The Hidden Leak in TriMet’s Payroll Tax

We’re happy to publish this guest post from Portland Afoot’s Michael Andersen – he said only Portland Transport’s audience was wonky enough to appreciate it! – Chris

Through all the hubbub of the last decade – through the ridership booms and the budget cuts – there’s been a little gremlin quietly sucking the juice out of TriMet’s budget. And not only is the agency totally unprepared for this gremlin to grow – it sounds as if its leaders, and the Metro forecasts they depend upon, haven’t even realized it exists.

I’m not talking about TriMet’s much-publicized obligations to its retirees, and I’m not talking about its looming need to serve Portland’s growing senior population. TriMet’s bosses are quite aware of both these gremlins, in part because we share them with transit agencies across the country.

No, this little guy is TriMet’s alone. Here he is:

It’s been a gradual slide, hard to spot amid the booms and busts. But from 1995-2000, the working-age (25-64) population in the Metro area grew by an average of 2.9 percent annually. In 2000, that rate began falling sharply; in the next 10 years it’s expected to slip to 1.8 percent, then 1.2 percent. Starting in 2020, even if you assume rising retirement ages, Metro expects working-age population growth in the area to fall to 0.9 percent per year and basically hover there indefinitely.

For 30 years, baby boomers have been the secret fuel in TriMet’s payroll-powered budget. Even when wage growth slowed, hundreds of thousands of workers at the peak of their earning power kept total payrolls growing. But as boomers slip out of the workforce, TriMet’s ability to keep up with growth will have to rely more and more on the wages of the workers who remain.

In other words, just as Portland’s TriMet-riding population is poised to swell, the tax that financed TriMet’s amazing 30-year expansion is about to shrivel.

The expected drop in payroll tax base growth, 2 percentage points a year, sounds small. It isn’t. To prove it, let’s look in detail at a big decision TriMet’s board will make this week: whether to let the agency borrow up to $60 million from future operating budgets to build a new MAX line to southeast Portland and Milwaukie.

A $60 million construction loan would cost TriMet’s general fund about $5.1 million for each of 20 years, and operating the line would cost another $14 million annually.

That’s a lot of money. TriMet thinks it can pay the bills, even as it restores and improves service on existing routes, with growth: Metro’s long-term growth projections estimate that the payroll tax base will grow by 4.5 percent annually.

At a glance, this looks like a conservative estimate. It’s a bit slower than growth from 1995 to 2010. But let’s look closer.

There are three factors that drive the payroll tax base, in increasing order of predictability: inflation, real wage growth, and the number of people working (itself mostly a function of demographics).

We’ll assume, with Metro, that long-term inflation will be 2 percent annually. That leaves real wages and demographics.

And indeed, if you assume no changes in the Portland area’s demographics over the next 30 years, the real wage growth required to meet Metro’s and TriMet’s revenue expectations would be perfectly reasonable by historical standards – 0.3 percent per year.

There’s just one problem: This projection ignores the aging workforce.

So let’s use demographic projections from Metro or the state to project future workforce growth. Here’s what would actually have to happen for TriMet’s assumptions to work:

To stay ahead of our graying workforce and falling birthrate, TriMet would need real wages to grow at five times the reasonable rate … forever. If wages don’t grow at the rate above, the agency will be trapped in its debts and service will suffer.

Keep in mind that this project requires a permanent and nearly unprecedented explosion in real wages in addition to the rising tax rates, overall population growth and continuing inflation that most of us expect. To make the Milwaukie rail numbers work, this unending boom will be needed even if all those things happen, too.

All these projections, by the way, generously assume a long-term inflation rate of 2 percent. That’s Metro’s long-term inflation assumption, and it’s also the upper bound of the U.S. Federal Reserve’s long-term projections. If inflation were instead to average 1.75 percent, the middle of the Fed’s range, TriMet’s assumptions would become even more far-fetched.

