with the promises of 40 years ago unfulfilled. The capital plan must include all the station rehabs, subway car purchases, track and switch replacements, signal system replacements, and other replacements needed to keep up with the needed pace of normal replacement, as described by the MTA itself. In some case, the pace of replacement may be re-evaluated -- MTA engineers often want to replace equipment faster than it wears out in order to bring more up to date equipment on line. But whatever the required pace is to avoid falling behind, and shifting costs to the future, it must be met.

That means, among other things, that the CBTC systems and additional subway cars the plan describes as Tier III improvements need to be described as what they are -- the equivalent of ongoing normal replacement, and part of Tier I. The MTA describes these as system improvements/capacity expansions because CBTC technology would allow more trains to run at peak hour, assuming there are no other constraints such as terminal capacity. Whether CBTC is installed or not, however, the signal systems on the Flushing Queens Boulevard Lines are overdue for replacement and cannot be simply left as they are. Moreover, the additional subway cars in Tier III would not even bring the MTA up to a 50-year replacement rate over the next five years, let alone the 40-year rate the MTA asserts.

Second, the MTA must never be allowed to borrow for ongoing normal replacement again. That means $22 billion must be funded in cash over the next six years just to pay for the normal replacement items the MTA has already identified, and perhaps several billion more to bring the rate of station rehabs, track rehabs, switch replacements etc. up to the needed rate to prevent system collapse. With the federal government presumed to put up $8 billion, perhaps $18 billion will have to be raised for the capital program in cash over the six years, or $3 billion per year. The money would have to come from an ongoing source of funds, so it would be available for the 2014 to 2018 capital plan as well. Where could it come from?

The truth is the MTA already collects enough money -- in dedicated MTA taxes and excess toll payments -- to pay for ongoing normal replacement. The problems are that some of the money the MTA collects is going to the burdens imposed by selfish past generations, not to transportation, and that contractors are charging too much money.

Consider the MTA operating budget in the February 2008 to 2011 plan. In 2007, the MTA paid $1.7 billion in debt service on past debts run up by the agency. Today’s New Yorkers get nothing, nothing at all, in exchange for that money. Over six years, that debt service would total $10.2 billion -- or more, if the MTA keeps borrowing money.

And consider what the MTA is paying for retiree health care and other non-pension benefits. In the past, MTA employees earned the right to receive these benefits by providing services to past MTA customers. But neither those past customers, nor past taxpayers, paid for those benefits at the time the services were received. Instead they shifted to the future a cost which the February financial plan estimates at $13.4 billion, or 1 ½ years of the entire MTA budget. The MTA spent $319 billion on these benefits in fiscal 2007, an amount what is increasing rapidly. That could be another $2.3 billion paid by the MTA with no current transportation benefits in the next six years, for a total of $12.5 billion.

It is my position that the MTA farepayers, toll payers, and dedicated taxpayers should not have to pay the debt service and retirement benefits shifted to the present from the past. All the transportation money paid today should be used for transportation today. The only “other post retirement benefits” that need to be paid for today is those today’s workers earn today. Yesterday’s burdens should be paid for by someone else.

And who is that someone else? Those who have stuck us with the bill.

As I wrote here, no matter how high one’s retirement income is -- $50,000, $100,000, or $1,000,000 -- it is totally free from New York’s state and local income taxes. The seniors who have left us with those debts pay nothing even if they are far better off than struggling working families, many of whom lack health insurance, pension or retirement plans, and the other benefits past generations had for themselves but denied to others. Now if Upstate New York wants to be a senior haven, then fine. But I propose that within the Metropolitan Transportation District, pension, Social Security and 401K income be taxed just like any other income. Or, perhaps $10,400 of such income could be excluded, but the rest taxed, just as it is under the federal income tax.

If a senior citizen doesn’t have a lot of income, they would pay little or no state and local income tax -- not because they did not work, because their income was low, and the New York State and local income taxes are progressive. But if a senior citizen had one of those six- or seven-figure executive pensions, or lots of other investment income, they would have to pay taxes just like those who are slaves to their jobs most days of our lives. If they lived here in the past, today’s retirees owe it to us because of what was done in the past, or rather what the New York State Legislature has done to us on their behalf in the past. If they just moved to Manhattan, as many affluent empty nesters are doing these days, then we wouldn’t be asking anything of them that we would also be asking of everyone who works to provide them with goods and services here.

And what if they want to leave? Then we should impose a substantial exit tax until the burdens of the past are paid off. There should be a much more massive real estate transfer tax on homes that are sold, but one that is refunded if another home is purchased within the state, so only those who leave actually pay it. Stay and pay your debts. Or leave and pay your debts. But don’t expect that transportation system to be destroyed because of your debts.

There are those in the state legislature who are proposing a surcharge on the income of workers, if those workers earn more than a certain amount, ever as those in their generation, particularly the former public employees with the richest pensions, pay nothing. To them I say do not worry -- federal, state, and local income taxes will be going up, not to pay for more services and public benefits, but to provide the same or less, because of what they have done. Raise the overall income tax “for transportation” and little or none of the money will go “for transportation,” guaranteed. Those working today and not in the charmed circle of self-dealers will be paying far more, working for far longer, and settling for far less. The question is whether those who put them in that situation will pay anything.

With the burdens of the past removed from the MTA’s books, and the expected federal contribution, we are up to $20.5 billion.

