Jul 11, 2017

CLEVELAND - The Greater Cleveland Regional Transit Authority (RTA) Board of Trustees Tuesday reviewed the 2018 tax budget and began discussions on finances for the 2018 calendar year. A public hearing was held, and RTA staff submitted to the Board its tax budget transmittal letter, below, which reflects a summary of anticipated revenue, expenditures and financial trends. 

Executive summary

The 2018 Tax Budget is an initial analysis of the economic financial trends, revenue and expenditure forecasts, and service levels of the Authority. It is a reflection of actions taken in the current and in previous budget years. It is a valuable tool in the budget development process, as it helps to identify upcoming issues and opportunities that may impact the Authority.

There is a pivotal question looming that will impact future budget years - uncertainty over what action(s) the State may take to address a potential narrowing of the Sales & Use Tax base that would cause a substantial loss in revenue for the Authority. The issue specifically relates to Medicaid Managed Health Care (MMHC) providers which, under State law, are currently included within the Sales & Use Tax base, while non-Medicaid MHC’s providers are not. 

Under Federal regulations, though, “taxing only a subset of health-care providers at the same rate as a statewide sales tax” is not permissible and the Federal Centers for Medicare & Medicaid Services (CMS) gave Ohio until June 30, 2017, to comply.

The 2018 Tax Budget is presented with State assistance for 15 months, October 2017-December 2018, due to the removal of the Medicaid MHC from the tax base. This funding is in the State’s budget.

Another option being considered is what is referred to as Dolan’s Amendment, named after Senator Matt Dolan. If approved, Dolan’s Amendment will provide an additional 6 years of funding from the State to mitigate the loss of revenue from the tax base.

Scheduled base fare increases, as well as Paratransit fare increases, will be executed in August 2018 and annualized in 2019. Major sources of revenue for the Authority, with the possible exception of the Sales & Use Tax, are expected to continue their current stable or slow growth pattern for the next 5 years.

Passenger Fares are estimated at an increase of 3.5 percent in 2018, as

  • The 2017 Paratransit fare increase is annualized.
  • The base fare increase is executed in August, and
  • Ridership slowly rebounds,
  • The continued low cost of gasoline will continue to have a dampening effect.

Projections are for a 3.3 percent increase in revenue for 2019, as the fare increase implemented in 2018 is annualized. For 2020 through 2022, Passenger Fares are budgeted to increase at 0.5 percent each year.

Reimbursed Expenditures, the third largest source of revenue, is budgeted to remain below $25 million, from 2018 through 2022.

A continued focus on data-driven performance initiatives, such as TransitStat, The Partnership for Excellence, and ISO 14001, will continue to improve processes, enhance operational capabilities, and reduce costs for the Authority.

  • TransitStat projects for 2017 were again aligned with the new Strategic Plan.
  • In a continuing drive to excellence, RTA made its first full application under The Partnership for Excellence and the Baldrige Criteria. RTA received the Gold Award recognition level. RTA is the first transit agency to receive this award.
  • In 2016, RTA received the Three-Star Ohio Green Fleet Award from Clean Fuels Ohio for work to improve air quality and health, reduce pollution, and strengthen Ohio’s economy. 

The 2018 Tax Budget shows positive year-end balances for 2018, due to the inclusion of funding from the State for the loss of Medicaid MHC. RTA must continue to work with counties, transit authorities and activist groups to communicate the importance of public transit to the communities.

General Fund Assumptions

Inflation Assumption: 1.7 percent to 2.0 percent  
Rationale:
The Federal Reserve Bank recently released projections for the remainder of 2017 through the next 30 years. Officials at the Cleveland Fed observed that the 4th District expanded at a moderate rate. They stated that labor markets have strengthened, but with pressure on higher wages for both low- and high-skilled workers. Employers are seeking employee retention through enhancements of benefit packages. The Federal Reserve Bank is expecting the economy to expand slowly -- between 1.7 percent and 2.1 percent through 2019. The Federal Reserve Bank of Cleveland projects the inflation rate to remain around 2.0 percent through the next 10 years.

Interest Rates Assumption:  1.6 percent to 2.9 percent
Rationale:
The Federal Reserve Bank raised interest rates again in June 2017, from 1 percent to 1.25 percent, the third consecutive increase in 2017. The June 2017 economic report on the current economic conditions of the U.S. projects an increase in the interest rate to 1.5 percent by year-end, and additional increases in 2018 to a projected high of 2.9 percent.

The economic activity in the U.S. continues to strengthen, while inflation rates remain low, and unemployment rate has been decreasing. The Fed hinted that additional increases were expected in federal funds rate. Bloomberg economists are expecting the Fed to increase interest rates 0.25 percent every quarter for 2018. The Fed economic projections of Federal Reserve Board Members and Federal Reserve Bank projects the Federal Funds rate from 1.9 percent to a high of 2.9 percent in 2018, and a projected high of 3.3 percent in 2019.

