Following my post regarding Metro service cuts and Kevin Desmond’s reply, Mr. Desmond very generously added some key details of financial projections, made time for a phone conversation, and then later commented on a draft of this article. Though I am grateful for Mr. Desmond’s time and help, I believe the details provided are actually strong evidence that the cuts are much greater than required, and that cuts can safely be postponed until a recession is apparent. Below I’ll review the financial projections and their implications, and then show Mr. Desmond’s response and other comments.
Background: Metro (and the county Executive) have proposed a financial plan that includes 250K annual hours of service cuts, introduced in 2015 and 2016, and funds a Revenue Stabilization Reserve (RSR) at a level intended to avoid further cuts in the case of a “moderate recession.” Others believe that the cuts may not be required, might be smaller, or could be deferred until the need is clearer.
About the financial projections based on a moderate recession, Desmond noted that the proposed reserve funding was not intended to handle another major recession such as started in 2008, but rather a more typical and frequent “moderate” recession. His office provided the following results of modeling based on a “moderate” recession (amounts are $M), compared with the OEFA forecast that assumes no recessions:
| Revenue Stabilization Reserve Balance: Metro-provided results of financial plan based on a Moderate Recession starting 2018 | ||||
| End of | 400k Reduction (Proposed) | 150k Reduction (Current service) | ||
| Year | OEFA Forecast | Recession | OEFA Forecast | Recession |
| 2015 | 300.54 | 300.54 | 235.28 | 235.28 |
| 2016 | 170.02 | 170.02 | 68.54 | 68.54 |
| 2017 | 219.17 | 219.17 | 68.48 | 68.48 |
| 2018 | 281.99 | 226.49 | 103.43 | 47.57 |
| 2019 | 384.19* | 228.35 | 175.08 | 18.52 |
| 2020 | 494.71* | 213.20 | 252.14 | (30.49)** |
| 2021 | 635.58* | 228.39 | 357.10 | (51.64)** |
*The RSR balances in this table sometimes exceed Metro’s proposed target level of 50% of annual Sales Tax revenue. In the County Executive’s proposed budget, the excess (if any) is included in the Ending Undesignated Fund Balance. At the end of the 2019-20 biennium, this amount is $170M. The excess would be available for service growth.
**A negative balance indicate the added amount needed so that other fund balance targets would still be met.
IMPLICATIONS:
The need to stabilize Metro finances is hard to dispute. But the details provided do not seem to justify service cuts anywhere near the depth proposed.
Why? A reserve established to stabilize revenue and sized to handle a “moderate recession” should be drawn down close to zero in the case of such a recession (otherwise the reserve is actually geared to a larger recession, or to another purpose). If the other reserves remain fully funded – as assumed in Metro’s recession analysis – they would amount to $256M in 2020, including $110M for fleet replacement. Those reserves would still be available to mitigate the risks for which they are designated and sized.
The proposed plan with more service cuts leads to an RSR balance of $228M at the end of the modeled recession, compared to a shortfall of $52M if there are no further service cuts.
Here are some options for much more moderate cuts to recover the $52M shortfall and to get through the Moderate Recession drawing the RSR balance to zero, but fully funding other reserves and programs. Specifics depend on when cuts would be initiated. Operating cost of $135 per service hour is assumed.
| Cuts start at beginning of year: | 2015 | 2019 | 2020 |
| Number of years cuts are effective | 7 | 3 | 2 |
| Annual shortfall ($M) | 7,378 | 17,215 | 25,822 |
| Annual reduction (hours) required | 54,649 | 127,515 | 191,272 |
Even if the cuts are postponed until 2020, 2 years after the start of a 2018 recession, they need not be as deep as those proposed to start in 2015-16.
Others have pointed out possible changes, such as a smaller Fleet Replacement reserve, that might further reduce or eliminate the cuts. But even if no such adjustments were judged prudent, it is still clear that cuts can be several-fold smaller. Or they can be postponed by several years and still be smaller than the 250,000 annual hours now proposed to be phased in over 2015 and 2016. If so postponed, they need not go into effect until and unless the revenue dip actually occurs.
