NewsLink V2N3 Summer1998: Next stop for the MBTA: Forward Funding?

In 1964, the Massachusetts legislature, responding to a need to shore up funding for public transit, established the Massachusetts Bay Transportation Authority (MBTA). The state assumed obligation for 90% of the MBTA's debt service relating to capital projects. Operating expenses were to be paid mainly out of revenues from fares. Any operating deficits would be modest and assessed to MBTA member communities.

Throughout the 1960s, fare revenues covered about 70% of MBTA operating expenses. Thirty years later, however, this ratio had declined to 33%, making substantial state subsidies necessary. In 1997 the state subsidy amounted to $510.3 million or 80.5% of the MBTA's operating and capital cost.

Over the years, both operating expenses and debt service have increased far more than fares. In addition, since the early 1990s, the federal government has reduced financial support for mass transit. Because of restraints placed upon cities and towns by Proposition 2 1/2, member communities have not been able to make up the difference. Under Proposition 2 1/2, assessments by cities and towns can rise by only 2.5% annually – leaving state taxpayers to pick up the tab for the difference.

Why have costs increased so dramatically? The reason is a lack of fiscal discipline. The MBTA submits its bills to the legislature retroactively. The state simply picks up the tab for MBTA expenses incurred as much as 18 months in the past. The analogy for a parent would be to tell a teenage daughter that she had to pay her own credit card bills but that she could always get the parent to reimburse her for whatever amount she cannot pay out of her pocket– provided that she keeps the receipts. This is a form of discipline that any teenager would welcome.

And like a teenager offered a deal like this, the MBTA is also independent. Although the MBTA budget is reviewed and approved by both the Board of Directors and the Advisory Board, the state exercises no control over the budgeting process. The state simply appropriates money in the current fiscal year to cover past expenses without so much as a hint that the MBTA might wish to exercise a little more discipline in the future.

The state currently raises the money to fund MBTA operating expenses by giving a cash advance from the Treasury or by issuing short-term notes. These notes carry higher interest charges than general obligation bonds. As of April 1, 1998, 72% of the total short-term liabilities of the Commonwealth were dedicated to the MBTA.

Backward funding has, predictably, become a budgetary embarrassment. In May, the House Committee on Ways and Means proposed a “forward funding” bill whereby the Commonwealth would not be liable for the MBA's operating deficit or debt service obligations issued after June 30, 1999.

The answer is “probably not.” Under the forward funding bill, the state would dedicate a revenue source to the “T”, making the expenditure of that revenue source an off-budget item. Each year, the state would allocate funds equal to 20% of the total sales tax revenue collected by the state to the newly created “MBTA State and Local Contribution Fund.” From that fund the “state treasurer [would be] ... authorized and directed to disburse amounts in the funds to the MBTA, without further appropriation, upon the request ... of the general manager of said authority.”

While this would end the practice of routinely picking up the MBTA tab retroactively, it would deny the state any authority over MBTA use of the dedicated revenue stream. Having been unable to say “no” to the MBTA in the past, the state would now offer a permanent “yes.” The state would relinquish any right to oversee the expenditure of hundreds of millions of taxpayer dollars.

Since 1993 state sales tax receipts have been increasing at a 5.7% annual rate. In 1998, the state collected $2.962 billion in sales and use taxes. If the MBTA had been forward funded with 20% of these revenues in 1998, it would have received $592 million from the state. In contrast, the state's actual obligation to the MBTA was $530 million (indicated by the Commonwealth of Massachusetts information statement of May 5, 1998, A31), $62 million less than it would have received under forward funding. The MBTA gets a $62 million or 10% bonus for agreeing to use state money to pay its bills on time.

If current trends continue, the MBTA will run a $660 million budget in FY 2000. The state is expected to spend $570 million on the MBTA, and the bonus for switching to the new system will have risen to $90 million.

The downside for the MBTA is that sales tax receipts are subject to cyclical ups and downs. The “bonus” could become a shortfall in a bad year. Since the MBTA is obliged to pay any debt obligation before meeting operating expenses, it might have to slow the growth of its operating expenses should an economic downturn occur.

This is, however, a poor form of fiscal discipline. Forward funding of the kind proposed here imposes no meaningful restraint on MBTA spending. The legislature, having refused to say no in the past, now simply shuts its eyes, hands over a hefty revenue stream and tells the MBTA to go and spend as it wishes. If the legislature is lucky, the taxpayers will never notice.

Next stop for the MBTA: "Forwarding funding"