Tuesday, March 09, 2010

Transportation in Trouble - Again

A recent analysis by the General Assembly’s Department of Legislative Services (DLS) shows that conditions for the Transportation Trust Fund (TTF) are becoming so dire that the state will have to sharply cut back new capital spending and even pick just one transit line to build between the Red Line, Purple Line and Corridor Cities Transitway. All of our bone-shaking predictions for transportation funding appear to be coming true.

In Maryland, most funding for transportation projects is derived from the TTF, which is financed by a variety of sources. Below is the revenue distribution for the TTF in Fiscal Year 2011 (which begins on 7/1/10).

However, only a minority of the TTF is used for actual transportation projects. Most of it goes to operating costs for the Maryland Department of Transportation (MDOT), revenue distributions to the counties (or now, the general fund) and debt service.

Most TTF revenue sources are forecasted to grow through FY 2015, although some (like motor fuel taxes) are projected to grow quite slowly.

The problem is that TTF spending obligations could very well grow more rapidly than revenues. DLS believes that the Maryland Transit Administration (MTA), which operates MARC trains and Baltimore’s bus and rail services, could be under-budgeted by as much as $30 million in FY 2011. DLS also notes the short-term problem of vast spending on snow removal – and that was before the giant February storms. And DLS points out, “Another potential looming expense is the outcome of the binding arbitration process MTA is in with the unions regarding salaries and benefits which could result in back salary payments being made for fiscal 2009 and moving forward.”

The most serious problem involves MDOT’s ability to finance interest payments on its bonds. DLS notes:

In its agreements with bondholders, MDOT has agreed to maintain a coverage ratio of prior year net income and pledged taxes at 2.0 times greater than the maximum annual debt service in a given fiscal year. If the department falls below the 2.0 times coverage ratio, it has agreed not to issue additional bonds until it exceeds 2.0 times coverage. To ensure fiscal prudence, historically, MDOT has maintained an administrative coverage ratio of 2.5.
But MDOT has temporarily dropped its coverage ratio below 2.5 to a range of 2.2-2.3 in Fiscal Years 2011, 2012 and 2013. Why? Because MDOT has sought to minimize cuts to its capital budget beyond the ones it has already made. While MDOT’s desire to maintain as much of its capital program as possible is admirable, the problem is that if revenues fall short of its forecasts, its coverage ratio may fall below the level of 2.0 it has pledged to bondholders. If that happens, MDOT will not be able to issue more bonds and that will cause significant capital financing problems.

The end result of all of this is that rising debt service and operating budget levels will eat up most of the revenue increases that may materialize in future years, thereby squeezing the capital budget. That will greatly handicap the state’s ability to construct new infrastructure of all kinds.

As we show below, capital spending is projected to actually FALL in the out years.

DLS summarizes the TTF’s outlook in words both grim and blunt:

As previously highlighted, downside risks exist in MDOT’s current TTF forecast. Titling revenue estimates may be ambitious, federal authorizations are likely to decrease significantly absent federal tax increases, there is no additional State debt capacity, and debt service coverage levels remain below administrative levels and close to the minimum required in bond covenants. The operating budget appears understated relative to actual experience, particularly for snow removal and transit operating costs. Furthermore, the forecast does not appear to account for potentially higher costs due to inflation, eventual employee cost-of-living raises, or the effects of higher interest expense that are likely to accompany an economic expansion.

It is becoming increasingly likely that planned capital spending currently outstrips available revenues in the six-year forecast. In addition, the department continues to pursue three transit lines that would require several billion in State and federal dollars to construct and tens of millions in State funds to then operate. Other major funding needs exist for dredging, chromium ore remediation, bridge rehabilitation, homeland security, MARC Growth and Investment Plan, freight funding enhancements, as well as continued investments in highways and transit to mitigate congestion.

In sum, this forecast calls into question MDOT’s ability to meet its current operating and capital commitments, much less its ability to respond to other unmet needs even if a robust economic recovery provides the level of revenue already estimated. The department, and General Assembly, in the future could be confronted with having to pick one transit line to construct, increasing pressure for a major revenue as the department cannot continue to constrain operating costs and meet debt service coverage levels as planned and the demand for capital projects continues to increase, and debt issuances are constrained by overall State debt limits.
You read that correctly, folks. DLS is repeating the warning that we issued in January: the state currently cannot afford its share of the cost of the Red Line, the Purple Line and the Corridor Cities Transitway simultaneously, or even two of them. Without a new revenue source, it may have to pick one. And as for the other new projects... what projects?