Monday afternoon, the County Council voted to table an ordinance incorporating the February 2015 Metro cuts recently proposed by an ad hoc committee of County Executive Dow Constantine and a few Councilmembers. The Council’s decision has the effect of postponing the 2015 cuts indefinitely. Without further action, Metro will continue to operate the same network it operates today, with this week’s cuts remaining in place.
The Council’s action was surprising because it approved the February cuts in principle just two months ago. That resulted from a compromise between a Council faction led by Councilmember Rod Dembowski, who sought in June to postpone all of the cuts except for this week’s, and Constantine, who doggedly insisted that all but a few of the cuts remained necessary despite higher forecast revenues.
A couple of things have changed since July, though. First, King County’s Office of Economic and Financial Analysis (OEFA), which is independent of either the Executive or the Council, released a new forecast with a significant increase in projected sales-tax revenue. Second, Constantine released his 2015-16 proposed budget, which substantially reduced the number of hours that needed to be cut — although it continued to treat the February cuts, along with another small future round of cuts, as necessary.
Yesterday afternoon, I caught up with both Dembowski and Metro General Manager Kevin Desmond by phone. Each was gracious, knowledgeable, and willing to talk about the situation in substantive detail. Their answers revealed a real philosophical divide about how to manage potential risks to the Metro system, and helped clarify a situation which those who follow Metro (including all STB staffers) have found very confusing. I’ll present a summary of each view below the jump.
First, though, I should provide a bit of background that’s necessary to understand either one. Twice before, Metro has been affected by funding crises at times when it had promised to expand. In 2000, the combined effect of Tim Eyman’s Initiative 695, which eliminated Metro’s permanent motor-vehicle excise tax (MVET) funding, and that year’s “dot-com” recession resulted in a failure to implement 400,000 hours of new service which had been promised to riders in the late 1990s. Again in 2006, Metro promised nearly 600,000 hours of new service through the voter-approved “Transit Now” sales-tax increase, and again Metro found itself using the revenue to backfill existing service instead when the Great Recession hit.
Buffeted by those experiences, which resulted in a lot of ill will from the public, both Metro and the Council worked together to pass new Fund Management Policies in November 2011 as part of that year’s Strategic Plan process. The Fund Management Policies provide that Metro has the following four commitments, “in this priority order,” for use of funds:
- Debt service
- “Operation of the current transit system level”
- “Capital needs of the current system level,” with first priority to fleet replacement
- Operating and capital funding for expansion
The policies provided for a new “Revenue Stabilization Reserve” (RSR) which was intended “to moderate future fare increases and to mitigate the impact of cost increases and revenue declines.” Further, they provided that the “Revenue Fleet Replacement Fund” (RFRF, cutely pronounced “riff-raff”), which funds regular bus replacements, must maintain a balance of 30% of the projected fleet replacement costs for the entire fleet, based on FTA useful lives of 12 years for diesel coaches and 15 years for trolley coaches.
Both Dembowski and Desmond justified their positions on the basis of these policies, but in very different ways.
Councilmember Dembowski saw maintenance of current service levels as his most important goal, both because he believes adopted policies require it and because he thinks it is good on a policy level. He believes that the Executive’s proposed budget, which builds the RSR substantially (under current financial forecasts) while cutting service, is “inconsistent” with the Fund Management Policies, which he sees as requiring that Metro fund current service first. He pointed to a page in the budget which shows the RSR growing to $365 million in 2019 under current forecasts, and argued that such an amount — which represents roughly 50% of annual sales tax revenue — is far higher than maintained by peer agencies. It makes no sense, he said, to cut service that is taking people to work and school in order to put hundreds of millions into the reserve fund, which, he said, would then be larger than that of any peer agency he is aware of in the country. He also mentioned a recent APTA report (thanks to Mike Lindblom of the Times for putting the report online) on Metro, which suggested cutting the mandated RFRF balance to 20% of projected fleet replacement costs; that would free up some tax revenue currently flowing into the RFRF for use on service, and some peer agencies are using the 20% level.
Councilmember Dembowski protested what he described as a lack of transparency in the process behind the Executive’s office budget numbers, saying that both operating and, particularly, capital budgets were substantially different from what had previously been proposed to the Council, and he did not understand the reasons driving the changed numbers. He also complained that he was “troubled” by what he saw as Desmond undermining OEFA’s work, by publicly speculating on the possibility and consequences of a recession not forecasted by OEFA.
General Manager Desmond indeed worried during our conversation about the risk of another recession notwithstanding relatively sunny OEFA forecasts, and frankly admitted that it is very difficult to predict when one might arise. Beyond the economic environment, he also saw financial uncertainty lurking for Metro in several other places: the current contract process with ATU Local 587, which is headed to binding arbitration over which Metro has no control; in the price of diesel fuel; and in highly volatile and unpredictable pension costs that may lag years behind investment returns. He pointed out the volatility of sales tax as a revenue source, saying twice that Metro had been “burned” by it in 2000 and 2008, and explained that Metro needed larger reserves than peer agencies because its primary funding source is more volatile. Desmond saw the Fund Management Policies as requiring him to develop a sustainable financial plan for the agency over the long term, and pointed out that the policies were developed and passed by the Council specifically in response to Metro having been unable to meet its commitments in past recessions. Desmond saw a potential reduction of the RFRF requirement to 20% as not having any real positive effect on Metro’s finances, as the local tax receipts that would be freed up would be offset by a need to use more of the agency’s federal grant funding on fleet replacement.
I asked Desmond whether he was “cutting now just to avoid cuts later.” He agreed that the question was a good one, but contrasted a relatively modest amount of cuts in the February 2015 package with an unknown and much larger amount of cuts the agency could have to make if it entered another recession without substantial reserves. He expressed a willingness to reevaluate the numbers in one year and possibly eliminate the scheduled 2016 cuts if the revenue picture continued to improve.
In the end, both Dembowski and Desmond agreed that their debate is a legitimate policy debate that should be settled during the upcoming budget process. I think each saw the other as having a different philosophy with respect to managing Metro’s risks going forward. I tend to share Desmond’s view, mostly because I agree that Metro funding is extremely volatile and I see building reserves in good economic times as prudent fiscal management. But, given the much more positive forecasts contained in OEFA’s latest analysis and Constantine’s proposed budget, Dembowski’s view is no longer as unreasonable as I found it in June. Avoiding service cuts has always been a compelling rationale, and doing so today is not quite the leap into the abyss that it recently seemed.