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Earlier this week I posted a quick analysis of Metro’s proposed financial plan, and concluded that the proposed 2015-16 cuts are not necessary. Some very apropos comments focused on the impact of another recession, which of course is inevitable, at some time and with some severity. Metro’s budget proposal mentions but does not detail an analysis based on “a moderate recession…after 2018.”

In the absence of Metro’s details,  I’ve added a simple model of a recession: starting in 2018, sale-tax revenue is 7.5% below forecast. In 2019-20, growth resumes as before, but from the “new” baseline – so those sales-tax revenues are ALSO reduced by 7.5% from forecast.

Why 7.5%? The Great Recession of 2008-9 reduced sales-tax receipts by 15%, before growth resumed. Half of that impact seems like a reasonable “moderate” recession.

Summary results: (details further below)

  • Cash flow remains positive in 2017-2020. (It’s negative in 2015-16 due to a very large capital program)
  • The Revenue Stabilization Reserve is exhausted right at end of 2020
  • However, Metro’s overall balance (Ending Fund Balance) is on the rise from 2017 through 2020.

My conclusions:

  • If the 2015-16 cuts are canceled,  a “mild recession” in 2018 would take Metro to the edge of needing cuts by 2020. If such cuts were needed, they would be foreseeable and NOT dramatic.
  • Long term, the current service level IS sustainable, even with a mild recession in 2018.
  • The proposed cuts amount to 7% reduction in service hours, and this is too high a price to pay to forestall the modest, foreseeable, and temporary cuts that might be needed in the event of a mild recession.

Yes, this is speculative, and Metro (and others) may have more authoritative and solid analysis. It would be really good to have that, with the numbers.

Details:

Similar to the previous post, here are Cash Flow and Reserve amounts, now with a case added without service cuts, but with the “moderate recession” in 2018.

As it turns out, Mr. Dembowski’s suggestion to reduce RFRF to 20% of anticipated capital spending helps a little, but not dramatically. If the amount of reduction were applied to the RSR:

3 Replies to “Are the Metro cuts needed, again: A quick look at a “moderate recession””

  1. Thanks for doing this work. I just put up a comment on your earlier post that came to a similar conclusion using different assumptions.

    By 2020 Link will have extended to Northgate, so Metro can reasonable cut back on service hours due to Sound Transit adding so much capacity in the University-Northgate corridor. These cuts are much preferable to service cuts next year.

    1. I’d much rather see Metro reallocate the 41/70s hours to frequent crosstown service than have them just cut those hours and leave Link riders transferring to half-hourly crosstown routes.

  2. A few questions/comments:
    – Are you equating revenue to service levels? If so I think this assumption is wrong because IICR Metro’s operating costs are growing faster than inflation and as such a dollar in 10 years will buy less service than it does now.
    – What definition of are you using for “sustainable” service levels? IMO sustainable is maintaining service though a recession without a cut in service.
    – Why did you assume a 1-year recession? I think a more conservative assumption is 18 months. (http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States).
    – Did you assume any reductions in sales tax revenue leading into and coming out of the 1-year recession?

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