Report by Finance and Budget Committee (A) 03-22-2018 Washington Metropolitan Area TransitAuthority Board Action/Information Summary MEAD Number: Resolution: Action Information 201965 Yes No TITLE: Approval of FY2019 Operating Budget & FY19-24 CIP PRESENTATION SUMMARY: Management will present the GM/CEO's FY2019 operating budget and FY2019-2024 Capital Improvement Program (CIP) for Board approval PURPOSE: Management seeks Board approval of the FY2019 operating budget and FY2019-2024 CIP. DESCRIPTION: Key Highlights: • The GM/CEO’s FY2019 budget totals $3.2 billion and is grounded in Metro’s three priorities: Safety, Service Reliability, and Financial Responsibility. • Metro will continue to deliver capital investments to improve safety and reliability and renew and preserve the system. FY2019 planned investment totals $1.28 billion. • The budget does not increase fares or reduce service and Metro will encourage customers to ride through fare pass products. • Management actions to improve efficiency and control costs will limit operating budget expense growth to less than one percent ($12 million), despite cost growth for legacy commitments, mandates and inflation. • Jurisdictional funding support increases by $165 million: $136 million (21 percent) for capital investments and $29 million (3 percent) for operating budget support. • GM/CEO proposing to adhere to three percent subsidy increase cap in FY2019 called for in the plan to Keep Metro Safe, Reliable and Affordable, even though revenue is projected to decline from the FY2018 budget level. Background and History: Metro’s Structural Challenges Metro continues to face structural challenges associated with chronic underinvestment Page 5 of 43 in the maintenance, rehabilitation and replacement of the system’s infrastructure and an unsustainable operating model. Metro is reliant on unpredictable year-to-year local, state and federal contributions and is the only major transit system without a dedicated revenue source. Metro also has a substantial deferred capital needs backlog associated with an aging transit system and has limited maintenance and rehabilitation opportunity due to its “2-track” design and constrained work hours. Metro is a labor- intensive operation with over 70 percent of the operating budget going to pay for wages and benefits and has substantial legacy commitments on wages, pension and health benefits. MetroAccess demand and subsidy have grown rapidly as Metro has limited ability to control the costs of the mandated service. Metro has no “Rainy Day” fund or contingency for unpredictable financial shocks. Keeping Metro Safe, Reliable and Affordable In April 2017, GM/CEO Paul Wiedefeld announced the plan to Keep Metro Safe, Reliable and Affordable. The plan calls for ten actions to restore the system to a state of good repair and establish long-term financial sustainability: • Invest $15.5 billion over next 10 years for critical capital projects, increasing average annual investment to $1.5 billion • Establish a multi-year, inflation-adjusted stable revenue source generating $500 million per year to a Capital Trust Fund • Dedicate the Capital Trust Fund exclusively to capital investment, not day-to-day operations • Secure Congressional reauthorization for federal capital investment (PRIIA) at least at current level of $1.5 billion over 10 years • Cap annual jurisdictional capital contribution growth at 3 percent • Cap annual jurisdictional operating contribution growth at 3 percent • Support flexibility to reduce cost through innovation and competitive contracting, where effective • Amend the National Capital Area Interest Arbitration Standards Act (Wolf Act) to require consideration of WMATA’s financial condition • Initiate new retirement program for new hires • Create a Rainy Day Fund to mitigate unforeseen obligations Back2Good Over the last two years Metro has pushed ahead on key priorities to improve Safety, Service Reliability and Financial Responsibility. Metro increased the rate of capital investment, spending nearly $1.2 billion in FY2017 to advance safety, reliability and system preservation projects. Safety and reliability have improved through track Page 6 of 43 inspection and preventive maintenance program and new 7000 series railcars. Metro erased a $116 million FY2017 revenue shortfall through management actions including reducing the size of the Metro workforce by 800 positions, other cost savings, and prior year budget surpluses. Metro balanced the FY2018 budget through management actions, service reductions, fare increases, and increased jurisdictional contributions. Discussion: FY2019 Budget Priorities The GM/CEO’s FY2019 budget totals $3.2 billion (including $55.9 million for debt service), and is grounded in Metro’s three priorities: Safety, Service Reliability, and Financial Responsibility. The GM/CEO’s Budget priorities: • Fund safety, compliance and reliability improvements to drive ridership • Deliver capital program investment to renew and preserve the system • Encourage customers to ride through fare pass products • No service reductions and no fare increases • Fund legacy commitments, mandates and cost inflation while limiting operating subsidy growth to 3 percent ($29 million) • Implement Management Actions to improve efficiency and reduce cost, including outsourcing where effective Capital Budget and Six-Year Capital Program The GM/CEO’s $8.5 billion FY2019-2024 capital program is focused on projects that improve the safety, reliability and state of good repair of Metro’s infrastructure, equipment