At Metro’s recommendation, I’ve also assumed a major shift in the workforce over this period: that 10 percent of people aged 65-70 will be in the workforce by 2020, gradually ramping up to 50 percent by 2040. Frankly, this trend represents a few drops in the ocean.

Finally, let’s look at the projections together. The green line represents the economic growth that TriMet and Metro leaders intuitively think they need, based on their life experience, to keep expanding service.

The yellow line is what TriMet would actually need, based on Metro aging projections.

The red line is even scarier: That’s what TriMet would need based on population projections from the state Office of Economic Analysis.

But could there be an error in my calculations? Maybe I’m wrong to conflate “working age” population so closely with available workforce?

I wrote TriMet to ask.

TriMet spokeswoman Mary Fetsch defended the payroll tax base assumption, suggesting I compare it to projections from Metro and the Western Blue Chip forecast from Arizona State University: “We think you will find that it is reasonable and in line with what others are forecasting.”

Well, the Western Blue Chip forecast isn’t much help: it goes only through 2011.

So to check the long-term forecasts I turned to Metro and to Dennis Yee, Metro’s chief forecaster, in two phone calls last month. He, too, defended Metro and TriMet’s assumptions.

“Anywhere from 1 to 3 percent” real wage growth, Yee said, is “not outrageous.”

No? Let’s look at Yee’s implicit expectations one last time.

Does an indefinite average of 1.5 percent wage growth look reasonable to you? It does not look reasonable to me. Yet it’s the assumption on which TriMet is building billion-dollar decisions.

I sent Yee this chart on Nov. 16, along with my calculations, asking for comment. I’ve since called him twice but not heard back.

I hope I’m wrong about all of this. Please, check my work. But I’m afraid that somewhere along the bureaucratic line, this hidden leak in TriMet’s payroll tax simply hasn’t been noticed.

Seems to me that someone in TriMet needs to notice it – immediately.

30 Comments

30 Responses to The Hidden Leak in TriMet’s Payroll Tax

  1. EngineerScotty
    December 6, 2010 at 10:30 pm Link

    Good work, Michael–but a few questions for you:

    My first thought about this is the following: Even if people start to retire, and the labor pool starts to shrink–that doesn’t necessarily mean that the JOBS will go away. The Millenials are now hitting the workforce hard, and Portland seems to be a popular place for many of them to come–and they still come here despite there being an unemployment rate north of 10%. If anything, the area’s attraction to emigrants is exacerbating unemployment.

    If the economy returns to normal in the next few years, AND the baby boom population starts to retire in greater numbers, creating new job openings…I wouldn’t worry too much about finding people to fill them. Indeed, the population boom of the 1990s coincided with an economic boom.

    The scenario that scares me is not a sudden glut of jobs due to a shrinking workforce–that’s not a bad problem to have. The scenario that worries me is a continuing lack of jobs–and YOUNG people, especially talented ones, leaving the area in search of work elsewhere. In other words, I worry about Portland turning into Buffalo, not turning into Miami.

    And one more question–it seems that retiring baby boomers, like the recession and the pension issue, is also a national problem–I find it hard to believe that Portland is unique in this regard. Any transit agency whose tax base is derived from an activity tax (sales, income, payroll) as opposed to an asset tax (i.e. property taxes) is susceptible to demographic shifts messing with the tax base. Did you take a look at any other agencies?

  2. EMS
    December 6, 2010 at 10:33 pm Link

    Very interesting article – makes me think about the Milwaukie light rail line in a whole new way… Eye opening arguments, at least to somebody who is not well versed in economics, tax bases and future growth projections.

    I feel that our best move right now would be to postpone the Milwaukie light rail line; I have long felt it is an outrageously expensive expansion that is not in line with our current economic reality. I am concerned that this expansion will be a huge burden for us in this region for years to come. I hope I am wrong in my pessimistic concerns, but I doubt I am.

