in Houston, Texas

Revenue projections for Houston-area Metro called optimistic by outside accountants; Metro: ‘We will not build more than we can afford’

Thursday, Aug 23, 2012, 08:26AM CST
By Mike Cronin
piggy bank

When the federal government provides $900 million in grants, it’s a big deal.

And if that award represents the first-ever funding of its kind for Houston light rail, the requisite celebration includes Federal Transit Administrator Peter Rogoff and members of the area’s congressional delegation.

Such was the scene in November as proponents for regional public transit lauded the taxpayer-funded gift for construction of two planned Metropolitan Transit Authority of Harris County, Houston light rail lines.

But some Metro critics such as Paul Magaziner say transit authority officials “knowingly misrepresented” data, such as projected fare revenues, to the Federal Transit Administration last year to obtain that $900 million.

Magaziner owns the printing business VCI Group/Color Reflections on Richmond Avenue. The planned University/Blue Line would run in front of his shop.

Metro officials identified 100 percent of sales tax revenues it collects and periodic fare increases as two sources of money in June 2011 FTA grant application documents. But Metro officials knew they could not count on the sales tax revenue unless voters allowed it during a referendum scheduled to occur on Election Day this November. And Metro President and Chief Executive Officer George Greanias has stated publicly that fare increases aren’t always politically realistic.

George GreaniasGeorge Greanias

“We can tell the federal government we’re going to increase (fares) by 8 percent every couple of years, but there’s a little thing called public opinion about that,” Greanias said in response to a question posed to him at a public forum in July at one of the Ripley House Neighborhood Centers. (Go to minute 57:00 of the linked video to hear the question and Greanias’ reply.) “I’d like to say that we could double the fares and raise a whole bunch of money. But we’d enjoy it for about 24 hours before we were all strung up from the trees.”

Greanias also said during his response that Metro’s “base scenario” contains no fare increases. The various financial scenarios that Metro has prepared all “have the same basis in fact,” he said.

“Even if we don’t increase the fares,” Greanias added, “we know that we can sustain what we’ve got because of the additional financial planning we’ve done.”

Greanias responded to questions from Texas Watchdog through Metro spokesman Jerome Gray.

“Metro went through a lengthy process that included an extensive review and FTA approval of $900 million in funds for a voter approved project. We are now more than halfway through building the two federally funded lines and a third locally funded line,” Greanias said in a statement.

Gray added in an e-mail that “we cannot say that future Metro boards will not raise fares.” And he pointed out that the financial forecast submitted to the FTA extends through 2035.

“Typically, fare increases are a reasonable assumption when developing a long-term (20-25 years) forecast,” Gray said. “Should fare increases not occur, Metro would certainly consider available revenue streams and determine how to proceed.”

Beyond that, farebox revenue pales in comparison to sales tax revenue, which makes up about 83 percent of Metro’s total revenue, Gray said.

Gray added, “We did not, and will not, knowingly present information that is not true.”

In the financial plan for the North/Red Line and the financial plan for the Southeast/Purple Line, Metro officials write that “base fares are assumed to increase by $0.10 in 2015, 2020, and 2025, and by $0.15 in 2030 and 2035.” That amounts to about an 8 percent increase every five years.

Yet Gray told Texas Watchdog in an e-mail that “Metro currently assumes that fares stay at their current levels and do not increase.” The Metro board “has not approved any change in fares.”

Harry RichardsonHarry Richardson

Transit expert Harry Richardson, of the University of Southern California, said long-term projections like those in Metro’s financial plans are always wrong.

“Who can predict what’s going to happen over the next 20 years? That’s crazy,” said Richardson, a USC professor and James Irvine Chair in Urban and Regional Planning. “Consultants always underestimate the costs of rail lines and overestimate ridership. If they don’t, they won’t get hired ever again. So they lie, lie, lie.”

Metro supporters say the greater Houston region will be harmed unless public transit becomes a viable transportation option. Automobiles can’t be the only way to get from here to there, say those such as Rebecca Perringer Tapick.

“We need multiple transportation solutions,” Perringer Tapick said. She is a board member of the Citizens Transportation Coalition, a nonprofit that focuses on transportation issues in the Houston region. “That’s the answer to problems such as road congestion, asthma and people getting to their jobs. If service people can’t get to their jobs, our economy will suffer.”

Metro based numbers on keeping greater share of sales tax

Metro’s June 2011 reports considered its finances in the context of projects under construction plus those still being planned, including 30 miles of light rail, 28 miles of commuter rail and 40 miles of rapid bus service.

Metro acknowledged in those reports that the sales tax projections were contingent on the agency recouping 100 percent of proceeds from its 1-cent sales tax after 2014, a plan that even the agency’s board is no longer pursuing.