and other assets. The six-year investment plan is based on ongoing projects and prioritized system preservation and renewal needs from the Capital Needs Inventory. Metro and the region must invest an average of $1.5 billion annually over the next ten years. Metro’s annual capital investment will ramp up from current investment levels (approximately $1.2 billion) to over $1.5 billion annually by FY2022. After several years of capital delivery falling short of expectations, Metro successfully invested $1.16 billion in FY2017, 122 percent of the original FY2017 capital budget and 99 percent of the amended budget. Metro’s FY2018 capital budget totals $1.25 billion, and after the second quarter Metro is forecasting that at least $1.1 billion will be invested again this year. Metro’s planned FY2019 capital investment totals $1.28 billion. Over 85 percent of the investment planned for FY2019 is to fund projects, programs and contracts that are already underway. Key FY2019 capital budget deliverables include, but are not limited to: 164 new 7000 series railcars (completing delivery of the 748 new railcars); completion of the new bus garage and overhaul facility at Andrews Federal Center; continued delivery of the radio Page 7 of 43 and wireless communication project; rail power system reliability and capacity improvements; track and structures rehabilitation; rehabilitation and replacement of station platforms, escalators, elevators, lighting, parking garages, and cooling systems; replacement of buses and paratransit vehicles; and modernization of information technology systems and infrastructure. Capital Program Funding $8.5 billion of federal and regional capital investment is required over the next six years to ensure a safe and reliable Metro system. Funding from current sources will not meet this need. The Passenger Rail Investment and Improvement Act (PRIIA), which provided $1.5 billion of federal funding for Metro’s capital program for ten years expires after Metro’s FY2020 (federal fiscal year 2019). Metro’s proposed FY2019-2024 capital program assumes that PRIIA ends after FY2020 and that federal formula funding programs remain at current levels. Without federal PRIIA reauthorization and a dedicated revenue source, annual jurisdictional contributions will total $6.3 billion over the next six years, $4+ billion more than the $2 billion contributed through the FY2011- 2016 Capital Funding Agreement. The FY2019 capital budget assumes federal formula, PRIIA, and other federal grants totaling $459 million, MWAA and other funding of $33 million, and $787 million of funding from the jurisdictions (including funding to match federal grants). The $787 million of jurisdictional funding is $136 million (21 percent) more than the jurisdictional share of the FY2018 budget. Capital Project Development and Evaluation The FY2019 capital program will continue to advance the development and evaluation of new major projects and system preservation programs. Development, evaluation and design initiatives include, but are not limited to: a new railcar acquisition program primarily for the replacement of the 2000 and 3000 series railcars, the replacement or rehabilitation of Bladensburg and Northern bus garages, a new railcar overhaul facility, tunnel water mitigation and ventilation systems, and core station passenger circulation improvements. FY2019 Operating Budget The FY2019 operating budget totals $1.837 billion. The budget assumes no fare increases, no service reductions, $38.5 million of management actions to reduce expenses and increase business revenues, and a $29 million increase in jurisdictional subsidy (three percent). FY2019 Operating Revenue Metrorail and Metrobus ridership continues to perform below expectations due to changes in trip-making, telework, competition from other transportation options, low gas prices, and the impacts of the fare increases and service reductions implemented earlier this year. Bus and rail ridership and revenue are below budget through the second quarter of FY2018. Rail ridership has stabilized as compared to the same period in FY2017, but is below budget. Consistent with regional and national trends, bus ridership Page 8 of 43 is below both last year’s actual performance and FY2018 budget expectations. While Metro expects that ridership will increase as new and returning customers experience reliability improvements, the FY2019 proposed budget includes ridership and revenue assumptions based on the current ridership realities. FY2019 bus and rail revenues are projected to be about $25 million (3.6 percent) below the FY2018 budget. Legacy Commitments, Mandates and Inflation Some of Metro’s fundamental operating cost drivers are not controllable. In FY2019 Metro’s costs will increase for legacy commitments, mandates, inflation and market realities. The proposed FY2019 operating budget assumes expense growth of $42 million of cost growth for: paratransit ($11 million), legacy labor commitments including contractually obligated wage steps and health care and pension contributions ($16 million), energy including propulsion power for rail and fuel for bus ($7 million), and inflation on materials, supplies and services contracts ($8 million). The operations budget has been updated to include an additional $0.5 million for the Office of the Inspector General. This increase has been offset by $0.5 million of management cost reductions. Management Actions and Initiatives to Reduce Operating Cost and Generate Revenue Over the last two years, Metro has acted to