    And, please know that I am a huge fan of light rail – always have been, always will be. Yet, even a fan like me feels that this is not a good choice for us at this time due to our poor economy. We have seen too little economic improvement in the past two years to hope for better times any time soon.

    Maybe let the Milwaukie line gather dust for a few years???? Sadly, I doubt that is not likely to happen…

  3. Aaron
    December 6, 2010 at 11:15 pm Link

    Seems to me even if everything goes wrong, TriMet just has to find some other way to pay the difference down the road if things don’t work out. $60M or a significant fraction of it is a lot of money, but I’ve seen more pulled out of a hat for less…

    I don’t think it’s worth risking the project never happening.

  4. Aaron
    December 6, 2010 at 11:18 pm Link

    (And I do realize what horrid economic analysis that is. “Ignore the charts, someone will put the money out of a hat!”)

  5. Bob R.
    December 7, 2010 at 12:12 am Link

    Ponies, unicorns and magic hats are time-honored political traditions among all noteworthy parties. :-)

  6. Michael, Portland Afoot
    December 7, 2010 at 12:56 am Link

    Wow, thanks for the quick turnaround, Chris! And thanks for the thoughts so far, Scotty and Aaron.

    First of all, Aaron: We’re not talking about just $60 million. This week’s borrowing decision is just one of several truckloads of money being spent now that may turn out to be hypothetical.

    By 2020, the difference between what I’m describing as a “reasonable” 0.3% wage growth scenario and Metro’s 1.5% wage growth scenario has reached $20 million per year. Even after inflation, that’s on the order of magnitude saved by September’s painful service cuts.

    What I think we’re really talking about is a situation where, year after year, TriMet leaders come before us looking dismayed, forced to announce that yet again payroll taxes haven’t grown as robustly as anticipated (that darn economy!) and sacrifices will have to be made. Which sounds a bit similar to the last five years, doesn’t it?

    And Scotty, your critique is more existential (or something like that). But I see the labor force differently than you do.

    The problem is that there isn’t a fixed aggregate demand for goods and services, to be met one way or another by a variable labor force. When the labor force shrinks, less work is being done than otherwise would be. Less wealth is being created, there is less demand for goods and services, and there are fewer reasons to hire people. Fewer workers means fewer new companies creating jobs, and fewer companies that can turn a profit by expanding to take advantage of surpluses of available labor.

    The problems of a labor shortage aren’t as intuitively bad for you and me as the problems of a labor surplus. But they’re bad. Without major immigration policy changes, we’re about to enter an era in which there simply aren’t enough working-age people in Buffalo to move to Oregon and support our economy (including our government) at 1999 service levels.

    That’s my perspective, at least.

  7. Michael, Portland Afoot
    December 7, 2010 at 1:10 am Link

    Another short thought, Scotty: Certainly there are many factors at play in all these situations, but I might ask myself whether the current glut of working-age Chinese people has been good or bad for the Chinese economy, or for that matter whether the world’s growing supply of workers over the last million years has been good or bad for the world’s economy.

    More hands at work are good; fewer hands at work are bad. We’re about to have fewer hands at work, comparatively speaking, and our governments need to be ready for that.

  8. Michael, Portland Afoot
    December 7, 2010 at 1:17 am Link

    And to answer Scotty’s last question, I didn’t look at other agencies, though I’d be curious to see it.

    Of all possible taxes, you’re right that property tax is least responsive to demographics, but payroll tax is most responsive. Social Security payments and pensions are taxed as income federally and by some jurisdictions.

    Sales taxes are paid more slowly by the old and the young, because old and young people have less money to spend, but they’re still paid.

    When people leave the workforce, though, payroll taxes vanish completely.

  9. R A Fontes
    December 7, 2010 at 7:21 am Link

    Then there’s the demand curve. While the supply curve is appropriate for the region as a whole, the demand curves are really specific to individual corridors. Yup, you got it: Lake Oswego, West Linn, Milwaukie, and Oak Grove have the oldest demographics while Forest Grove, Troutdale, and other far-out suburbs have the youngest.