Desmond’s comments in response to this analysis: “While your math appears to be reasonably accurate, your suggestion would result in zero funds available in the Revenue Stabilization Reserve (RSR) under the moderate recession scenario… We consciously have not done that. We believe that would keep Metro in an on-going precarious position, as there are elements of the budget, not related to sales tax, that we do not control that can also change (e.g. diesel fuel costs, pension costs).”
Further comments from Mr. Desmond in our exchange: In response to my question, whether the planned cuts could reasonably be postponed until revenues started to dip significantly from current forecasts, Mr. Desmond said that this is an issue for the county executive and council to decide as they balance risks against the interest to preserve service now. He emphasized the history of volatile revenue and public disappointment after that volatility prevented Metro from fulfilling promised service increases. He mentioned deferral of important capital spending in order to maintain service through the recent deep recession. He pointed out that Metro has been called upon to find a path to more stable funding, and said that the RSR was established for that purpose. He concluded that the proposed plan would be sustainable, by contrast with the past 6 years of just getting by, and would help restore trust in Metro that has been eroded by the lack of stability.
Desmond said that once an adequate RSR is established, then service growth could be introduced, if and as revenue improvements support that.
In regard to planned capital spending, Mr. Desmond said that while $190M in capital projects were cut during the recession, this did not include any projects necessary to keep assets in good repair, and that the proposed budget also avoids any deferred maintenance.
***
The King County Council staff are preparing Metro budget scenarios including various combinations of service levels and recession model. The first set was reviewed at the Physical Environment panel meeting October 16, and likely a more extensive set will be reviewed at the October 23 meeting. Interested readers can find staff analysis and other meeting material here.”
Thank you for bird-dogging the numbers and following up with Mr. Desmond. Again, I find your conclusion a bit too rosy for my taste.
I think the situation he wants to be in is for Metro cuts to be a thing of the past. He has a point that your scenario makes a lot of favorable assumptions about things Metro can’t control. Following a recession, given our public pension system, increased pension costs are very likely. Fuel costs are completely unpredictable and may rise. Under your scenario, any unexpected costs like those would lead to immediate cuts in service, given that you are completely draining Metro’s cash reserves.
Is the RSR Metro’s only reserves? I thought there were more, as the RSR was a recent addition. Were other reserve funds cut?
The only other reserve that can pay for service hours is the operating reserve, which is $50 million or so and is really intended for emergencies. All of the other reserves have specific purposes. The biggest are fleet replacement and capital projects.
The pre-2011 reserves were spent pretty much in their entirety.
See the notorious Page 776 of Dow Constantine’s proposed budget.
Reserves with line items in budget include:
Operating Reserve
Revenue Stabilization Reserve (RSR)
Capital Projects Reserve
RFRF Reserve (Fleet Replacement)
Bond Reserve
Sinking Fund Reserve
In Metro’s modeling (and mine) all except the RSR were funded to their target levels in both the Proposed plan and the Recession study. The reserves OTHER than RSR add up to $256M as of 2020.
David,
The Revenue Stabilization Reserve is intended to address the volatility of revenue, and Metro’s rationale for maintaining the 2015-16 service cuts is that a recession (volatile revenue) would put them in a bind.
If fuel prices are a significant threat, then I agree that should be planned for. This might take the form of an additional reserve for that purpose, calculated on the basis of usage and some reasonable risk case.
It might also take the form of getting authority for a fare surcharge in case of fuel-price spikes. I don’t advocate either approach in particular, but if it is a significant threat, let’s talk about it and figure out how to deal with it on its own terms.
My point is that the reserves are designated for specific purposes, and good policy and good governance require that the reserves be calculated and used for those purposes.
I think “operating costs exceed revenues due to volatility” is specific enough. What is the advantage of having the money split up based on the cause of the shortfall? (I get the spending – there are serious downsides to pulling money from capital projects to run daily operations, and vice versa)
To me it seems like it’s better to have flexibility and avoid bureaucratic complexity, and keep how we earmark dollars as simple as possible.
