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|
*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.
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.”