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from NewsLink, Vol. 4, No. 1, Fall 1999
Beginning in FY 2001, state funding of the MBTA will change dramatically and, according to most commentators, much to the better. But be forewarned: The T funding saga hasn't reached the end of the line.
T finances clearly needed reform. Under the now-eliminated “backward-funding” arrangement, the legislature effectively appropriated whatever money the T needed in order to cover its deficit. This engendered what just about everyone agreed was a breakdown in fiscal discipline, runaway costs, oversubsidization and irrationally low fares.
Over the last 35 years, under backward funding, the T's deficit grew, in inflation-adjusted dollars, by 1060% or at an annual rate of 7.25%. During that time, the T became increasingly dependent on state tax revenues, reaching the point where it relies on those revenues to cover 65% of its costs. It covers only 17% of its costs with fare revenues.
Free of restraint from the legislature and offering an almost free ride to its passengers, T management had little incentive to resist pressure from transit unions. T wages soared, exceeding by a wide margin the wages paid by other Massachusetts employers and by comparable transit authorities.
MBTA Finances
($ millions)FY 2000 FY 2006 Fares 162
182
Subsidies 613 841 Other Revenue 175 213 Costs 950 1417 Deficit 0 181 In reaction to this state of affairs, Massachusetts has now created a new “forward-funding” plan, under which it will limit support of the T to 20% of sales tax revenue less revenue collected on meals. A “foundation” budget puts a floor on the state subsidy. But the new law supposedly puts the T on notice that it gets its share of the sales tax and nothing more.
This 20% solution seems neat and clean: The T doesn't have to tighten its belt now, but it has to control future costs enough to live within its means.
The problem is that there is no justification for the level to which the current subsidy has grown or any reason, for that matter, to believe that 20% represents the “correct” subsidy. In Financing the MBTA: An Efficient and Fare Solution, BHI argued earlier this year for reducing the current subsidy by about 35% and for doubling fare revenue.
We argued against the 20% solution on the ground that it left the MBTA with too large a subsidy. Failure to reduce the subsidy and to raise fares would simply perpetuate the budget-busting character of the T, posing an obstacle to tax reduction and diverting funds from more urgently needed capital projects.
So why did the state act as it did? The answer is partly political and partly economic. The political argument is that there is currently no support among the electorate for a substantial fare hike.
The economic argument is that things might get even worse if we don't limit state subsidies now. MBTA costs are about to accelerate. By tying the subsidy to 20% of sales tax revenues, the state avoids burdening taxpayers with T deficits that would have grown far larger over the next few years.
Unfortunately, this argument assumes that the state will have the courage later on to impose fare increases that it is unwilling to impose now. The untold story behind the 20% solution is that substantial fare increases will be needed.
Suppose that T costs rise by 8% a year for the period 2001-2006. Suppose also that the T is able to achieve some cost savings by increasing efficiency. (Our study put the one-time saving at about 6%.) Then, given generally optimistic assumptions about the growth in sales tax revenues, ridership, local assessments and other revenues, we project a T deficit of $181 million in FY 2006 (See table.) In order to cover that deficit, the T will have to double fares, having put off for five years into the plan what we recommended for FY 2000.
Will the legislature permit fares to double? Probably not. Expect it to find ways to take the sting out of forward funding. An obvious start would be to raise the foundation budget. Another would be to expand the law to include taxes on meals. If the economy takes a downturn just as the predictable deficits start to materialize, there is every chance that the legislature will provide “temporary” relief from an increase in fares.
The new law doesn't go into effect for several months. There's still time for the legislature to rethink the plan. We vote for raising fares now to put teeth into forward funding. Otherwise, taxpayers are likely to find that they have been taken for a ride.
NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-2002. All rights reserved.
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