I agree with David Lawson and Paul Desmond – realistic expectations of the future include plenty of scenarios that could get us into trouble, and that’s the purpose of these reserves. Play it safe and build them up.
Also, I loved Desmond’s origional post – I thought it made it apparent how much we all (myself very much included) speculate and back-of-the-envelope and have all of this passion that leads us to build our most perfect imaginary alignments and such without any of the rigor of the actual alignment picking process. It’s great fun being an armchair transit planner, but Desmond showed me how much I don’t know about the budget process.
I agree with what David points out, that Metro doesn’t seem to want the RSR to get to $0. You mentioned that if it was spent to get out of a recession and there was money left over, that indicates that it was planned to handle a larger recession. I disagree. The RSR should be big enough to handle a moderate recession while leaving enough money in there for a subsequent, smaller one (aka, a “double-dip” recession) during which time the RSR is refilled. The problem with the sales tax in general is that its tax revenue drops like a stone at the slightest hint of economic pull back and takes years to recover. If the first “splash” of a revenue drop sends the RSR to $0, what next?
I applaud the effort and the debate, though I still think that Metro is correct in trying to get within a set of service hours that let it stop disappointing the public and actually fulfill promises it makes for service. I’m tired of people saying that Sound Transit is amazing and awesome and wonderful because they–in recent memory–have been doing all of the good works while Metro slogs along in the background. If Metro’s costs are too high, then let’s have that debate, too, but I am wholeheartedly in favor of Metro trying to get on stable footing even if it means a smaller Metro in the short-term.
(In short, vote “yes” on Seattle TBD Prop 1 so the city can help shore up Metro and right the bus.)
I also think your take on the number is too optimistic and in fact makes the case for a reasonable amount of the cuts proposed earlier.
Metro is trying to build a house it can guarantee tax payers it can afford, through good and bad, and your own analysis shows that existing service levels are not sustainable. Extending the home analogy, anyone how has ever done a home remodel will tell you it takes longer and is more expensive than they thought, even if they budgeted carefully. There are always unforeseen issues that come up along the way. That’s why you always need to have a cushion.
For Metro major sources of uncertainty like healthcare, pension and fuel costs are not addressed in your analysis, and since they are ongoing annual costs just a small change each year can quickly compounds to a substantial amount.
Metro needs to build up this reserve just once and if after that it will finally be on a stable footing.
For Metro major sources of uncertainty like healthcare, pension and fuel costs are not addressed in your analysis,
Metro already has a quarter of a billion dollars in reserves allocated for those things:
https://seattletransitblog.wpcomstaging.com/2014/10/20/metro-cuts-follow-up-with-kevin-desmond/#comment-542706
The RSR is specifically for revenue shortfalls during a recession. According to Jim Whitehead’s analysis (which Kevin Desmond says is ‘reasonable accurate’) this recession reserve will have another quarter of a billion dollars in it, after a medium recession. It is insane to cut service now so that you can save up enough money so that you can get through a recession with a quarter of a billion dollars in your recession fund after the end of recession. That isn’t a reserve, that is a slush fund.
^That was supposed to be to Adam.
I quickly looked into those other reserves and they look to mostly be either “on-hand cash” reserve for doing business or “savings funds” for future require capital expenses or payment obligations. Could you please point me to a Metro document that explicitly says that uncertainty in fuel, pensions, healthcare or other employee costs are covered in those reserves? It’s possible that fuel is covered somewhere else but I highly doubt that Metro has a “reserve” fund to cover uncertainty in other costs, that’s what budgets are for. If those costs go up the money has got to come from somewhere else in the budget.
Until I know how those costs are accounted for I still think that Jim’s analysis is optimistic and some cuts are still necessary.
As I said, Jim’s own analysis shows that the RSR isn’t large enough with no cuts. Add to that my concern about unforeseen costs and that’s why I think more cuts are necessary. I certainly don’t think all of the remaining cuts are necessary, but I also don’t think no additional cuts is a safe policy choice either.
some cuts are still necessary.
