The Good News and Bad News About the MTA Capital Plan

About a month ago, the MTA released a list of $54 billion worth of major projects to be done over the next five years—a twice-a-decade rigmarole known as the Capital Plan—and an outline of how to pay for it.

Only a few weeks later, NYCT President Andy Byford handed in his resignation letter to his bosses, in part because he, as Dana Rubinstein of POLITICO put it, is “disinclined to preside over possible service cuts or layoffs.”

OK, don’t panic, people. Byford rescinded his resignation and issued a statement saying he’s “not going anywhere.” (I believe the 😬 emoji was designed precisely for this moment.) But the fact that Byford was ready to resign because service cuts and layoffs are likely provides a stark contrast to just a few weeks ago when the MTA had a plan to fund $54 billion of system upgrades in five years.

How, it is fair to wonder, can the MTA both have a $54 billion repair plan and need to slash service and lay off workers just to make ends meet?

The answer is: debt.

As is so often the case with the MTA, to understand what’s going on here, we have to go back in time. This capital plan tradition originates from the subway crisis of the 1980s, a crisis that was the result of decades of underinvestment and deferred maintenance that literally resulted in dozens of trains falling off the tracks. The idea of coming up with a plan every five years for how to consistently and strategically invest in the MTA to keep the system in working order, otherwise known as a “State of Good Repair,” came as a result of that failure.

However, this capital plan, mammoth as it is, is not one about deferred maintenance. It is about modernization. About $37 billion of the total cost is earmarked for the subway alone. Among those expenses: $7.1 billion for CBTC upgrades and $5.2 billion for station accessibility, including elevators at 66 more stations. To give a sense of scale, the first capital plan, funded in 1981, cost $7.2 billion, or about $20 billion in 2019 dollars, and was considered an historic investment and re-dedication to the city’s mass transit system.

To be sure, there is a lot to celebrate about this plan. At least in this preliminary form, it checks off every box that requires major investment that was included in the Fast Forward Plan Byford released way back in May 2018, which at the time received widespread acclaim from reporters including myself and the transit advocacy community.

Likewise, the Capital Plan was similarly lauded (the MTA sent out no fewer than three press releases stuffed with quotes from politicians and business leaders praising the plan) for, in the MTA’s words, vowing “unprecedented investments” 70 percent larger than its predecessor, which cost $32 billion for all of the MTA combined.

This is all good news until we remember that one word: debt. Because at the root of this plan is a fundamental fallacy. The MTA is trying to spend its way out of a spending crisis.

The MTA, you may remember, is in a fiscal crisis. Now, bear with me as I talk about budgets, the single most exciting thing in the world. The MTA has two budgets: the annual operating budget that has to be balanced every year by law, or the board goes to jail or something, and the capital plan. When the capital plan racks up debt, the MTA pays it off with the operating budget, money that would otherwise go towards running trains and buses or paying for workers and their benefits.

In other words, the debt accrued by the capital plan doesn’t just magically disappear. It shows up in the annual operating budget as an expense, right alongside payroll and health care and pensions. Here, I even annotated the MTA’s 2019 budget to show you:

As you can see, the MTA has a lot of debt. Currently, about 16 percent of its annual operating budget goes straight towards paying off its debt. Do not pass Go, do not fund a single train, go straight to Debt Service.

That number will only keep rising in the years to come. In August, after the MTA approved the 2020 budget, the Citizens Budget Commission warned the transportation agency’s budget woes are dire. The MTA’s plan (like, their actual plan) going forward is to amass a cumulative deficit of $740 million by 2023, even though by law they must balance their budget every year.

That’s not even the worst of it. The CBC warned this forecast, dire as it is, is based on “four assumptions that point to an even more alarming fiscal outlook.” Mainly, the MTA is assuming it can execute its transformation plan flawlessly and realize its “highly optimistic estimates” (in the CBC’s words) for savings. The MTA also assumes it will be able to save $251 million by running its organization more efficiently (or cutting service) in 2023—not by 2023; in 2023—but doesn’t say how. Nor is it clear, the CBC warns, how these two plans—the operations savings plan that originated within the MTA years ago and the state-mandated transformation plan hyped by Cuomo’s people—interact, or if they double-count savings, because each is too vague to sufficiently interrogate.