Beginning and Available Ending Balance

For 2017, revenues are currently estimated at $293.3 million -- $3.8 million above budget -- and total resources are estimated at $326.4 million. The ending balance for 2017 is estimated at $31.1 million, or $22.6 million better than budget, due to:

  • 2016 ending $11 million better than the estimate.
  • Funding from the State for the loss of the MMHC from the Sales & Use Tax receipts in the last quarter of 2017.
  • 2017 operating expenses being monitored tightly.

The major challenge for 2018 is the decision the Ohio General Assembly will make regarding Senator Dolan’s Amendment. The projected annual loss of $20 million in 2019 Sales Tax revenues, with the projected increases in expenditures, will severely impact the ending balance in 2019 and beyond. If legislators cannot override the Governor’s veto on the Amendment, the General Fund ending balance is estimated to be ($2,232,846) in 2019.  Although budget execution is key, even the best budget execution will not solve the looming Sales & Use Tax problem.

REVENUES

Passenger Fares Assumption:    $48.5M
Rationale:

Passenger Fares for 2018 are estimated at $48.5 million, a 3.5 percent increase from 2017 projections. Fares include:

  • The annualized 25-cent base fare increase ($2.25 to $2.50), which was executed in August 2016.
  • An additional 25-cent fare increase to Paratransit, beginning in August 2017 ($2.50 to $2.75).
  • A 25-cent base fare increase to be implemented in August 2018 (Fixed Route: $2.50 to $2.75; Paratransit: $2.75 to $3.00).  

Actual Passenger Fare revenue received through May 2017 was $17.1 million. This amount is $1.6 million above 2016 actuals through May, and 7.4 percent above budget.

No fare increases are planned for the out-years 2019 through 2022. The increases executed in 2018 will be annualized in 2019, where Passenger Fares are projected at $50.1 million. For 2020 through 2022, Passenger Fares are projected to increase at 0.5 percent each year.

Advertising & Concessions

Assumptions:
$1.5 million, Advertising Contract and Concessions
$   615,000, Naming Rights: HealthLine, CSU Line, and MetroHealth Line
$  2.1 mllion Total
Rationale:
Advertising revenue is composed of three subcategories.

  • Current advertising contract and concessions are projected to total $2.4 million in 2018 and projected to increase $50,000 each year from 2019 through 2022, due to the Advertising Contract..
  • Naming Rights for the HealthLine, CSU Line, and the new MetroHealth Line.
  • New contract for advertising on the bus shelters, estimating revenues of $185,000 for 2018.

Sales & Use Tax Revenue Assumptions:

Sales & Use Tax: $203.2 million
State Assistance for MCO Loss: $ 20.1 million
Rationale:

RTA receives 1 percent of the Sales & Use Tax Revenue collected in Cuyahoga County. The estimate for the 2018 Tax Budget is provided with State Assistance through December. It is uncertain what decision Ohio General Assembly will make regarding Senator Dolan’s Amendment.  If State Legislators override the Governor’s veto, funding will be provided by the State to the counties and transit agencies for 6 years, to cover the loss made by the removal of the Medicaid MHC from the Sales & Use Tax. Sales & Use Tax receipts are projected to decrease by 8.5 percent in 2019, and increase minimally from 2020 through 2022. 

Investment Income Assumption: $70K
Rationale:

The estimate for Investment Income for 2018 is $70,000. The Federal Reserve Bank has increased interest rates 0.25 percent for the last three quarters. The Investment Income estimate for the 2018 Tax Budget is $70,000. This remains at the same level from 2019 through 2022.

Trolley Assistance Assumption: $640,000
Rationale:

The B-Line, E-Line, C-Line, and NineTwelve Line are partially subsidized by the Downtown Cleveland Alliance, through area businesses, and the RTA. The B-Line, E-Line, and NineTwelve Line provide service for Downtown customers during the weekdays. The C-Line provides service around Downtown during the evenings and weekends. Receipts for this revenue stream are projected at $640,000 for 2018 and each of the out-years.

Other Revenue Assumption: $1.2M
Rationale:

This revenue category is difficult to project, as it consists of various claim reimbursements, rental income, salvage sales, and identification card proceeds. For the 2018 Tax Budget, receipts are projected at $1.2 million. For 2017, the Authority has received justr over $1 million through May, and is projected at $1.5 million by year-end. The out-years, 2019 through 2022, are projected at $1.2 million each year.

Reimbursed Expenditures Assumptions:
$20.0M, Preventive Maintenance Activities
$  1.1M, Fuel Tax Reimbursement
$  0.8M, Reimbursed Labor & Material
$  0.2M, Other Reimbursements
$22.1M, Total

Rationale:
This category is composed of:

  • The reimbursement of labor costs for capital projects.
  • Preventive maintenance activities within the Operating Budget.
  • Diesel fuel tax refunds. 

For the 2018 Tax Budget and the out-years (2019-2022), revenues from Reimbursed Expenditures are estimated at $22.1 million each year.

