By Francis Menton
After running a large surplus as recently as 2006,
the Metropolitan Transportation Authority suddenly in late 2008 projected a deficit of some $700 million for 2009 and announced a round of major service cuts to plug the gap. Topping the list for elimination was the Village’s own M8 crosstown bus.
Our representatives to the state Legislature quickly sprang into action. State Senator Tom Duane and Assemblymember Deborah Glick appeared at meetings and rallies, wrote letters and applied pressure. On May 27, 2009, the Legislature passed a bailout package, including a new payroll tax. The M.T.A. rescinded the service cuts. The M8 was saved. Thanks Tom! Thanks Deborah!
But by December 2009 it was the same story again. The payroll tax raised far less than the hoped-for revenue. Another multi-hundred million dollar deficit is projected for 2010. So the M.T.A. has again announced a big round of service cuts. In the latest list of proposed cuts, the M8 — Eighth St. crosstown — bus will lose all overnight and weekend service, but will survive weekdays — at least for now. The M21 (Houston St.), M9 (Avenue B) and M6 (lower Broadway) buses also face major cuts.
Another round of political theater is no doubt coming. And perhaps the M8 will again survive major cuts, at least until next year. But the nagging questions are: How did we get to the point where the M8 is on the block? How do we know that the next “saving” won’t be just another one-year stopgap? And how did the M.T.A. go from substantial surplus in 2006 to hundreds of millions of dollars of deficits in 2010?
The answer to the last question is easy enough to find, and it’s not what you might think. With the recession, subway and bus ridership is off only about 3 percent from 2008 levels, so that explains only a little. Arbitrators awarded a pay increase to the workers that Mayor Bloomberg has challenged as too generous. But again, even the pay increase explains only a small part of the problem. Instead the big dollars are in two places: (1) real estate transaction taxes, and (2) defined benefit pension plans.
Besides fares, the Legislature has provided for the M.T.A. to be funded largely by certain dedicated taxes. Prominent among those are taxes on real estate transactions, including sales of buildings. Such taxes can raise lots of money when the real estate market booms, as it did in New York from about 2003 to early 2007. But these kinds of taxes are also notoriously volatile, and the revenue they provide inevitably plummets when the real estate market falls.
How sharp can the fall in real estate transaction taxes be when the market falls? The M.T.A. reported that it took in some $1.5 billion in real estate transaction taxes in 2007, but expects final collections of only about $500 million for 2009. That’s a swing of a billion dollars!
Defined benefit pension plans are almost equally volatile. When the stock market booms, pensions become overfunded and require little or even no contributions for years on end. Then the stock market falls — as it did from 2007 to March 2009 — and suddenly the pensions are underfunded and require massive contributions. How big can these swings be? For just one of its many pension plans (NYCERS), the M.T.A. reports that required contributions went from $220.5 million in 2006 to $333.2 million in 2007 to $429.5 million in 2008, with final 2009 numbers not yet in. Other pension plans of the M.T.A. followed the same pattern, for totals of multiple hundreds of millions of dollars of adverse change.
Put together the toxic combination of real estate transaction taxes and generous defined benefit pension plans, and it’s no surprise at all that the M.T.A. went from hundreds of millions of dollars of surplus in 2006 to hundreds of millions of dollars of deficits today.
Now it’s not like the volatility of real estate transaction taxes and defined benefit pension plans is a secret. People who know how these things work know full well that they will collapse in even a moderate recession, let alone a severe one. But the M.T.A. must operate in good times and bad, and so needs financial arrangements that do not cause disaster in bad times. Who then made the decision to saddle the M.T.A. with major revenues from super-volatile real estate transaction taxes and also with major costs from just-as-volatile defined benefit pension obligations?
That of course would be the New York State Legislature. The Legislature controls both the taxes that support the M.T.A. and also its employee pensions. The Transport Workers Union, along with the other city worker unions, greatly prefers to have its pensions controlled by the state Legislature, as opposed to through collective bargaining, because it knows that the Legislature is a soft touch. Union political contributions and vote efforts undoubtedly are the explanation for that. In simple terms, the Legislature responds to the concentrated special interest of the employee unions, and very little to the riders.
The big pension cost problems of the M.T.A. today stem from pension sweeteners passed principally in 2000, when the Legislature mandated for the M.T.A. to pick up the full cost of retirements at age 55 after 25 years of service. Retirement at 55 basically means that, eventually, there will come to be almost as many retired M.T.A. workers as active. But, hey, the stock market was up in 2000, so the cost would not be noticed immediately, and instead would arrive many years out whenever a big recession hit — like now. Were Tom Duane and Deborah Glick part of the Legislature that approved that pension sweetener? Yes, they were.
In fact, in 2003 the Legislature attempted to mandate that M.T.A. workers could retire with full pensions after 20 years at age 50 — a rule that over time would lead to the even more unsustainable situation of more retired than active workers. That legislation passed in both houses of the Legislature, and thus with the full support of both Mr. Duane and Ms. Glick, but failed only because vetoed by then-Governor Pataki.
So, while Mr. Duane and Ms. Glick get admiring press coverage for their supposed efforts to save our crosstown bus, in fact they (along with the rest of the Legislature) are the ones directly responsible for putting the M.T.A. into the financial mess that has put the M8 on the block. The bus riders, and voters, are like the marks in a three-card Monte game, with their attention misdirected to the miraculous “saving” of the service — when, in fact, the service has been doomed from years ago by improvident and incompetent financial arrangements implemented by our elected representatives.
Will the M8 bus survive the current budget crisis? My bet would be yes, although with significant cuts, at least for another year. But long term, the outlook is very poor. The 25/55 pension sweetener mandated by our public-employee-dominated legislators has put the M.T.A. in the unsustainable situation of ultimately having to pay almost one fully guaranteed pension to a retired M.T.A. employee for every current employee who actually runs the service. If we continue down that road, before very long the M8 and many other routes will die, and the M.T.A. will gradually turn into a greatly shrunken enterprise providing much less mobility for New Yorkers, and run instead for the benefit of its retirees, à la G.M. Ridiculously volatile taxes like those on real estate transactions can never hope to finance equally volatile defined benefit pensions where retired workers equal or outnumber the active.
If our representatives actually care about our transit service, they need to stand up against imposing burdensome and volatile costs — like overgenerous defined benefit pensions — on the M.T.A. If they don’t do that, and instead support unsustainable pension sweeteners, we should recognize that despite what they may be saying, they don’t care about the M8 bus. When it counts, they will sell out our bus service for political contributions and election help from union allies. Indeed, it appears that they have already done that.
Menton served for more than a decade as president of the Bleecker Gardens Association, a homeowners association covering the area around Bleecker, Perry and W. 11th Sts. He is a partner at the law firm Willkie Farr & Gallagher LLP.