improve efficiency and reduce operating expense through the reduction of 800 positions and contributions to non-represented employee healthcare, implementation of controls on absenteeism and workers’ compensation, and the launch of the Abilities-Ride program as an alternative to high cost MetroAccess service. Metro is also increasing revenue through enhanced advertising and improved fare enforcement through the Fair Share initiative. To balance the budget and meet the three percent subsidy cap commitment, management is advancing additional actions to reduce cost and generate more revenue including $25.5 million of further cost efficiencies and reductions, $5 million of additional controls on overtime expense, $6 million in parking revenue initiatives, and $2 million from expanded advertising opportunities. While aggressive management actions closed the FY2018 and FY2019 budget gaps, the scale of the reductions is unsustainable. Major structural reforms consistent with the actions called for in the GM/CEO’s plan are required in order to constrain future operating subsidy growth and ensure financial sustainability. Metro will move ahead with efforts to advance structural changes including outsourcing where effective, a reexamination of the bus network, and a review of opportunities to save money by consolidating pension and health care programs. FY2019 Jurisdictional Operating Subsidy The proposed budget constrains jurisdictional operating subsidy growth to $29 million, three percent more than the $980 million FY2018 approved operating subsidy. Jurisdictional subsidy increased by $135 million (16 percent) from FY2017 to FY2018 after no increase the previous year (operating subsidy was $845 million in both FY2016 and FY2017). Without sustainable, structural changes to control costs, Metro forecasts that jurisdictional operating subsidy will grow by an average of 7.5 percent per year from Page 9 of 43 FY2020-2024. Not included in the FY2019 Budget The GM/CEO’s commitment to cap annual operating subsidy growth at three percent requires structural reforms and does not include funding to increase service or address unsustainable mandates or initiatives. These potential additions would force increased contributions from the jurisdictions above the three percent cap. The FY2019 budget does not include funding for: • Silver Line Phase 2 – costs to ramp up to revenue service operations are assumed to begin in FY2020. • Increases in rail and bus service requiring additional subsidy (e.g. bus service proposals, additional rail service). • Wage increases for FY2019 or prior years. • Reduction in FTA grant funding of vehicle preventive maintenance (remains at $60 million). • Rainy day contingency fund to insulate Metro’s jurisdictional funding partners from unexpected financial shocks. Operating and Capital Budget Risks There are substantial and ongoing risks inherent in the proposed FY2019 budget including: • Ridership uncertainty due to changes in trip-making and transportation market (telework, alternate modes, gas prices, etc.) • Outcome of collective bargaining • Significant paratransit ridership growth • Pension and OPEB liabilities • Safety needs and additional system inspection and maintenance efforts • Federal uncertainty – PRIIA reauthorization, formula program funding, transit benefit, federal employment and contracting levels Metro does not have a rainy day or contingency fund. The GM/CEO’s plan to Keep Metro Safe, Reliable and Affordable calls for the establishment of a rainy day fund for emergencies, compliance mandates and unexpected market shifts. A rainy day fund would insulate the jurisdictions from unbudgeted events such as federal government shut downs, major unscheduled regional events, safety mandates, energy price volatility, and snow and other operational disruptions. Page 10 of 43 FUNDING IMPACT: Board action will approve the FY2019 operating and capital budgets. TIMELINE: November 2017 - GM/CEO FY2019 budget proposal December 2017 - Board authorization for budget public hearing Previous Actions January-February 2018 - Board budget work sessions January-February 2018 - Public comment period, including public hearing (January 31, 2018) April 2018 - Transmit FTA grant applications for review and approval Anticipated actions after presentation July 1, 2018 - FY2019 Begins RECOMMENDATION: Management recommends Finance Committee and Board approval of a resolution adopting the FY2019 budget and FY2019-2024 CIP. Budget adoption in March 2018 will (1) allow for the timely application and award of FTA grants, and (2) ensure critical safety, reliability, and state of good repair capital projects are not interrupted. Page 11 of 43 PRESENTED AND ADOPTED: March 22, 2018 SUBJECT: APPROVAL OF FISCAL YEAR 2019 OPERATING AND CAPITAL BUDGETS AND PUBLIC PARTICIPATION REPORT 2018-08 RESOLUTION OF THE BOARD OF DIRECTORS OF THE WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY WHEREAS, The Washington Metropolitan Area Transit Authority (WMATA) Compact Sections 23 and 24 require the Board of Directors to adopt a capital budget and an operating budget each year; and WHEREAS, The Board of Directors received and considered the General Manager/Chief Executive Officer's (GM/CEO) proposed Fiscal Year (FY) 2019 Operating Budget and FY2019-2024 Capital Improvement Program (CIP); and WHEREAS, The Board of Directors conducted (1) a public hearing on January 31, 2018, preceded by an open forum on the proposed Operating Budget and CIP and Federal FY2018 Grant Applications; and (2) notified the public