Grabauskas on the D’Alessandro Report: It goes beyond the news that “the T is still broke”

By Daniel Grabauskas

Tasking business executive David D’Alessandro to determine if the MBTA’s financial situation is still dire is a lot like asking someone 25 years ago to confirm that the Boston Harbor was still polluted. At some point the answers became obvious and widely accepted as true. The harbor was still dirty; the T is still broke.

It took years to recognize that Boston Harbor had become a toxic mess, though we knew the root causes many years before. It seemed a near-impossible problem to tackle. But Boston Harbor was cleaned up, and a plan to keep it clean for generations to come was put in place. The harbor was recognized as a resource too important to fail, a resource that, if made right, would enhance the quality of life for Boston and for the entire Commonwealth. Otherwise, the dirty harbor would diminish the city and the region, both economically and environmentally. The fix required a concerted effort by many parties. It was expensive. It was worth it.

What about the MBTA? There is no guarantee that the MBTA will receive the same attention. Boston Harbor, after all, had a judge working on its behalf. But as the D’Alessandro report indicates, the truth is becoming obvious. The MBTA’s current financial situation, like the water in the harbor 25 years ago, is poor and getting worse. Indications are that it is finally approaching toxic levels.

I am optimistic the T will be shored up and saved, if for no other reason than because the MBTA, like Boston Harbor a generation before, is too important and “too big to fail,” as the D’Alessandro report opines.

I was part of the chorus of skeptics who wondered if another review of the MBTA
would yield anything new. In the most basic sense, the chorus was right. The D’Alessandro report reconfirms what most of us already knew. The MBTA is broke. There is a structural imbalance between revenue and expenses. The most significant cost drivers — fuel and utilities, commuter rail, federally mandated paratransit service (The Ride), and payroll and benefits — are beyond management control, and there is no choice but to pay those bills to operate the system. The system is old and in need of repair. There is not enough money to repair it. Any money used to tackle the backlog in repair projects has to be borrowed because there isn’t any cash, so the debt burden increases. The MBTA gets more broke. The structural imbalance between revenue and expenses gets worse. And so on. All confirmed. Again.

What’s new in the report

But the chorus wasn’t completely right. There is some important new stuff in the D’Alessandro report and, perhaps as importantly, some old stuff that we see in a new way. Why is that important? Because policy-makers have to understand that no matter who has sliced and diced the information, the same conclusion is reached by everyone that embarks on the quest to answer the question, “What’s happening at the T?” Basically, it has serious financial problems that affect its ability to assure the highest quality of service.

What I liked about the D’Alessandro report was that it answered the question on the minds of so many: If the T has been structurally broke for several years now, why hasn’t it gone bust? Every year the budget was balanced, and services were not cut. In fact, service was expanded. How could that be?

D’Alessandro’s simple explanation is that the T refinanced billions of dollars worth of old, higher interest rate debt very aggressively to take advantage of the historically low interest rates of the past seven years. The savings totals over $500 million in previously anticipated debt payments. The curative effects of these savings, in contrast to the uncontrollable, escalating costs during those years, was real and beneficial. These savings served to temporarily rescue the T. But there is no more mountain of high interest rate debt that can be refinanced for substantial savings. No more chlorine, if you will, to scoop into the harbor to shock the bacteria and buy another year of non-toxic, albeit dirty water.

The other D’Alessandro insight — made with the advantage of the most time passed and most complete data since implementation — is that the experiment with forward funding the T has failed. While I don’t agree with every conclusion in the report on this subject, the synopsis of the history of how and why it came about, the assumptions that were made, and the finance plan thus developed are quite good. It also lays out clearly why the report concludes that “the forward funding finance plan proved unrealistic in many of its assumptions and nine years later can be deemed a failure.”

Where forward funding was a success

I don’t know if he chose those words carefully and purposefully to call the “forward funding finance plan” a failure, and not forward funding as a whole. I hope so, because while the financial assumptions proved very, very wrong, the forward funding legislation can and should be seen as successful in several areas.

First, it reined in what had been unconstrained discretionary spending by management. These past practices had shaken the public’s confidence with excesses that riled people who believed their money was being wasted. And in many instances, it was. As the D’Alessendro report concludes, forward funding served a vital purpose:

Critics may argue that the MBTA did not “try hard enough” to embrace Forward Funding because it failed to control the growth of operating costs. These costs indeed grew by a cumulative half-billion dollars more than the Finance Plan had anticipated between FY01 and FY08, and their continuing growth defines the deepening structural deficits of the next five years.

The Finance Plan substantially underestimated the system’s cost drivers, both for costs within the MBTA’s control, such as wages, but especially for costs outside its control, such as energy, health insurance and contracted services like commuter rail and The Ride.

