It’s been a rough winter for transit in Boston. The agency’s general manager resigned; they’re buried in 90 inches of snow – it’s a natural disaster in slow-motion. All of those problems are piled on top of the MBTA’s structural deficiencies, outlined in this 2009 review of the agency’s finances. The review, led by former John Hancock CEO David D’Alessandro, paints a bleak picture.

Prior to 2000, the MBTA was backward-funding – sending a bill to the state to cover the organization’s annual operating deficit. A reform program sought to make the MBTA fiscally self-sufficient by dedicating a portion of the state’s sales tax revenue to the agency in exchange for a requirement that the MBTA balance their budget every year. This requirement to balance the budget every year would serve as an incentive for the MBTA to control costs and grow revenues.

Often, similar conversations emerge around WMATA, noting Metro’s lack of a dedicated funding source. However, the MBTA case study shows that dedicated funding alone isn’t a silver bullet. There are other elements to the MBTA’s structural deficit beyond funding.

The MBTA blueprint for self-sufficiency was based on several bad assumptions: The plan called for the MBTA to decrease operations costs by 2% a year. In actuality, they increased by an average of 5% per year. Fuel and energy costs account for a large portion of the shortfall as oil prices rose dramatically (and unexpectedly). Sales tax revenues were expected to grow at 3% per year, the actual growth averaged to 1% per year. The net impact, even with rising fare revenue, is a sea of red ink:

Cumulative impacts from the MBTA funding plan, showing large net negative impacts from the baseline.

There are two different kinds of error here: one is a failure to account for uncertainty in the forecast. Sales tax revenue is strongly influenced by the larger economy; fuel and energy prices are similarly based on much larger and unpredictable energy markets. The size of the error also increases with time from the original plan. Error in the MBTA’s fuel cost assumptions gets larger with each successive year from FY01 to FY08 – beware the cone of uncertainty.

The second type of error stems from wishful thinking. While it’s nice to plan on reducing operations costs, and there’s value in budgeting accordingly in order to set a goal to do so, it’s not clear that the legislation had a clear idea for how the MBTA would reduce those costs. Another analysis from the MBTA shows binding arbitration between the MBTA and labor unions imposed substantial wage increases with no regard for the MBTA’s operating deficit. In that light, assuming the MBTA’s operating costs would decrease seems like wishful thinking at best.

The D’Alessandro review notes that the MBTA’s headcount is actually down, yet wages are up. The agency showed progress in reducing costs, but they “could not pare staff below the number needed to move hundreds of thousands of riders across hundreds of routes each workday.” Baumol’s Cost Disease in action – increasing costs without a corresponding increase in productivity.

To meet the requirement to balance their annual budget, the MBTA sought to lower their annual debt service payments by refinancing their debt to push the principal into the out years and lower near term payments. Much of this refinancing simply ‘papered over’ the agency’s structural deficit. Again, the faulty assumptions of the financing plan exacerbated that structural deficit.

The MBTA’s debt load is also a major issue, one that dates back well before the Forward Funding plan. As a part of a 1991 consent decree to get approval for Boston’s Big Dig, the courts required a broad array of transit expansion projects as “environmental mitigation.” The decree did not identify any funding for those projects. Now, the MBTA has a massive amount of debt, of which approximately 2/3rds is dedicated to prior obligations before the Forward Funding agreement or towards state-mandated expansion projects.

(It’s worth noting the decision-making priorities involved in the Big Dig – the massive tunnelling project was only approved because the transit mitigation projects, backed by transit advocates as a way to hitch their wagon to omnipresent highway funding – yet those projects were never fully funded and now play a large role in exacerbating the agency’s stability. Imagine a project that simply removed the Central Artery and ‘replaced’ it with the long-imagined North/South rail link instead; or where the response to the Big Dig proposal was focused on re-defining the project itself rather than just tacking on ‘mitigation’ transit expansion.)

D’Alessandro’s conclusion is stark: “A private sector firm faced with this mountain of red ink would likely fold or seek bankruptcy.”

Yet, at the same time, the MBTA is “too big to fail.” Transit provides a critical service for any large city’s economy. Given the subsidized nature of public transit in the US, any reform must involve the public sector.

Airlines provide an interesting point of comparison: While US airlines operate for-profit businesses, the nature of air transport is deeply intertwined with the public sector. However, US Airlines are private, for profit corporations. Unlike the MBTA, they can seek legal protections to restructure their business through bankruptcy – and every major airline has done precisely that over the last decade. Airlines used bankruptcy to reduce operations costs from long-term labor agreements. German transit agencies have achieved fiscal stability using similar tools.

Unfortunately, the simplified narrative in the wake of the T’s failure to function normally in the face of Boston’s record snowfall has been to set up a false dichotomy between transit system expansion and system maintenance. In spite of the Big Dig deal, the challenge isn’t between expansion vs. maintenance, but between the political governance and funding mechanisms and the technical requirements to operate and maintain the system.

This political challenge isn’t limited to transit. Highway spending is overwhelmingly focused on expanding the system, at the expense of maintaining the system we already have. Angie Schmidt at Streetsblog put it bluntly: More money for transportation won’t matter if we don’t change how that money is spent.