Tag Archives | finances

TriMet and the Trust Gap Part 5: The perfect storm and the $800 million fruit salad

A discussion of TriMet’s finances.
Better late than never.

This article was supposed to be part 3–but I decided to postpone it until after the election, to simplify the analysis; and then a few other post-election issues took center stage.

In the article TriMet and the Trust Gap, we looked at the phenomenon of an apparent lack of confidence in TriMet, particularly on the part of some system patrons who had expressed skepticism of Ballot Measure 26-119, the $125 million bond measure which failed in the November 2010 elections. In Part 2 of the series, more focus a bit more on TriMet’s governance, particularly on the belief that the agency exhibits a “bunker mentality”. Part 3 covered TriMet’s role in the planning process, and Part 4 covered the agency’s relationship with its workforce, and the general question of who should suffer (or benefit) when times are bad (or good).

Today, we look at an important issue which was omitted from the discussion of the first two articles (though conspicuous in the comments): the present state of TriMet’s finances. We’ll start with factors other than the pension issue, and then move on to that.

The perfect storm

The past several years have been a “perfect storm” for transit agencies around the country, including TriMet. A handful have shut down altogether, and quite a few more have experienced service cuts fare more serious than TriMet has made. Even those agencies which didn’t engage in any significant management missteps have been buffeted by a combination of high fuel prices leading up to 2007 or so, followed by the Great Recession. Most transit agencies have operations funded by a combination of fares and a volatile tax source, such as income/payroll or sales taxes. When a recession occurs, the economic activity on which the tax is based goes down, and fewer commuters use transit to get to work, as many of them have lost their jobs (and quite a few of the remainder switch to driving as congestion goes down and parking becomes more available). In addition, the rising cost of healthcare is another serious factor.

Unfortunately, TriMet has made a series of unforced errors compounding the problem. In response to the fuel crisis, TriMet entered into hedge agreements to protect it from further rising prices–right before the recession hit and oil prices went down, forcing the agency to pay above-market prices for diesel. While use of short-term futures contracts is probably a good idea for TriMet (to make the cost of fuel more predictable over a budget cycle), hedging against moves in the price of petroleum is not. Transit agencies already have a built-in hedge against fuel prices: higher fuel prices boost ridership (and lower prices have the opposite effect).

And the WES project… has been a disaster for the agency. Ridership is well below projections (though it has been improving somewhat); and the operational costs of the line are ridiculous. And this past Friday, TriMet suffered an additional $3.1 million setback, when a judge ruled that TriMet was not legally entitled to collect on a letter of credit issued on behalf of Colorado Railcar (to indemnify TriMet should CR default, which it did), and ordered the agency to refund the money to investors. (TriMet plans to appeal, though as the case was decided on summary judgment–legal-speak for “laughed out of court”–prospects for an appeal seem dim).

In short, the past few years have not been good to the agency; and a fair bit of that is TriMet’s own doing. And that’s not considering the elephant in the room–the pension situation.

Meet the elephant

TriMet recently issued its FY2010 auditor’s report concerning their financial statements, and it contains some rather ugly numbers: over $800 million in unfunded liabilities related to pensions and Other Post Employment Benefits (OPEB, in much of the literature). That TriMet has large unfunded liabilities is not a surprise; but the scope of the debt is. Much of the debt is due–again–to unexpected rises in healthcare costs, which TriMet is on the hook for.

Many of TriMet’s critics have pounced (here’s Wendell Cox, for instance), and GM Neil McFarlane served up a tone-deaf remarkto KATU, giving out a recipe for the healthy dessert mentioned in the title of this post (though those on cholesterol medication may want to skip the grapefruit), and providing transit opponents with a juicy soundbite. (Pun intended. Naturally).

A common narrative that has arisen is that this issue trumps all others facing the agency, and any future expansions of the system, particularly those that involve borrowing money, ought to be put on hold until the issue is resolved.

Just how bad is it, anyway?

$800 million is not a small number–especially for an agency the size of TriMet. It’s in the same ballpark as TriMet’s overall annual budget, and twice what the agency spends on operations each year. So it is certainly a significant problem–one which, if not dealt with, could severely impact service levels in the future.

On the other hand–this figure is an estimate of how much TriMet needs to satisfy its long-term obligations under its pension agreements. It’s not a figure which needs to be coughed up in a year–it’s an estimate of how much will be needed over time. (Unfortunately, with defined-benefit pensions, estimates are the best you can do; and often times are still too low–TriMet may find itself on the hook for even more, particularly if healthcare costs continue to rise). Contrary to some assertions from the peanut gallery that TriMet is nearing insolvency; TriMet has more than enough revenue from existing streams to pay off the debt as it becomes current. However, there is the definite potential for debt service to command a larger and larger share of TriMet’s budget, necessitating further service cuts–service cuts which will further reduce the agency’s farebox revenue. A “death spiral” of cuts and lost customers is entirely possible–either that, or the agency may be forced to signficantly raise taxes to pay off the pensions and maintain service levels–an act which may meet significant political resistance.

In short, it’s probably not an existential threat in the short term–but it is definitely a quality-of-service threat in the short term. And in the long term, it could very well threaten the agency itself. And thus, it is something that needs to be taken seriously.