    Guess where the complex transit projects are going.

  10. John Reinhold
    December 7, 2010 at 8:34 am Link

    So when people retire companies don’t refill those positions?

  11. Unit
    December 7, 2010 at 12:15 pm Link

    I’ve got to side with Scotty and John Reinhold on this one. When people retire, companies fill those positions. Changing demographics are a natural part of human economic history; humans have altered policy and tax structures throughout history to best suit the climate. If the economy is humming and there are jobs available, I think recent history would suggest Portland would have no trouble attracting young talent.

    To me, the larger concern is in what form the national economy will return, and if/when the federal government will ever quit the self-destructive partisanship and become productive again. If partisan battles are the only progress, we’ll become a 3rd-world country in due course, and good jobs will be sparse everywhere.

    TriMet’s struggles are merely an indicator of larger issues in this case.

  12. bjcefola
    December 7, 2010 at 4:41 pm Link

    A comment on inflation- to assume 2% annual inflation over the next 30 years is pretty conservative. That isn’t a bad thing and the pick is quite justifiable, but I think it has a lot more upside then downside. Try a volatility check- what happens if you assume 2.5% or 3% between 2010 and 2040?

  13. Steve S.
    December 7, 2010 at 6:04 pm Link

    “TriMet’s board will make this week: whether to let the agency borrow up to $60 million”

    It’s $63 million.

    “$5.1 million for each of 20 years, and operating the line would cost another $14 million annually.”

    “TriMet thinks it can pay the bills”

    I’d like to see their business plan for paying the bills.

    Can you post it?

  14. Michael, Portland Afoot
    December 7, 2010 at 7:40 pm Link

    John and Unit: If there is not demand for its services, then no, a company will not fill its open positions.

    “Job openings” are not independent or immutable. They are dependent on aggregate demand, which is dependent on available workforce.

    bjcefola: True enough! 2 percent inflation is way low by 30-year historical standards, obviously. If the Fed and Metro are wrong and inflation were to average 3 percent over the period, then real wages would have to grow by only 0.6 percent per year — high, but not ridiculous. Like any highly leveraged firm, inflation would be great news for TriMet.

    Steve S.: the financial projections I’m using are in Chapter 5 of the Portland-Milwaukie EIS.

  15. Michael, Portland Afoot
    December 7, 2010 at 7:42 pm Link

    P.S. These are great questions! Keep them coming, or keep the debates going. And please don’t hesitate to tell me if I’m wrong.

  16. Steve S.
    December 7, 2010 at 9:52 pm Link

    Michael,

    I knew what you were using for your piece but I was talking about Trimet’s plan for paying their bills.

    As most of us know there is no such plan.

    Just as there is no plan for the soaring OBEB problem.

    Which makes their approving $722 million in bonds and a no bid contract tomorrow close to being criminal.

  17. EngineerScotty
    December 8, 2010 at 12:40 am Link

    This sort of demographic economic analysis is getting way too technical for me to really comment intelligently on, but…

    It’s useful to consider the difference between “export” jobs and “local” jobs; the former being employment in activities which bring outside money to the region, the latter being those which mainly recirculate money within the region. (And there’s those which support activities that cause money to leave the region, such as retail in goods/services which come from elsewhere).

    Export jobs are not as sensitive to local demand. WW did a report a while back noting that one reason Portland suffers greatly during recessions, is that much of our export-based economy is in goods and services which go up and down with the business cycle (high-tech, building materials, trade in general). Some of that export business is fungible and could be relocated if necessary, others are more difficult to move. Many of these jobs, though, aren’t easily relocated and might be filled by non-area residents moving here if there aren’t sufficient local workers.

    The interior service jobs, OTOH, don’t go away just because people doing OTHER jobs happen to retire–retired people still consume, after all; and will need services. If retirees pack up and move to Arizona, taking their pensions with them, that might pose some issues; but help in other ways.