But most worryingly, the plans continue to assume “unprecedented continued economic growth” (again, CBC’s words), a state of affairs that many experts not only caution may come to an end but may do so in disastrous fashion.

It’s obviously difficult to predict economic winds, but there are serious warnings the good times are coming to an end. For example, I now spend my days paying close attention to the auto industry and, as I have come to learn, car companies have some of the finest economic forecasting departments in the world because they plan product cycles four to six years in advance. They simply must have some idea of which way the economic winds are blowing so they can plan their global supply chains and product offerings accordingly (like the MTA, these highly bureaucratic organizations sometimes do not listen to the smartest people on the ground and make bad decisions as a result). To that end, both Ford and GM are hunkering down for a recession in the next 12 to 24 months. They’re not alone. About three out of every four economists forecast a recession by 2021.

Now, economists are more or less always forecasting a recession on the horizon, but the slowed growth of major index funds like the S&P 500 seem to at least confirm that the angst is hardly limited to car companies and the 200 or so economists surveyed by a trade group.

At the very least, the modest prediction that this unprecedented period of growth may, in fact, turn to the other end of the business cycle soon hardly seems outlandish. Many companies and investors are taking steps to shore up their cash reserves for this very scenario.

But not the MTA. In his annual report, State Comptroller Thomas DiNapoli warned the transportation agency of the recession risk. Why is a recession especially bad for the MTA? Because 86 percent of its annual budget comes from dedicated taxes, toll revenue, and fares. All of those revenue streams are highly vulnerable to economic downtowns. So, DiNapoli urged the MTA to build up its reserves to avoid severe service cuts. Such cuts, by the way, are already on the table for the agency to slash operating costs as it services its increasing debt load even in good economic times.

The problem is, the MTA responded to this warning by…adding more debt. Prior to the new Capital Plan’s release, the MTA was anticipating a debt load in 2022 of $3.5 billion, or about 19 percent of the operating budget. That’s three percent higher than the current budget. The Capital Plan will add an estimated $9.7 billion of additional debt load even after estimating revenues from congestion pricing revenues, federal grants, and additional taxes levied to fill the MTA’s coffers, all potential windfalls subject to change.

The very, very thin window of opportunity here is that the MTA need not acquire so much debt during the next capital plan, because the capital plan itself is so bloated with extremely high cost projections way out of line with industry standards—one of the key problems that resulted in the debt to begin with—that there are plenty of theoretical opportunities for savings. The MTA is budgeting something like $78 million per accessible station, which as the Times and Slate pointed out is a ridiculous sum way out of line with other cities. And Ben Kabak of Second Ave Sagas detailed how the Second Avenue Subway Phase II costs are still projected to be in the $6 billion range—although the number fluctuates even within the MTA’s own plan—meaning Phase II is projected to overtake Phase I as the most expensive subway per mile of track on Earth.

Whenever this issue of exorbitant costs comes up, MTA officials say something to the effect of “We know, we’re working on it.” At a TransitCenter panel about the Capital Plan, the guy responsible for all MTA capital projects, Janno Lieber, was a good sport fielding tough questions from moderator Colin Wright about this very topic. I do believe Lieber when he says they’re making progress on delivering projects on time and at cost—he often cites LIRR’s Third Rail project as a pioneering and replicable example—but “at cost” is not good enough for this Capital Plan.

If, as I suspect, the MTA’s long-term fiscal health relies on this plan coming in roughly 15 to 17 percent under budget, then I don’t see any evidence they can deliver on that (nor does it make any sense for the MTA to budget absurd costs for projects only to promise to trim those costs later). There is nothing in the agency’s history that suggests they can deliver that. There is nothing in any public transit agency’s history anywhere in the world that suggests this is a reasonable expectation, because megaprojects invariably cost more than expected, not less.

The only conclusion, then, is that this is a plan to mire the MTA further into debt it can’t afford right as some of the world’s leading economic forecasters are projecting an oncoming recession. Rather than batten down the hatches, the MTA just bought a bigger yacht and is sailing out to sea.

To be clear, some amount of debt is healthy for the MTA, since it has a reliable source of revenue to pay off bonds and can typically borrow at favorable interest rates. Yes, congestion pricing gives the MTA more revenue off which to borrow. But there’s a balance to be struck, and the MTA has been on the wrong side of that balance for years now. Rather than using congestion pricing to get on the right side, the MTA is borrowing more.

