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