    A few other things which very-long-term economic planning ought to consider:

    * LIFT paratransit service. This is expensive to provide, a Federal requirement, and an aging population might increase demand for this service. OTOH, an aging population might also mean possibilities for converting LIFT “routes” into regular bus routes. One interesting thing about Milwaukie MAX is that it’s proposed route passes by a large number of retirement homes (within a half-mile of stops); a shuttle service between MAX and the homes in question might be an attractive opportunity. (This would apply to any rapid-transit on the corridor).

    * More (transit-dependent) older people on the system (assuming they AREN’T all using Lift) might not be a bad thing–especially if they take up seats on transit that are now empty and improve the net farebox recovery ratio.

    * A point hinted at in the prior post, but not addressed fully–is use of payroll taxes for transit appropriate when roads are funded with more stable sources? Ballot Measure 5 at present probably makes a switch to property taxes improbable (other government services are already using the non-school 1%); but a constitutional amendment to permit a capped property tax to replace an existing payroll tax might not be a bad idea.

    * Analysis of inflation is an interesting case. Inflation is probably good for TriMet overall–not because it boosts the payroll taxes collected (something which is largely offset by corresponding increases in current expenses–labor, fuel, etc)… but because it devalues TriMet’s long term debt. If you owe money, inflation is your friend; if you have a pile of cash (or are a creditor) it is your enemy. Right now, the monetary policy in place at the Fed is to keep inflation low but positive–deflation is generally bad for everyone, but higher levels of inflation will utterly piss off the bond markets, who don’t want to see their Treasury bonds devalued. (The “quantitative easing” approved by the Fed last month certainly caused a lot of hackles).

    To echo a comment made above: Much of TriMet’s long-term forecasting is highly dependent on economic trends and decisions that the agency has no role in; like all of us, it’s surfing on the wave hoping that it doesn’t crash us into the rocks.

  18. R A Fontes
    December 8, 2010 at 6:19 am Link

    On the second ‘asterisked’ point:

    Another way of saying this might be that the smoothing out of transit demand in a corridor with a high population of older riders results in less peak demand relative to non-peak.

    Major projects seem to be consistently judged on the relative abilities of transit alternatives to accommodate peak demand. Projected trip times are for evening peaks, not average for all trips. EIS papers, in all their iterations, aren’t showing the range of trip times. It is important because the great majority of all travel is outside of peak hours even in corridors without a high percentage of older riders.

    The point is that corridors with high and growing proportions of older residents might actually be better and more economically served by low-capital flexible systems than by costly fixed guideway projects.

  19. Michael, Portland Afoot
    December 8, 2010 at 8:20 am Link

    Steve S.: Sorry for misinterpreting.

    Scotty: Good points all, I’d say, and reasons to be a little hopeful that real wages might grow. I’d only add that the pensions, securities and SS/medicare/medicaid that let most seniors live comfortable lives today aren’t free money. They’re transfers of income from working people to nonworking people, so they’re dependent on a robust and productive working population. (Not that there’s anything wrong with that!)

    What will an economy in an aging population feel like? It’ll be functioning as normal but just … not … grow … as … fast … as it seems like it should.

  20. Lenny Anderson
    December 9, 2010 at 8:40 am Link

    Nice work Michael, but capital investments that improve service and reduce operating costs still need to be made. The still incomplete MAX network…one line (E-W) with a couple of branches and half of another (N-S) that does not reach its logical end station…provides more and better service at lower cost to more riders. We need to continue to build out that network so that a real transit option exists in every major transportation corridor, not just I-84 and US 26.

  21. Michael, Portland Afoot
    December 9, 2010 at 9:48 am Link

    I don’t necessarily disagree, Lenny! But if the region believes that we need to keep improving service, I think this shows that our existing revenue sources are likely to be inadequate, and Portland can’t expect further MAX expansion without new tax revenue.