Contrary to not trying, we found evidence that the MBTA did make some hard expense choices. Across-the-board cuts were routinely made to departmental budgets. Periodic layoffs and hiring freezes restrained the headcount. Individual managers took pride in eliminating inefficiencies and redundancies, while embracing a new organizational ethic of customer service. Yet in the end, they could not pare staff below the number needed to move hundreds of thousands of riders across hundreds of routes each workday. Add the complexity and cost of sustaining the system’s aging infrastructure, and it became evident that the cost inflation and savings assumptions in the Finance Plan were never tested against the daily grind.

The MBTA would not have received such a positive management assessment in the 1980s, prior to forward funding. Public confidence that money is not being wasted at the T will be essential if more money is to be invested in public transportation. Governor Patrick made that point repeatedly at the press conference. The recent changes in T retirement benefits (including the elimination of the notorious “23 and out” provision) and significant changes in health care benefits mandated by the new transportation reform legislation were equally necessary to build public confidence that the T is not wasting money. These benefits outliers have now been eliminated. The case needs to be made convincingly that costs beyond the control of management have pushed the T to the brink — not waste, fraud, or mismanagement.

Generally, we did examine major market comparisons in wages, fare prices and cost per mile and determined that the MBTA was within reasonable ranges.

D’Alessandro’s report makes these and other positive comments about how the place is run that should aid in confidence-building.

Second, forward funding set a goal to foster greater equity between those riding the T and the state’s residents as a whole. In return for a share of the state’s sales tax, the T asked its riders to increase their contribution to the agency by paying half, instead of a quarter, of the cost per trip. In addition to equity, this cost sharing was meant to solidify a meaningful and predictable source of revenue for sustained operations. The analysis in D’Alessandro’s report and the comments upon its release missed this point. Yes, T riders are paying somewhat higher fares in absolute dollars than was expected under the forward funding finance plan, but with the explosion in the overall budget (well documented in the report) the conclusion that riders are paying more than expected or than is fair ignores one of the key metrics associated with forward funding, namely the cost per rider subsidy. Again, the goal set for management was a fare-recovery ratio that rose from one quarter of the cost per ride to one half of the cost. Periodic fare increases would, and have at this point, accomplished this goal.

Third, despite the head-scratching claims of a lack of transparency at the T at the press announcement of the report, just the opposite is true. In the years since forward funding was passed a robust and extremely transparent budgetary process has developed. It is a process that requires a near zero-based budget review by the MBTA Advisory Board, representing all the 175 cities and towns in the MBTA service area. A review by the MBTA Board’s own finance subcommittee continues on an ongoing basis. Public presentations and public input takes place in various venues, including the open public comment period that precedes each monthly board meeting with the Transportation Secretary, board members, and senior staff present, along with the media.

In the past 24 months there have been numerous Legislative oversight committee hearings and pre-and post-hearing staff-to-staff communications to understand and dissect the budget, before determining that an additional $160 million appropriation was necessary this year. The Executive Office of Transportation routinely reviews programs and projects and their costs. The Administration’s Executive Office for Administration and Finance is briefed prior to significant bond issuances. And on it goes. Jokingly, the Chief Financial Officer and I used to describe these ongoing reviews as a never-ending proctological examination — with similar levels of discomfort borne gladly because of a belief that the beneficial results gained from constant examination was worth it for the organization’s credibility.

These three goals were achieved. Those who may draft a new approach to funding the T on a long-term basis should work to retain these incentives for good management, oversight, accountability, and equity.

Time to break the crippling cycle

A final observation regarding what the report calls “Debt — The Faustian Bargain.” The report is highly critical of the decision by the MBTA Board over the past several years to refinance current debt into the future as a part of the solution to balance the annual budgets. It should be. That is not what the staff, the board, or the members of the advisory board would have recommended or approved but for the recognition that the alternative was to cut service. In addition, the continued issuance of debt to fund the capital program was understood to push costs into the future to maintain, and in some cases expand, the system. But the bulk of the money — some 95 percent of all capital spending — was and is spent simply to maintain what is already in operation. In the simplest terms, there was no choice not to fix. The only option was to borrow. Let’s hope that, whatever the long-term plan is for the T, this crippling cycle will be broken. It has to be. That has been clear in every report done in the past 10 years.

At the release of each new study or report on MBTA finances, I marvel that the “breaking news” in every “new” report is always the same old information. But that’s not a bad thing. Each report reinforces the last, and keeps the problem current. The D’Alessandro Report, therefore, is a good thing. Let’s hope it leads to action toward a sustainable solution.

Daniel Grabauskas is MassINC's first senior fellow for public policy. He formerly served as general manager of the Massachusetts Bay Transportation Authority.

Comments

[John A Keith]

So, tie the fares to the rate of inflation. Doing so would allow lawmakers to take just one vote, now, while giving the MBTA a more-steady revenue stream. A very small step in the right direction, but one that should happen.

[GGW]

This is a great post - I learned a lot.

To what extent do you think the Carmen who retire at age 40 blocks any rational discussion? I'm a moderate voter.

When I hear about that, my instinct is basically "Starve the T" until there's some semblance of reasonableness between taxpayer work life and MBTA work life.