Draft for Discussion & Policy Purposes Only

Operations Budget Stability CommitteeFY17P - FY20P Baseline Pro Forma

9/9/2015

1

Draft for Discussion & Policy Purposes Only 2

• This pro-forma baseline projects the MBTA structural deficit based on run-rate assumptions that pre-date the formation of the FMCB. It is a status-quo pro-forma which forecasts the future financial health if MBTA continues on “current course and speed”

• The pro-forma financials do not include any potential impacts of any contemplated reforms or suggested actions (for cost control or revenue enhancement) by the FMCB

• Projected figures are likely to change in the future as reforms to both MBTA revenues and costs are considered and adopted

• The FMCB is working on a set of proposals for cost-control and revenue enhancement and looks forward to working with multiple stakeholders (including MBTA staff, unions, private sector, and advocates), and will make those proposals in the December report

• Analysis contained in the report is not meant to be prescriptive but rather to show the sensitivity of the structural deficit to various inputs

Pro-Forma Baseline:What It Is (and What It is Not)

DRAFT

Draft for Discussion & Policy Purposes Only 3

• The MBTA has 5 Sources of Revenue– Fares ($618M in FY16)– Other Operating Revenue – Parking/Advertising/Real Estate ($50M in FY16B)– Dedicated Local Assessments ($163M in FY16B)– Base Revenue Amount ($986M in FY16B) - MBTA gets higher of Dedicated Sales Tax or

“Base-Revenue Amount”– Other Income ($35M in FY16B) – Interest income, legal settlements, Federal operating

assistance, MassPORT Silver line Revenue

• In addition, discretionary “Additional State Assistance” ($125M in FY15A and $187M in FY16B) is provided to the MBTA to cover costs over and above sources of revenue – essentially it is the annual “plug” between revenue sources and total costs

• We define the Structural Deficit as the difference between the 5 sources of revenue listed above, and the forecast operating and debt expenses of the MBTA

• The legislation creating the FMCB calls on the FMCB to propose a plan for balancing the Structural Deficit in FY17 and onward, through a combination of cost control and maximization of own-source revenues

A Note on Definitions DRAFT

Draft for Discussion & Policy Purposes Only 4

FY17P – FY20P Current Pro-Forma Projection Assumptions (Part 1)

DRAFT

Revenue FY 16B Assumption Source

$50M Other operating revenue (advertising, parking, real estate) grows by 13.8% (FY17), 3.5% (FY18), 2.3% (FY19) and 2.4% (FY20)

Internal

$618M Fare revenue increases by 4.0% (FY17), 1.0% (FY18), 3.0% (FY19), and 1.0% (FY20) due to FY17 and FY19 fare increases of 5.0% and 1.0% ridership growth in off years

Internal

$986M Base revenue amount increases at 1.6% in FY17 forward (based on inflation formula) Statutory

$163M Local assessment increases by 2.0% post FY2015 (based on inflation formula) Statutory

Non-Debt operating costFY 16B Assumption Source

$0M Capital employee and project transition expense is $52M (FY17), $62M (FY18), and $88M (FY19) Internal

$511M Wage Expense increases by 2.5% in FY17 and FY18; no increase assumed in FY19 and FY20 Internal

$109M Total Net GIC Healthcare decreases by 4.7% (FY17), and increases by 6.5% in FY18 and 5.5% FY19 forward Internal

$79M Energy costs increases by 3.5% from FY17 – FY20 Internal

Headcount remains at current budget level of 6,677 through the projection period Internal

Draft for Discussion & Policy Purposes Only 5

FY17P – FY20P Current Pro-Forma Projection Assumptions (Part 2)

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Debt ServiceFY 16B Assumption Source

$34M Legacy debt service grows/-declines by -23.0% (FY17), 18.2% (FY18), -0.4% (FY19), and -2.3% (FY20) Contractual

$109M Central artery debt service stays flat at 0.0% growth for the projected period Contractual

$305M Capital plan debt service grows at 5.9% (FY17), 11.8% (FY18), 5.3% (FY19), and 4.3% (FY20) Internal

New bond issuances include $200M offerings in FY16, FY18, and FY19 Internal

Summary of assumption impact:• Total Revenue: is projected to grow at 1.6% over the pro-forma projected period

(compared with 0.2% per annum growth from FY13 – FY15)

• Operating Expenses (“Opex”): are projected to grow at 4.4% over the pro-forma period and at 3.1% growth if capital employee and project transfer is excluded (compared with 6.5% per annum growth from FY13 – FY15)

• Debt Service: is projected to grow at 4.5% over the pro-forma projected period in line with contractual payment obligations (compared with -2.7% per annum growth from FY13 – FY15)

Draft for Discussion & Policy Purposes Only 6

FY16B $200M Bond Issuance is Adequateto Fund FY16B Capital Plan

DRAFT

0

250

500

750

1,000

$1,250M

FY16B

MBTA

State

Federal

$1,046M

21.6%

32.7%

45.8%

% of TotalCAGR

Capital Funding Sources

FY16B CAPITAL FINANCING SOURCES

Draft for Discussion & Policy Purposes Only 7

From FY13 until FY15, Ridership and Revenue were Flat while Operating Expenses Grew at 6.5% CAGR