Why has the MTA borrowed so much to begin with? Because when Governor Cuomo promised the MTA $8.3 billion towards the current capital plan in 2016, he did so under one condition. The MTA could only have $7.3 billion of that after it became “fiscally exhausted,” or, in the words of Reinvent Albany, “after the MTA borrows until it can borrow no more.”

Anyone who’s faced having to pay off student loans or credit card debt knows that borrowing money to cover short-term costs just means greater pain when the bills come due. With each successive capital plan, the MTA continues to kick the can down the road in a way that will inevitably result in higher fares and service cuts, perhaps dire ones. And in 2016, Governor Cuomo gave that can a big ol’ wallop.

At the root of this issue is a fundamental difference between the 20th Century subway crisis and the 21st Century one. In the 1980s, the MTA really did need a huge fiscal injection to pay for badly needed repairs of track, cars, and other infrastructure simply to keep the system functional. That is much less the case today.

As I have repeatedly argued, the subway crisis of 2017 was one primarily of gross mismanagement. My proof is in subway service today, which is about as good as it’s ever been, even though the MTA has received very little in the way of additional funds. Even if every single dollar of the $836 million Subway Action Plan made the subway better—something I do not myself believe—that is still only about five percent of the MTA’s 2018 budget. Even granting the dubious premise that “The Subway Action Plan Is Working,” it still begs the question: If all it took was $836 million to fix the subway, why couldn’t they find it before in the agency’s annual $16 billion budget?

No, the problem was never how much money the MTA received, but the way in which that money was spent. The rampant waste in megaprojects—in a more sensible world, East Side Access and it’s $11.4 billion price tag would be on the receiving end of several different independent investigations by city and state government officials—forced more borrowing to pay for exorbitant costs, and that borrowing must be paid off from the operating budget, taking dollars away from running trains, buses, and conducting maintenance and repairs. And there’s plenty of waste on the operations side, too. The money is there, but it’s going elsewhere.

I am hardly the first, nor will I be the last, to raise this alarm. In 2014, the Permanent Citizens Advisory Committee to the MTA published a review of the MTA’s entire capital plan history and found much the same:

Unfortunately, over these thirty years the MTA has been forced to incur an increasing level of debt in order to finance the continued rehabilitation of the transit system. Today, the MTA has $32 billion in long-term debt (bonds) on its balance sheet. This debt is supported by farebox revenues and tolls, and a bevy of dedicated taxes, all subject to economic cycles. These bonds currently require a $2.3 billion annual debt service, which must come out of operating revenues.

Since then, the only thing that has changed is the debt has increased. These forces, “all subject to economic cycles,” will continue to be subject to the economic cycles when those cycles are no longer favorable. Then what?

The 2020-2024 plan is a plan to continue this trend, of passing the “then what?” question along like a hot potato in hopes that whatever bad thing happens waits until the hot potato is out of your hand. This plan sinks the MTA’s operating budget further into the grip of bond service, meaning more of your fare will go towards paying off the ill-considered promises that have only delayed the inevitable.

The Capital Plan has been hailed as a triumph that will finally usher the MTA into the 21st Century. In a vacuum, that praise is well placed. But the MTA does not exist in a vacuum. It inherits the mistakes of its predecessors. The subway is running better than it has in years because of the reversal of a small fraction of those mistakes. There is a lot more work to be done. I believe a lot of people at the MTA, and at NYCT, are up for the challenge. I also believe the only prudent move is not to saddle those dedicated public servants with the burden of having one out of every five dollars in their budget go straight to debt service.

The MTA could have its cake and eat it too if costs were under control, but they’re very much not. Instead, it would behoove the MTA to prioritize what it can afford and save other projects for the next plan. Maybe the Second Avenue Subway—for which the federal government is budgeted to foot about half the bill—needs to wait until the East Side Access boondoggle is behind them. Perhaps this isn’t the time to be spending $704 million on 375 electric buses, or $1.87 million per bus. But that’s not what this plan is about. This plan is about making everyone happy.

It is for this reason I’m worried the MTA is, in some ways, getting what it needs at the precisely the wrong time. For all of its transformative promises, the 2020-2024 Capital Plan is more of the same from our leadership. More promises. More spending. More debt. Eventually, something is going to snap the MTA out of its spending problem. You wouldn’t know it from our elected officials, but it can’t go on forever.