RD7 - Review of Operating, Governance and Financial Conditions at the Washington Metropolitan Area Transit Authority – 2017

Executive Summary:

This report compares the Washington Metropolitan Area Transit Authority (WMATA) against other large transit agencies on a variety of indicators. Data reflects 2015 unless otherwise stated.

Cost Structure. By multiple measures, WMATA’s cost structure is generally average for a large transit agency. All-in labor costs per hour, including salaries, wages and fringe benefits, are average. The unit cost to deliver service, as measured by total operating and maintenance (O&M) spending per hour of service delivered, is average for Metrobus and nine percent above average for Metrorail. Higher than average Metrorail O&M costs derive from rail maintenance spending that is 20 percent or more above average. Costs for rail operations are average.

Although WMATA’s unit costs to deliver service are mostly average, it has delivered high levels of both bus and rail service considering the level of ridership. In FY2015, bus service hours per 10,000 passenger trips were 25 percent above average, and rail service hours per 10,000 passenger trips were 22 percent above average. Bus service levels per rider have been high going back at least 15 years. For rail, high service levels per rider emerged mostly after 2009, as service kept expanding while ridership fell. In 2017, WMATA reduced train frequencies significantly and this should bring rail service levels closer to average. Corresponding changes to bus service were more limited.

Two labor policies that contribute to cost were found to be outliers. On average, WMATA’s hourly employees contribute 3.1 percent of wages to pension, where the national average among all workers in defined benefit plans is 7.1 percent. In addition, WMATA’s unionized employees count overtime earnings in determining post-retirement pension payments. Changing these policies would generate savings, although it should be noted that WMATA’s all-in labor costs per hour were average even with these policies in place.

Funds Paid by State and Local Governments in the Region. Under the WMATA compact, any costs not covered by federal grants, fares or other internally-generated revenues are paid by the region’s jurisdictions. Even though WMATA’s O&M costs are average for a large transit agency, these state and local payments have been growing rapidly, at nearly 10 percent per year. This steep increase in payments is caused almost entirely by four factors:

- The cost of buying new railcars;
- Increased spending on rehabilitating the WMATA rail system;
- Growth in WMATA’s contributions to pension plans; and
- A large revenue decline due to falling ridership.

After accounting for these factors, all other WMATA costs grew at around three percent per year.

Board Operations. With 16 members, WMATA’s board is large. The average transit agency board has nine members. The WMATA board has nine committees or subcommittees, tied for the highest number among large peer transit agencies. Recent efforts to streamline the committee structure have not been successful. The WMATA board also has many meetings – there were 85 board, board committee and board subcommittee meetings between June 1, 2016 and May 30, 2017.

WMATA’s board includes elected officials, a trait it shares with 22 percent of transit agency boards. However, because of the way WMATA is funded, the elected officials on its board could be characterized as ‘dual fiduciaries’ – that is, accountable for the financial health of both WMATA and a local government that makes payments to WMATA. This arrangement is very rare at other large transit agencies, which are mostly supported with dedicated taxes.

Opportunities for Improved Financial Performance. This report estimates the effects of six measures to improve WMATA finances. In dollar terms, the largest is a return of rail ridership. Metrorail ridership declined 14 percent between FY2015 and FY2017, while other U.S. heavy rail systems saw a decline of just two percent. Returning to FY2015 levels (minus the effects of this broad national decline) would reduce the need for operating subsidies by as much as $57 million per year. WMATA’s customers are its biggest funder.

The WMATA bus system is ripe for a major reset that would update where and when service is offered. The scenario analyzed for this report yields a subsidy reduction of as much as $38 million per year, through a combination of reduced costs and increased revenues. Bringing employee contributions to pension up to the national average could be expected to yield $25 million per year. Other changes – decreased fare evasion, more advertising, and lower absenteeism – could yield an additional $35 million per year combined.

Implementing these measures would take several years, and achieving full results on all fronts simultaneously would be difficult. Nonetheless, it is reasonable to estimate a possible reduction in expected operating subsidies of at least $40 million per year after several years. As described below, such a reduction in operating payments by the region’s jurisdictions would allow for funds to be shifted to capital needs.

Need for Capital Investment. Metrorail opened in 1976, and many of its components began to reach their 30-year useful life around 2006. An increase in capital funding would have been appropriate at this point. Unfortunately, new federal funds under the Passenger Rail Investment and Improvement Act (PRIIA) were not approved by Congress until FY2009, and did not flow to WMATA until FY2011. It took even longer for WMATA to ramp-up spending. In FY2017, capital investment finally reached a level sufficient to stabilize the system, but the decade-long lag between growing need and lower-than-necessary investment helped create a backlog of deteriorated assets currently estimated at $7 billion. In addition, as each year passes additional assets wear out and must be renewed. From FY2018 to FY2026, this ongoing need is estimated at a further $1.1 billion per year.

To estimate the funding needed to cover all these state-of-good-repair needs, a financial model of WMATA’s capital program was developed out to 2040. It estimates that WMATA would require additional capital funds of $540 million per year above current contributions from its federal, state and local funding partners. If savings to the operating budget of $40 million per year are achieved as stated above, this need could be met with $500 million per year in new capital funding. This funding would cover only WMATA’s state-of-good-repair needs; any expenditures to enhance the system would require supplemental funding.

To eliminate its state-of-good-repair backlog in a timely manner, WMATA would need to pledge a large portion of new revenues to back new borrowing, estimated by the model at $5.9 billion. For this reason, new funding would need to be dedicated in a manner adequate to secure bonds.