DRAFT

-4

-2

0

2

4

6

8%

Compound Annual Growth Rate (CAGR) FY13A - FY15A

Total Ridership

0.25%

Total Revenues (includes Operating Revenue,

Dedicated Sales Tax, Local Assessments, and Other Income. Does not inclue

additional assistance)

0.20%

Operating Expenses

(Not Including

Debt Obligations)

6.50%

Debt Service

-2.70%

HISTORIC RIDERSHIP, REVENUE AND OPEX GROWTH RATES

Draft for Discussion & Policy Purposes Only 8

Growth Rates for the Components of Operating Expense from FY15A:FY20P

DRAFT

0

200

400

600

$800M

0

200

400

600

$800M

Millions ($)

Wages + Capital Employee and

Project Transfer

$490M

$625M

Commuter Rail

$397M$423M

Materials & Services

$181M

$243M

Ride / Boat

$112M

$179M

Healthcare

$115M$135M

Energy

$72M$91M

Pension

$72M$86M

Other Fringe Beneftis

$51M$56M

Other Expenses

5.0% 1.2% 6.0% 9.9% 3.2% 4.8% 3.8% 1.9% 7.3%5 YR CAGR (%)

Non-debt Operational Costs

FY 2015AFY 2020P

ANALYSIS ON FY15A:FY20P GROWTH RATES OF KEY OPERATING COSTS

Draft for Discussion & Policy Purposes Only 9

In FY17P, the Structural Deficit is Forecast to Increase by $72M, Driven by $104M Growth in Opex

-300

-200

-100

$0M

FY16B Structural

Deficit

-$170M

Increased Revenues

$42M

Increased Baseline

OpEx

-$52M

Capital Employee

and Project Transfer

-$52M

Increased Debt Service

-$10M

FY17P Structural

Deficit

-$242M

DRAFT

BRIDGE FROM FY16B TO FY17P STRUCTURAL DEFICIT

NOT INCLUDING ANY ADDITIONAL STATE ASSISTANCE

Draft for Discussion & Policy Purposes Only 10

Structural Deficit will Continue to Increase if Operating and Debt Service Expenses Grow Faster Than Revenue

DRAFT

0

1

2

3

4

5%

Compound Annual Growth Rate (CAGR) FY16B - FY20P

Total Revenues (includes Operating Revenue, Dedicated Sales Tax, Local Assessments, and Other

Income. Does not include additional assistance)

1.60%

Operating Expenses Including Transitioned Employees

4.40%

Debt Service

4.50%

FY16B – FY20P PRO-FORMA ANNUAL GROWTH RATE

Draft for Discussion & Policy Purposes Only 11

Annual Projected Revenues, Expenses andStructural Deficits FY16B – FY20P

DRAFT

1,000

1,500

2,000

2,500

$3,000M

2,0212,135

2,2502,340 2,402

FY16B FY17P FY18P FY19P FY20P

1.6%

4.4%

CAGR (%)

1,851

1,893 1,915 1,949 1,975

-$170M -$242M -$335M -$391M -$427MStructural Deficit

Total RevenueTotal Expenses including Employee Transfer

Projected Structural Deficit

NOT INCLUDING ADDITIONAL STATE ASSISTANCE OF $187M in FY2016B

Draft for Discussion & Policy Purposes Only 12

Annual Structural Deficit is Forecast to Grow to $427M by FY20P, Driven by Increases in Opex and Debt Service

-500

-400

-300

-200

-100

0

$100M

FY15A Structural Deficit

-$119M

Increased Revenues

$172M

Increased Baseline OpEx

-$265M

Capital Employee

and Project Transfer

-$88M

Increased Debt Service

-$126M

FY20P Structural Deficit

-$427M

DRAFT

BRIDGE FROM FY15A TO FY20P STRUCTURAL DEFICIT

Draft for Discussion & Policy Purposes Only 13

0

100

200

300

400

$500M

$190M

$273M$303M

$339M

$242M

$335M

$391M

$427M

FY16 FY17 FY18 FY19 FY20

Base Case Structural DeficitState Assumes Capital Employee and Project Transfer

Structural Deficit Impact of Capital Employees: Even if the State Provided Funding to Transition 532 Capital Employees to the Op Budget, FY20 Deficit would exceed $300M

DRAFT

Draft for Discussion & Policy Purposes Only 14

Next Steps DRAFT

• The FMCB is looking forward to developing a set of proposals to address the financial challenges laid out in the baseline pro-forma assumptions presented

• Next steps include exploring cost-control and revenue enhancement measures and working with multiple stakeholders (including MBTA staff, unions, private sector, and advocates)

• The FMCB looks forward to developing:– Comprehensive scenario development – Operating savings opportunities – Revenue generating opportunities – Items not included in the baseline, such as positive train control – Impact on the Commonwealth trust fund– Further debt evaluation – Peer comparables to benchmark cost and revenue