Counting the beans

The sudden appearance of this issue on TriMet’s books, in such magnificent splendor, is in good part due to the intersection of two factors: 1) As already mentioned, rising healthcare costs, which have caused the amount TriMet must pay for retirement benefits to skyrocket well beyond what was expected, and 2) A change in pension reporting requirements promulgated by GASB (Government Accounting Standards Board, the public-sector equivalent of FASB) which required that government employers make and report sound actuarial estimates of their post-employment benefits. Prior to 2008, TriMet reported retirement expenses on a “pay-as-you-go” basis–recording such expenses on the books as incurred–but GASB 45 now requires that the total liability be estimated and reported.

Public agencies are still permitted to pay such liabilities on an unfunded basis–in other words, not setting aside reserves to pay for the liabilities, and instead paying for them out of the general fund as needed. Unlike the private sector (where retirement funds must be funded and separately administered, to protect retirees from fraud or bankruptcy of the employer), the risk of public-sector default on retirement benefits has traditionally been very low–as public agencies generally don’t “go out of business” and have taxing authority which can be used to repay debts if a default does occur.

However, recent events throughout the US suggest that pay-as-you-go accounting for such benefits is just as foolish in the public sector as it is in the private. Just as the federal government is fond of borrowing money to provide politically-popular goodies to the public in the absence of taxation to pay for them; so are local governments. While local governments can’t borrow money like the Feds can–one way they can get away with buy-now-pay-later budgeting is through off-books deferred compensation to public employees. And governments all across the board have been doing just that.

And now, it appears that the bills are coming due.

When sorrows come, they come not as single spies…

A battalion of other bad news has stormed the agency’s gates in the past years. As mentioned above, Measure 26-119, which would have financed certain capital investments (and freed up operating money for other purposes) was soundly defeated. While some objected to the agency taking on more debt–this was debt that would have come with its own funding source, and could have helped the agency improve its operating base in several ways. (The money was limited to capital improvements, and could not directly have been used to restore service or fund pensions, but it could have freed up other general-fund dollars earmarked for capital expenditures).

One other piece of bad “news” which came over the summer–news is in quotes because a good argument can be made that it should not have come as a surprise to TriMet, and the agency failed to adequately prepare for the contingency–was the announcement that Uncle Sam would only be picking up (at most) 50% of the tab for Milwaukie MAX, not the 60% match which the New Starts program commonly does for smaller projects. This prompted the agency to go hit up its partners for more cash, which it has secured (subject to some popular objection in Milwaukie), and to trim the project’s scope a bit.

Union blues

And then there’s the matter of TriMet and its relations with the transit union (ATU local 757). In years past, the agency was frequently criticized for failing to bargain hard with the union (the 1994 contract negotiations spearheaded by then-GM TimTom Walsh have long been targets of criticism, under the grounds that Walsh “caved” to ATU). At any rate, the agency is playing hardball now–demanding, essentially, that workers now contribute to their own health insurance premiums (presently all costs are paid by the agency). Last summer, the two sides reached an impasse in their talks, forcing the matter to arbitration. In addition to that, a freeze on salary and benefits imposed by TriMet for next year has drawn a few unfair labor practice complaints from ATU, and the agency and the union have been engaging in heated war of words in the media.

This is a gambit, however, which may backfire. Arbitration cannot start until the ULP compaints are resolved, at which point each side submits a “last, best offer”–and the arbitrator(s) are required to choose one package or the other. The risk to the agency is that if they were to be too aggressive in their demands, ATU could “win” the arbitration, resulting in little or no concessions–a prospect which would both likely aggravate service cuts in the near term, and the pension crisis in the long term.

So what to do about all of this?

Much of the debate around the state around TriMet’s finances seems to resolve around the controversial Milwaukie Light Rail project. TriMet continues to support the project, but many critics have called for its postponement or outright cancellation–and a few have gone further, and have called for TriMet to shut down its capital projects division altogether (laying off the planning staff and putting a stopper in future projects coming down the pipe) and divert the division’s $20 million annual budget to helping plug the agency’s overall budget hole. An interesting question is whether the project can be “postponed” (and for how long) without jeopardizing the funding commitments or requiring that the recently-completed EIS be redone. I personally consider the project important and useful from a transit perspective, but share many of the concerns about its funding–particularly the bonding of operational dollars and the overuse of urban renewal districts.

However, and this is an important point–canceling MLR would not solve all of TriMet’s problems. Even if MLR were to be stopped, there’s still a worst case scenario that needs to be addressed: If TriMet loses in its arbitration with the union, if the economy continues to stagnate, if healthcare costs continue to rise–what happens? Could we end up in a situation where the bulk of operating dollars are used to pay the bills of the past rather than the bills of the present? Could we end in a situation where the service cuts necessary become so severe, that the future of the agency–or of public transit in the metro area–is threatened?

Discussion

Given all that, what should TriMet do to get on a sound(er) financial footing? Milwaukie MAX and relations with the union have already been extensively discussed here; feel free to comment on these but I’m also looking for other ideas beyond these two topics. Should the funding arrangements for TriMet be altered? Is a single regional transportation agency a bad idea? Where should TriMet focus the service dollars it has? And–what should TriMet’s overall mission be? Is trying to build a comprehensive transit system an unwise idea–or is failing to do so what is unwise, given concerns about peak oil and the environment?