David Lawson’s recent post very nicely laid out the contrasting views of Metro general manager Kevin Desmond and Council member Rod Dembowski regarding the need for Metro’s proposed 2015 and 2016 service cuts. Higher forecast sales-tax revenue and Metro efficiency improvements have raised the issue, and the disagreement now has centered on two reserve funds.
Generally speaking, there are two important questions to answer: (1) is the current service level (annual service hours) sustainable in the long term?, and (2) is there sufficient reserve to respond to un-anticipated, shorter-term dips in revenue? If current service IS long-term sustainable, it seems unfortunate to cut service levels in order to sort out reserves.
In any event, I think it might be useful to take a look at the numbers. I reviewed the most recent Metro proposed financial plan (see p. 776 of this download, reproduced below) and estimated what the plan would be without the proposed 2015-16 service cuts.
The results suggest that the cuts are NOT necessary. Even without the cuts and with an unusually large capital spending program in 2015-16, Metro’s overall reserves would increase from now to the end of 2020. So Metro looks to be long-term sustainable with current service levels.
On the other hand, the Council and Executive DO face the task of developing a policy for the RSR – what fraction of a year’s operating expense should it have? – and sorting out how to achieve and maintain that level.
I started with the summary financial plan:
That proposal includes cuts, totaling 249,000 hours annually, previously agreed to be introduced in early 2015 and early 2016. I adjusted the plan to the additional cost of keeping those hours, and adjusting the Revenue Stabilization Reserve accordingly. The adjustments are very simple – $136 per hour of service, with 3% annual inflation starting in 2015. This overstates the impact, as it ignores the revenue loss that offsets savings from the cuts.
A bit of explanation:
- Cash flow – total revenue minus total expenditure. Includes an unusually large capital program in 2015/16
- Ending fund balance – includes ALL reserves
- RSR – Revenue Stabilization Reserve, in case of revenue dips
- RFRF – reserve for fleet replacement (the main capital expense)
- Ending un-designated fund balance – any balance not designated to a specific reserve
Assuming the proposed 2015-16 cuts:
And if there are NO cuts:
- Metro includes a sizable ($171M) undesignated fund balance as of 2020. It would be good to understand why, and in particular why it would not be applied to the RSR.
- Without the cuts, the RSR is not increasing, which might cast doubt on sustainability. However, the Ending Fund Balance IS increasing, due to increasing fleet-replacement reserve and the large undesignated balance in 2020. This DOES support the position that Metro is financially sustainable without the cuts.
- Metro refers to modeling of a moderate recession in the future, but provided no specifics in the budget proposal.
- I don’t believe these results settle the disagreements over necessary reserves, but they do suggest that Metro is long-term sustainable without further service cuts.
- Entrenched positions make the discussion difficult. My take is that Rip Van Winkle (having missed all the fun of the past year) would wake up, look at this, and say “You guys need to sort out your reserve funds” but would NOT say “You guys need to cut service or you’ll run out of money.”
APPENDIX: DETAILS OF THE ADJUSTED FINANCIAL PLAN