In addition to these burdens, the capital budget is saddled with a share of the operating budget. Because “operating” expenses have been paid for the in the year they were incurred, while “capital” expenses are borrowed for, operating costs are watched very carefully, while capital costs are allowed to spin out of control. There is also a tendency to shift operating costs to the capital plan wherever possible.

In 2007, nearly $1 billion in labor costs for MTA employees -- not contractors -- was charged to the capital plan, and borrowed for, while $6.1 billion was charged to the operating budget. And I can tell you that a lot of those charges have little to do with capital projects. Others could go either way. Are the flagmen, station personnel giving directions, extra buses providing alternative transportation, flyers and information, and other work required to provide service during a capital project a cost of the capital project. Or the cost of continuing to provide service?

If all the costs of MTA personnel who do not work exclusively on capital projects were charged to the operating budget, that could be another $4 billion for the capital plan, although that much more money would have to be come up with for the operating budget. Riders, who have seen their fares fall substantially since 1995, would have to pay their share. And MTA employees would have to stop objecting to productivity improvements to reduce costs. According to the MTA budget, the share of total agency costs covered by fares is planned to fall from 38.5% in 2007 to 35.8% in 2011. If the transit system is to be preserved, costs will have to be reduced, and fares increased, to at least maintain the farepayer’s share, if not increase it.

The big cost decreases, however, should come from contractors. Given the extent to which the MTA is overpaying, as I showed last week, the public should demand that it collect the money and sit on it until contractors are willing to do all the work the MTA proposed, AND the additional work required not to defer maintenance, AND the entire upper half of the Second Avenue Subway, AND the link from MetroNorth to Penn, all for $30 billion the MTA has asked for, or much less.

Rather than put out a proposal and see what the price is on the bids, the MTA should set a price up front, and keep re-bidding until someone meets it. And that price should be much, much lower than in the past. If, as a result, that means that most of the work funded from 2008 to 2013 actually occurs from 2010 to 2015, fine. The public sector would get better prices if it did its capital spending in construction busts rather than construction booms, and a bust is already under way across the country and is guaranteed to reach here by the end of next year.

The federal money, making the retirees pay equal taxes to fund the burdens of the past, and making the farepayers cover and employees reduce operating expenses, adds to $24.5 billion for this capital plan, with additional money similarly freed up for the next capital plan and the one after that. Congestion pricing, if unencumbered by borrowing, could add $500 million per year, or another $3 billion over six years, bringing the total to $27.5 billion. And demanding more from contractors, and doing the work during down years for construction rather than up years, should stretch that $27.5 billion to the amount required to avoid deferred maintenance and finish the long-promised improvements. Use the transportation funds for transportation rather than the burdens of the past, make drivers pay to occupy scarce CBD road space, make farepayers cover as much of the system’s cost as they once did, tell employees that they have to work more efficiently, and get better value from contractors, and the crisis is over.

If the giveways and favors that got us into this mess could be described as the “everybody wins” plan, then perhaps this could be described as the “everybody loses” plan. But if the future continues to be drained and the transit system and other social institutions collapse, everybody will lose anyway, except those who die off and move out and don’t care about those left behind.

As it happens, that is exactly the sort of person who matters most in the New York State Legislature. So the legislature is unlikely to ask anyone to pay for what they have done on behalf of the people who mattered in the past. So then what? It is my observation that younger generations are no less likely than older generations to be primarily concerned with their own situation. So will they be willing to pay ever more taxes in return for schools, subways, roads and bridges that are falling apart, again? I said that the MTA should not be saddled with the burdens of the past. If those burdens cost us quality transit service from the MTA, then perhaps no one should pay them.

Two kinds of people have been getting richer for the past 30 years, senior citizens, especially retired public employees, and top executives. Everyone else has been getting poorer. Just allowing the government to go bust, once there is nothing for the rest of us to lose, would turn the tables -- public employees would lose some or all of their pension and retiree health care benefits, and the wealthy, who tend to hold state and local bonds because they are tax free, would lose some of their wealth. How can past generations expect to leave us with nothing left to lose, and yet expect us to keep sacrificing and paying for their benefit? It won’t happen. We are going to walk away from those obligations, and given what has been done, not think twice about it. “Realism” can cut both ways.

After my run for state legislature, I wrote the following: Given that most children in New York City did not receive a publicly-financed "sound basic education" over the past 30 years, and that most of those now under 50 will receive radically less extensive public benefits in old age despite paying more for them, if those now in power insist on piling up debts on us besides, they ought to consider the possibility that at some point my generation, and those following, will simply refuse to pay the money back. That's right, not pay it back, and if things get bad enough, perhaps not pay public pension obligations and throw in an occasional general strike besides. You never know where the political appeal of something for nothing, indifference to civil society, and opportunism in a value-free environment, will lead. I advise against holding long term debt issued by governments with diminishing claims on our loyalty, led by cynical politicians who lack the moral authority to ask for any sacrifices for any purpose from anyone who matters, even in a time of war.

After reading through the MTA Capital Plan, and after Governor Spitzer signed a bill allowing NYC teachers to retire at age 55 with full benefits at the expense of younger teachers and the city’s children, the “if” is gone. So perhaps all those people I used to think less of, those grabbing ever more, refusing to pay anything, and not worrying about a future that is doomed anyway, were right all along. Governor, you've convinced me it's hopeless, but perhaps there is a way out, and a way of life, after institutional collapse after all. More on that later.