What makes this really complicated is that it’s all a continuum: the more cuts you approve now, the lower the likelihood of any cuts in future, and the smaller the size of any cuts that do occur.
According to Jim’s table, in the recession scenario, waiting until 2020 to cut results in deeper cuts than the current February 2015 plan.
Most of this debate is unresolvable, as a Council that fails to reserve for a case that happens 10% of the time will be proved “right” 90% of the time.
Martin,
“According to Jim’s table, in the recession scenario, waiting until 2020 to cut results in deeper cuts than the current February 2015 plan.”
Just to clarify, the Feb 2015 + 2016 cuts (169,000 + 80,000) is more than waiting until 2020 (192,000). And Metro / Constantine’s propose financial plan IS for both the 2015 and 2016 cuts.
Also, bear in mind that the putative recession would become apparent in time to start the cuts in 2019, in which case only 127,000 would be needed – less than the 169,000 that are scheduled for 4 months from now.
I think that the proposed cuts should be enacted, for the simple reason that they provide an opportunity to genuinely revamp and revitalize service. The anti-transit people who complain about “empty buses” are of course vastly over-stating the number of such runs, but they are right at least to some degree. To ignore them gives them ammunition that “Metro doesn’t care about efficiency.”
Of course it’s all just a red herring in service of their auto-sprawl agenda, but it has a superficial consistency that appeals to uninformed people.
So, go ahead and chop mid-day, evening and weekend service in far-flung affluent SFH neighborhoods. Hardly anyone is on those buses, so overall ridership will hardly be affected.
Then, when it becomes clear that revenue is running far ahead of projections, put hours in RapidRide and other frequent service routes to run them more frequently throughout the day, later into the evening, and on weekends. In other words, redesign the system to be more line-haul and collector and less CBD-centric, in preparation for Link.
Permanently jammed SOV lanes prove that huge percentage of cars are at least 3/4 empty. But re: empty buses, I always get ticked off watching empty buses on base routes. Hate “Business Access/Transit” lanes. But “Terminal/Express” bus routes might gain us some votes.
But mainly, the whole discussion above presents a balance sheet with no credit column. Or reason for one. Analytical mistake here is that recessions, and the damage they do, aren’t changing climate or plate tectonics.
If they were, the Detroit suburbs would look just like Detroit. Instead of making Medina look like Dogpatch, as they do. Nor has any recession in memory left Seattle looking like Detroit.
Detroit let itself become dangerously dependent on a single industry- with predictable results. It also refused to upgrade or repair that industry’s machinery- and management. In addition to a sustained list of unattended problems having nothing to do with either budgets or recessions.
And to keep it [On T]: as part of its collapse, Detroit also junked a terrific streetcar system in the late 1950’s.
It’s hard to imagine Seattle wrecked like that. But our city, our lives, and our transit system don’t have to consider service cuts and quality sacrifice as out of our control. Reason I won’t ease up of bad Tunnel operations: losses are totally under transit control, and totally correctable.
Also, money now questionably spent anywhere can diverted to intensified operator training: also under transit’s control and totally beneficial, short term and long. And serious measures to include the operating workforce into planning and managing transit operations, daily and long-term. And a whole list of lasting, capital-free improvements.
In other words: debit column is like a gauge on an engine, valuable for indicating trouble. But credit column and the energy behind it are the engine itself. Bad readings come around with good repair, maintenance, and handling.
Mark
Mark Dublin
I’d be interested in seeing information about how Metro intends to finance modernization of the propulsion systems in their fleet. This is something that ought to be factored into Metro’s retention of funds for fleet replacement cycles.
While large fleets are trying propulsion modernization in fits and starts, it’s small fleets that seem to be showing the way forward because they’re more vulnerable to volatile fuel prices. Assuming acquisition capital is available, results seem good.
