PART III: Why the MBTA is Broke

By Jason Schwartz | Boston Magazine |

FISCAL INSANITY   Until 2000, the authority got its money by simply sending a bill to the legislature at the end of each year. Nobody had much incentive to innovate or find savings. So legislators came up with a plan in 2000 to make the T live within an annually balanced budget. The plan, called “forward funding,” would give the MBTA dedicated sources of revenue and force it to reform. This seemed smart.

FLAWED FUNDING FORMULA   Legislators anticipated that revenue from the sales tax would grow  at 3 percent a year. That wasn’t an outrageous idea; it had gone up at an even higher rate in the 1990s. To enact forward funding, lawmakers dedicated one penny out of every 5 cents of the sales tax to the MBTA. But — and this is a big but — legislators never accounted for the possibility that healthcare, fuel, energy, or, really, any costs at all might ever increase. They also didn’t adequately prepare for future T expansion — not even for projects then mandated by Beacon Hill. To make matters worse, some $3 billion of preexisting debt was piled onto the system — including $1.67 billion in borrowing related to the Big Dig that had less to do with the T and more to do with political horse-trading.

[sidebar]PERMANENT IMPLEMENTATION OF SHORT-TERM SOLUTIONS   A dirty secret: The forward-funding law was designed merely as a temporary fix. “None of us were pretending that [the T] could live within that money in perpetuity,” says state Senator Stan Rosenberg, who helped shape the bill. But no one asked questions about the plan’s longevity, according to one legislative aide intimately involved in creating forward funding, who spoke on the condition of anonymity. “When [the plan] landed on people’s desks, to the extent that anyone took a look at it — and I’d probably guess in the legislature maybe three people did — the underlying assumptions were not challenged; they were not vetted,” the aide says.

LOWER TAX COLLECTIONS   Since 2000, sales tax revenue hasn’t gone up  at nearly the rate the state expected, and in recent years it has actually decreased. Meanwhile, the T’s operating costs have grown by about 5 percent per year since 2000. Last year, the MBTA faced a $230 million gap between expenses and revenue. The legislature stepped up with $160 million — but that wasn’t enough.

BORROWING TO CLOSE BUDGET GAPS   Without the money  to maintain a balanced budget, something that’s mandated by state law, the MBTA has had to keep borrowing to make ends meet. The T has refinanced and restructured its debt every year since 2002.

ESCALATING DEBT   Higher debt-service payments mean  bigger annual deficits. Last year alone the T spent $434.5 million in finance payments, which was an increase of $92.7 million from the preceding year. “They’re in a class by themselves,” Northeastern’s Stephanie Pollack says. By comparison, the New York transit system, which is about 10 times the size of the MBTA, carries a debt ratio that’s roughly one-third the size of the T’s. In fact, things are so bad with the MBTA that the $434.5 million it paid last year just to cover its debt is almost equal to the money it collected from fares. So every dollar that we, the riders, pay to the T does little more than provide the authority the money it needs to make the minimum payment on the money it owes.

THE ABILITY TO KEEP BORROWING   Even with its finances in the gutter, the MBTA is able to keep borrowing. When you buy something in Massachusetts, one out of every 6.25 cents you pay in sales tax (the rate was raised in 2009) goes straight into the MBTA’s piggy bank. The T can then go to Wall Street and sell bonds to investors. The authority uses the money from the sales tax to guarantee those bonds. Basically, the T can say, “Your investment will always be repaid.” That fixed source of income has allowed the MBTA to continually borrow at exceptionally low rates. Robin Prunty, an analyst for Standard & Poor’s, acknowledged that it wouldn’t even matter if the T shut down tomorrow and never ran another train. So long as Massachusetts has a sales tax, investors who buy the T’s bonds will be repaid. And that’s how the MBTA maintains its sterling credit ratings. That said, cheap credit has proved a double-edged sword for the T. Yes, it’s good that it can borrow from Wall Street at low rates. At the same time, it has meant the candy shop is always open. The T can always return to Wall Street to borrow more and avoid making hard choices.

BUT HARD CHOICES ARE COMING   There actually is a limit to how much the MBTA can borrow,  it turns out. Prunty, the S&P analyst, estimates that the authority has about $500 million worth of borrowing space left. And Brian Kane of the MBTA Advisory Board says that if the T continues increasing its debt at current rates, in three to five years it will reach its limit. “They don’t have any more tricks left,” says Michael Widmer of the Massachusetts Taxpayers Foundation. “They’re running out of room, unquestionably.” In the end, it all boils down to this: the more the T spends on debt service, the less it can spend keeping the system safe and reliable.

Source URL: http://www.bostonmagazine.com/2011/01/why-the-mbta-is-broke/