A decision on sales tax collection amounts won’t be made by voters until November’s referendum. Because of that uncertainty, FTA officials requested additional cash-flow analyses to assess Metro’s ability to meet its matching grant obligations.

In July 2011, Deva & Associates, P.C, a Maryland accounting firm, provided the FTA with a revised financial report for the North/Red Line and a revised report for the Southeast/Green Line, the two projects the awarded $900 million in grants will fund. This is the first time those reports have been made public, Gray said.

The revised reports assume that the sales tax payments to other local governments continue, that Metro completes the three rail lines that are underway --- the third is the East End line along Harrisburg ---- and that other projects not yet begun “could be delayed if necessary should cash flow problems materialize.”

The accountants determined that while some of Metro’s numbers were optimistic, the agency was prepared financially to construct and operate the three lines and to operate and maintain the existing system.

“FTA carefully analyzed Houston Metro’s financial plan supporting the ($900 million grant application) for the North and Southeast Corridor light rail projects,” FTA spokesman David Longo said in an e-mail. “We concluded that Houston Metro had sufficient financial capacity to construct and operate these light rail systems.”

The reports explain that if sales taxes and fares fall short, the agency has other debt instruments, like commercial paper, available.

“Leadership at Metro has stated over and over that we will not build more than we can afford,” Gray said. “That remains true.”

That Metro officials assumed the transit authority would be able to keep all of the sales tax revenue a year-and-a-half before the results of this November’s referendum will be known doesn’t sit well with Houstonians such as Barry Klein, president of the Houston Property Rights Association.

“This is an agency that’s pursuing every avenue it can to pursue federal grants,” Klein said in a phone interview. Metro officials simply will cut back on bus services at the expense of rail expansion, he said.

“That’s where they’ll find their salvation if their projections of revenue flow don’t work out,” Klein said.

But David Crossley, president of Houston Tomorrow, says the $900 million in federal grants is justified. Houston Tomorrow is a nonprofit organization that focuses on growth and other urban issues.

“Why is the $900 million even an issue?” Crossley asked. “Look how hard the pro-sprawl developers fought that. And the federal government went ahead and awarded the grants, anyway. That tells me (FTA officials) are confident that Metro has the right stuff.”

Beyond that, Crossley said, “Economic prosperity for Houston and the region rely on continuing to grow the light rail and bus system. If we can’t continue to do that we’re looking at a Detroit situation.”

Detroit confronts an economic crisis that could force city officials to privatize public transportation and city lighting and reduce other traditionally public services such as garbage collection.

Metro fare box collections ‘aggressive,’ sales tax projections exceed historical average: Accountants’ reports

Like the June 2011 reports, the July 2011 reports include plans to increase fares. They also state that Metro assumes no ridership declines due to those fare increases -- even though ridership decline is common “during years of fare increases.”

None of the reports include an assessment of what would occur if Metro chose not to increase fares at all. But they did measure the transit authority’s varying financial position if growth projections for fares were off. Under a scenario where fare and sales tax revenues were five percent below projections and operating costs were 5 percent higher than projected, the accountants concluded that around 2018 the agency would need to dip into reserves or incur more debt.

“Overall, the projected farebox revenue is considered aggressive since Metro... did not provide any other supporting documentation to justify increases in ridership during years when fares are increased,” the July 2011 reports say.

The accountants with Deva & Associates also cautioned that the sales tax projections remained optimistic.

Metro estimates growth in sales tax collections of 4.2 percent to 6.1. percent through 2035, even though historical growth was on the low side of that range: just 4.5 percent over the prior 15 years.

“For 23 years of the 25-year cash flow, the projected growth rate for sales and use tax revenue exceeds the historical average,” Deva & Associates officials wrote.

The FTA requested the Deva & Associates reports specifically to show whether Metro would be able to afford its future projects if the transit authority must continue to pay a portion of its sales tax revenues to Houston, Harris County and 14 other cities for road construction and repair.

Board members on Friday approved the final draft language of a November referendum to allow voters to choose whether Metro should continue those “general mobility payments” or keep all of that money.

The ballot question proposes to continue the current agreement in which Metro distributes up to 25 percent of the sales tax revenue it collects every year to the other local governments, with this modification: If voters say yes, any sales tax growth above what the transit authority collects in 2014 would be split equally by Metro and those local governments for the following 10 years.

Metro board Chairman Gilbert Garcia estimated that if voters approve the measure, the amount of added revenue for the transit authority would total about $400 million, critical to paying down existing debt and adding as many as 200 new buses.

The referendum will be held against the backdrop of a debate between those who support expanding public transit in the region to spur economic growth and those who criticize Metro for not keeping all of the promises it made in 2003.

***
Contact Mike Cronin at mike@texaswatchdog.org or 713-228-2850. Follow him on Twitter at @michaelccronin or @texaswatchdog.

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Photo of piggy bank by flickr user kenteegardin, used via a Creative Commons license.

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