Draft for Discussion & Policy Purposes Only

Appendix

15

DRAFT

Draft for Discussion & Policy Purposes Only 16

DRAFT

0

100

200

300

$400M

FY17P

"A""B"

"C"

$261M

$190M

$242M

FY18P

$357M

$273M

$335M

FY19P

$366M

$303M

$391M

MBTA 2014 Pro-FormaCurrent MBTA Pro-Forma without Capital Employee and Project TransferCurrent MBTA Pro-Forma + Capital Employee and Project Transfer

Projected Structural Deficit Comparison to 2014 Pro-Forma

COMPARISON OF MBTA 2014 PRO-FORMA PROJECTIONS:“APPLES TO APPLES” COMPARISON IS BETWEEN “A” AND “B,” BUT ACTUAL STRUCTURAL DEFICIT INCLUDING CAPITAL EMPLOYEE TRANSFER IS “C”

Draft for Discussion & Policy Purposes Only 17

0

500

1,000

1,500

$2,000M

711 737 773 801 836888

938 9801,038

1,138 1,177 1,2201,293 1,329

1,4301,509

1,569

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16B

9.7% 3.4% 3.7% 6.0% 2.8% 7.6% 5.5% 4.0%3.7% 4.9% 3.6% 4.4% 6.2% 5.6% 4.6% 5.8%Growth Rate (%)

Annual Operating Expenses

Annual operating expenses (not including debt service) will grow to $1.6B in FY16B

DRAFT

Draft for Discussion & Policy Purposes Only 18

0

2

4

6

8

10%

Fiscal Year

Annual Opex Growth

2.4%

3.7%

4.9%

3.6%

4.4%

6.2%5.6%

4.6%

5.8%

9.7%

3.4% 3.7%

6.0%

2.8%

7.6%

5.5%

4.0%

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16B

Annual operating expenses (not including debt service) grown annually 5.5% over past 4yrs

DRAFT

Draft for Discussion & Policy Purposes Only 19

MBTA Annual Debt Service Expense Will Grow to $540M by FY20

Note: Central Artery Debt refers to Financing Related to the Big Dig Project. Legacy Debt refers to debt inherited at the start of Forward Funding.Source: MBTA Internal Data

DRAFT

0

200

400

$600M

FY 2016P

Capital Plan

Central Artery

Legacy Debt

Leases$452M

FY 2017B

$462M

FY 2018B

$505M

FY 2019B

$524M

FY 2020B

$540M

6.8%

0.0%

-3.0%0.0%

FY16:FY20CAGR

34 26 31 31 30Legacy Debt109 109 109 109 109Central Artery305 323 361 380 396Capital Plan

Draft for Discussion & Policy Purposes Only 20

Debt service payments are split roughly evenly between principal and interest

DRAFT

0

200

400

$600M

Millions ($)

FY 2013A

$437M

FY 2014A

$435M

FY 2015A

$413M

FY 2016B

$452M

FY 2017P

$462M

FY 2018P

$505M

FY 2019P

$524M

FY 2020P

$540M

-0.3% -5.0% 9.4% 2.2% 9.3% 3.8% 3.0%Annual Growth (%)

PrincipalInterestLease payments

ANALYSIS ON 7 YEAR DEBT SERVICE GROWTH RATES

Draft for Discussion & Policy Purposes Only 21

Wage growth, largely due to the transfer of employees to the operating budget, is the largest component of FY17P Opex increase

DRAFT

-60

-40

-20

0

$20M

Healthcare

$6M

Other Fringe Benefits

-$1M

Other Expenses

-$2M

Pension

-$2M

Energy

-$3M

Materials & Services

-$12M

Commuter Rail

-$12M

Wage

-$13M

Ride / Boat

-$14M

Capital Employee and

Project Transfer

-$52M

BREAKOUT OF COMPONENTS OF $104M FY17P OPERATING COST INCREASE

Categories with increased year-on-year costs

Draft for Discussion & Policy Purposes Only 22

532 employees with a fully-loaded annual cost of $126K will be transferred from the capital budget to the operating budget in FY17P, FY18P, and FY19P

DRAFT

0

200

400

600

Total number of employees to be transferred

Capital Budget Employees

Design & Construction

E&M: Maintenance of Way

E&M: Rail Maintenance

E&M: Signals & Communications

Everett Vehicle Engineering

E&M: Power Systems Maintenance

532

0

50,000

100,000

$150,000

Fully-loaded annual cost of employee to be transferred

Average Cost per Capital Employee

Capital Regular Wages

Capital Overtime Wages

Fringe Benefits

Indirect Costs

$126,095

PRELIMINARY ANALYSIS ON TRANSFER OF CAPITAL EMPLOYEES TO OPERATING BUDGET

INCLUDES DIRECT EMPLOYEE SALARY COST. IN ADDITION, THERE IS $20M OF EMPLOYEE RELATED OPERATING COST ASSOCIATED WITH FULL CAPITAL PROJECT BUDGET TRANSFER