  22. Allan
    December 9, 2010 at 10:00 am Link

    Michael- you don’t mention farebox revenue at all in your analysis. With each new line, the number of trips that can be made on the network increases in a geometric fashion. As a result, the argument can be made that we should just keep building these things until the network is profitable. As congestion increases due to increased population, the desire to shift to alternate modes will increase demand as well.

    It seems like we should intentionally cause more congestion (by not widening roads, etc) so that more folks are forced onto transit and increase funding at the farebox.

  23. EngineerScotty
    December 9, 2010 at 10:12 am Link

    The big variable in all of this is the price of gas.

    If gas goes back to north of $4 a gallon (and if TriMet can resist the temptation to go playing around in the futures market…), ridership will go up, as well farebox revenue. And here, electric-powered vehicles (such as MAX and Streetcar, though certainly not limited to rail) will offer an advantage.

    OTOH, if a heretofore undiscovered source of dead dinosaurs is found and gas drops back below $2, you can probably expect a drop in ridership.

    Personally, I’m betting that $4 gas is more likely than $2 gas.

  24. Bob R.
    December 9, 2010 at 11:27 am Link

    It seems like we should intentionally cause more congestion (by not widening roads, etc) so that more folks are forced onto transit and increase funding at the farebox.

    I dare say that sounds like troll bait to me. That’s exactly the sort of thing that transit supporters regularly get accused of.

  25. Lenny Anderson
    December 9, 2010 at 11:34 am Link

    Yes, tear down the Marquam Bridge and remove the Eastbank Freeway! I want to ride Streetcar to the new East Portland Beach along the Willamette.
    And yes, Michael, the next batch of MAX expansions…the Yellow to Hayden Island, Green to Tigard, Orange to Oregon City, and Red to Tanasborn… need to be funded with a property tax bond issue just as the westside Blue Line was in the 90’s.

  26. Michael, Portland Afoot
    December 9, 2010 at 11:54 am Link

    Good points, Allan and Scotty.

    Keep in mind that farebox revenue (which I’d agree depends on gas prices and congestion, though I’d be interested to know which order) is already baked into TriMet’s long-term revenue projections. The payroll tax projections (discussed above) are in addition to whatever ridership trends the agency forsees.

    Fares cover about 20 percent of TriMet’s operating costs. I understand that’s fairly normal for a system of TriMet’s size, but I haven’t looked at this in depth.

    Denser development and rising ridership rates would probably increase TriMet’s efficiencies in the long run, especially on MAX lines. Fares cover half the costs of operating NYC’s MTA!

    In the shorter run, rising ridership can hurt TriMet’s finances, if it forces them to increase service volumes to keep up. Even if additional rides were covering half or 3/4 of their marginal cost, each new rider would still require some new money from taxpayers.

    Not all of TriMet’s operating costs are variable, though, so you can’t just assume every new originating ride brings in 40 cents and costs taxpayers $1.60.

    Also, note that one of OPAL‘s proposed long-term initiatives is to freeze fare prices, probably driving down farebox revenue as a share of operations.

  27. R A Fontes
    December 9, 2010 at 1:17 pm Link

    According to the October performance report, passenger revenue now covers 31.93% of the system cost at $2.90 per ride. This is while TriMet reports a small 0.2% increase in overall ridership compared with last year.

    So all we have to do is keep on eliminating service while growing ridership and presto-change-o TriMet’s in the black. We can look forward to luggage racks on the top of buses and MAX trains. Then Oregonians won’t have to travel to some 3rd world country to share the experience.

  28. Allan
    December 10, 2010 at 10:49 am Link

    I guess the important thing to note here is that we don’t want to become a 3rd world city just to get the experience.

  29. Michael, Portland Afoot
    December 10, 2010 at 11:22 am Link

    Ha! I stand corrected on operating revenues, RA.

  30. EngineerScotty
    December 10, 2010 at 12:41 pm Link

    TriMet may have to alter its animal policies, then, to permit passengers using the bus to carry live chickens to market… :)

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