and collected public comments at certain locations in the Metro system, online, and from community-based organizations all pursuant to the Board-approved Public Participation Plan, the results of which are summarized in the Public Participation Report (Attachment A); and WHEREAS, WMATA's Grants Policy Section 201(a) requires Board of Directors' approval for certain grant opportunities; however, there are grant opportunities which require a prompt turnaround and for which the Board's approval cannot be scheduled in advance; and WHEREAS, It is in WMATA's and the region's interests to support innovative ways to reduce the cost of paratransit while providing eligible MetroAccess customers with additional service options; and WHEREAS, WMATA received a premium on the sale of the Series 2017B bonds and wishes to use these bond premium funds to credit the capital contributions for the jurisdictions who have committed to the payment of the debt service on these bonds; NOW, THEREFORE, be it RESOLVED, That the Board of Directors approves the Public Participation Report concerning the proposed FY2019 Operating Budget and FY2019-2024 CIP; and be it further Motioned by Mr. Goldman, seconded by Ms. Harley Ayes: 8 - Mr. Evans, Ms. Harley, Mr. Corcoran, Mr. McMillin, Mr. Marootian, Mr. Goldman, Mrs. Hudgins, and Mr. Horner RESOLVED, That the Board of Directors approves and adopts the FY2019 Operating Budget (inclusive of all Operating Reimbursable and Operating Reimbursable Safety and Security projects) of $1.837 billion, with revenues, expenses, and subsidies detailed in Attachments B and C; and be it further RESOLVED, That $55.9 million of debt service expenditures resulting from the issuance of Series 2009B, 2017A, and 2017B bonds are due from and allocated to the participating jurisdictions as detailed in Attachment C; and be it further RESOLVED, That the Board of Directors approves and adopts the FY2019 Capital Budget of $1.28 billion (inclusive of all Capital Reimbursable projects) and the six-year CIP for FY2019-2024 of $8.53 billion as summarized by investment category and funding source in Attachments D, E, F, and G; and be it further RESOLVED, That the Board of Directors approves the use of Federal Transit Administration {FTA) grant and local matching funds in the amount of $60 million for eligible preventive maintenance expenditures through the FY2019 Capital Budget; and be it further RESOLVED, That, subject to any requesting jurisdiction's paratransit expenses being favorable to such jurisdiction's budgeted paratransit amount and WMATA's net expenses on Metrorail, Metrobus, and MetroAccess being favorable to WMATA's FY2019 Operating Budget, the GM/CEO and Chief Financial Officer (CFO) are authorized to provide credits to any jurisdiction sponsoring innovative paratransit programs not to exceed the actual savings from such jurisdiction's budgeted paratransit amount in the succeeding quarter where credits are based on the per trip rate used by the innovative paratransit program; and be it further RESOLVED, That, subject to a net favorable FY2019 Operating Budget position, the Board of Directors authorizes the GM/CEO to fund the OPEB trust in an amount not to exceed $10 million during FY2019; and be it further RESOLVED, That the Board of Directors authorizes the GM/CEO to accept grant funding, above the amounts listed in the FY2019 Operating Budget and FY2019-2024 CIP, without further Board action so long as there is no increase in the total annual expense budget authorization; and be it further RESOLVED, That the GM/CEO shall report to the Board of Directors all unbudgeted grant funds received on a quarterly basis; and be it further RESOLVED, That the CFO is authorized to credit the capital assistance billing in FY2019 and prior years for all jurisdictions entitled to a share of the bond premium in the amounts of their respective shares of the bond premium; and be it further 2 RESOLVED, That, in order to implement the elements of the FY2019 Capital Budget or the FY2019 Operating Budget, the GM/CEO, the CFO, or their designees are authorized to: (1) file and execute grant applications and accept grants on behalf of WMATA for funds from the federal government and any other public or private entity regardless of whether a local match is required without further Board of Directors' action, so long as that the acceptance of such grant does not result in the increase in expenditures above the approved FY2019-2024 CIP or the approved FY2019 Operating Budget; (2) conduct public hearings at any time during FY2019 in furtherance of the implementation of the FY2019-2024 CIP; and (3) execute and file the annual FTA Certifications and Assurances as a prerequisite to the submission of federal grant applications; and be it further RESOLVED, That the Board of Directors acknowledges that, in accordance with the terms of the Capital Funding Agreement (CFA), if any projects are started during the term of the CFA or any bonds or other financial instruments are issued pursuant to the CFA, the Contributing Jurisdictions have agreed to continue to make their Allocated Contributions for those projects or debt service until the conclusion of the projects or the final maturity of the bonds or other financial instruments; and be it finally RESOLVED/ That, to allow staff to timely apply for the coming FY's grants, this Resolution shall be effective immediately. Reviewed as to form and legal sufficiency, Pji!lricia Y. Lee General Counsel WMATA File Structure Nos.: 2.7 Delegation of Authority 4.2.2 Fiscal Year Budgets 3