Some useful background information here:
http://www.slate.com/articles/technology/the_juice/2014/09/electric_buses_proterra_wants_to_rid_america_of_emission_spewing_buses.html?wpsrc=sh_all_dt_tw_top
Loads of information on emerging modernized propulsion here:
http://insideevs.com/category/bus-2/
Desmond and several commenters bring up fuel prices, pensions, and other possible volatile expenditures. Though I’m not convinced the RSR can or should be used for those, let’s assume that it IS ok to do so. There’s still a big problem with the numbers. The proposed reserve size, in order to handle future volatility, is $322M. Throughout the modeled recession, the RSR went no lower than $213M – two thirds of the total. So the other risks must be (altogether) twice the impact of the one that Metro chose to model in justifying the proposal. If that’s the case, they also deserve calculations to scope their impact – but none have been supplied. Given the large numbers involved, and the sizable service cuts that are on the table, the burden of proof is still on folks proposing the large reserve and the service cuts.
I don’t mean to dismiss fuel prices nor pensions – they both need consideration and planning – nor other risks not yet mentioned. So let’s have that discussion – at length and with detailed numbers, if the risks are large – but just mentioning their possibility is NOT sufficient to justify $200M+ of the total RSR, and the service cuts scheduled to start 4 months from now.
I completely disagree with your assertion. Conservative financial assumptions and predictions should be the default assumption of any public agency. The onus is on people like you who want to be more optimistic/aggressive with your assumptions. Show me these risks aren’t big and I be more comfortable with smaller cuts.
Again, as Martin and I’ve said before, the cuts shouldn’t be all or nothing. Your analysis is systematically optimistic because you’re counting all the revenue but you’re not counting all the costs (read risk). That is why I think more cuts are needed. How much, I don’t know.
I’d be happiest with holding off the cuts until the putative recession is evident, and then if need be taking cuts that would still most likely be less than those Metro proposed for 2015/16. But if you said “OK, looks like 55K annual hours starting in 2015 would take care of the likely recession risk” I’d say that’s at least reasonable choice. Unfortunately what’s proposed is 250K annual hours, and that’s what I object to, absent some strong additional arguments with numbers to support.
“Show me these risks aren’t big” doesn’t fly when the proposal is (more) actual service cuts to actual riders. I’ve accepted Metro’s analysis of the recession risk – just did the arithmetic (that Desmond says is accurate) to show that smaller and/or later cuts could still handle that risk. As to OTHER risks, it’s fine to bring them up, but cutting service further for those risks, without ANY details or numbers, is not justified.
You’re being naive of council politics if you think the only options are all or nothing cuts.
I think they are delaying the inevitable, and even though there is an uptick in funds, proceed with the service reductions and restructuring, taking the “saved” hours and re-investing them in productive urban services, rather than DART routes and other low-ridership services. This also puts metro in a better position should they have to cut again in the future.
If the cuts do end up being reduced rather than reinstated or cancelled (which I suspect is what will happen), I do hope that they intelligently reassess the cuts instead of simply going forward with the February service change, because many of the June and September 2015 cuts were moved into February service change without consideration that less cuts may be necessary.
Metro is reporting about 400,000 boardings a day. The opening of U-Link is supposed to carry 50,000 to 70,000 riders that are mostly using Metro buses today. Shouldn’t we be expecting a reduction in bus service as well as ridership once U-Link opens?
A projections model should take this into account. Does this work take this into account?
I agree that the impact of Link service on Metro ridership could be important. Your numbers sound pretty high for the near term – can you reply with a link to the information? Particularly for the conclusion that it would reduce bus ridership by that amount?
I wish I could help, Jim but I can’t! It’s a good question for Metro and ST to consider in their “integration” strategy.
I can’t seem to find an ST or Metro report that presents the impact of ST expansion on Metro ridership or route frequencies.The only thing I can easily find in the ST project documents are 2030 numbers – and those were developed from a 2004 model which is years before Link opened. In a recent STB item, it was also noted that the land use projections are out of touch with the current urban living construction boom.
Maybe someone else who is reading this can point us all to what the impact is anticipated to be.