Formula grant funded reimbursement of preventive maintenance activities is the largest item included within Reimbursed Expenditures, and represents a trade-off between providing funding for needed State of Good Repair projects, or to support daily operations. A long-term goal is to keep preventive maintenance reimbursements under $25 million, with grant funding steered toward capital projects. Other reimbursements include ODOT reimbursements and bus bridge reimbursements, which are projected at $0.2 million each year.

EXPENDITURES

Salaries and Overtime Assumption: $145.7M
Rationale:

These costs account for 54.2 percent of RTA’s operating expenses. In the past, labor agreements for ATU and FOP were very innovative and tied wage increases to the percentage increases of sales tax and fare revenue. Both FOP and ATU contracts are being negotiated in 2017. Future increases will be based upon the negotiated contracts. Non-Bargaining personnel wage increases are not budgeted for 2018 or the out-years.Total Salaries and Overtime are budgeted at $145.7 million for the 2018 Tax Budget. They are projected to increase 2.5 percent in 2019, with and nominal increases from 2020 through 2022.

Fringe Benefits Assumption: $53.5M
Rationale:

Fringe Benefits costs account for about 19.9 percent of RTA’s operating expenses. The main categories in Fringe Benefits include health care and prescription costs, vision and dental costs, and PERS (pension) expenses. Fringe Benefits are budgeted at $53.5 million for the 2018 Tax Budget. From 2020-2022, Fringe Benefits are projected to increase slightly.

Fuel and Natural Gas Assumptions:
$ 6.5M, Diesel Fuel
$ 2.3M, Natural Gas
$ 8.8M, Total

Rationale:
Utilities are the second largest expense, after personnel costs, for the Authority. The Energy Price Risk Management Program has helped to stabilized one of RTA’s most volatile expenses -- diesel fuel. Through this program, the cost of diesel fuel has remained steady. The U.S. has increased production of crude oil markedly in the last few years,and is now less dependent on foreign sources. RTA placed 106 new CNG buses into operation and the older diesel buses have been retired, reducing the total cost of fuel by nearly $883,000 in 2017 and an additional $167,000 in 2018.  Over the next five years, diesel fuel costs will continue to decrease as newer buses are introduced.  For the 2018 Tax Budget, the total for Diesel and CNG is $8.8 million, a 1.9 percent reduction from 2017 projections.

Other Expenditures Assumption: $ 61.1M

Rationale:
Other expenditures are estimated to increase by $6.5 million in the 2018 Tax Budget. The major drivers for this increase are service and maintenance contracts, inventory, and ADA purchased transportation. This does not include transfers to other funds.

Electricity and natural gas are also closely managed now. RTA has reduced electricity costs by nearly $14 million over the last five years. In June 2014, a new contract for electricity was awarded, which fixed costs for the next three years at a very favorable price for the Authority. Natural gas is hedged through 2018 at very favorable prices and a new contract was negotiated at the end of 2016.

Transfers Asumption:         
$  18.9M, Bond Retirement
$  15.0M, Capital Improvements
$    2.1M, Insurance Fund
$ 75,000, Pension Fund            
$  36.1M, Total

Rationale:
The transfer shown for the bond retirement “set-aside” is simply debt service less the investment income earned in the Bond Retirement Fund. The interest and principal payments on outstanding debt are taken from debt amortization schedules. A $30 million debt service was planned for 2017. but is scheduled to be deferred to 2018.

The transfer to the Capital Improvement Fund covers 100 percent locally funded capital projects in the RTA Capital Fund, as well as required local matches for most grant-funded projects in the RTA Development Fund. 

The $18.9 million transfer to the Bond Retirement Fund for debt payments represents a transfer of 8.4 percent.  The total contribution to capital, at 15.2 percent, remains outside the Board policy of a maximum of 15 percent of Sales & Use Tax revenue. This continues to reflect the significant financial requirements of the Authority’s capital program.

The $2.1 million transfer to the Insurance Fund is required to maintain the Fund Balance at the current $5 million level and to cover expected expenses for the 2018 Fiscal Year. Lastly, the $75,000 transfer to the Supplemental Pension Fund is also needed to maintain the recommended balance. 

FINANCIAL INDICATORS

The General Fund statement presented in this Tax Budget results in the following performance against the Authority's financial policy goals.

OPERATING EFFICIENCY

Operating Ratio: The Board policy requires a 25.0 percent ratio in operating revenues compared to total operating expenditures. The 2018 Tax Budget yields an 18.9 percent ratio, which is below the policy objective. The Operating Ratio for 2017 is estimated at 19.1 percent. The decline is a warning that expenditures are growing at a faster rate than operating revenues.

Operating Reserve:  An estimated ending balance of $23.8 million is a 1.1-month operating revenue for the 2018 Tax Budget. The reserves for 2019, estimated at -0.1-month, is a further indication of an imbalance between revenues growing at a slower rate relative to the growth in expenditures. This highlights the need to identify new revenue sources and to effectively monitor and control expenditures to achieve a sustainable Operating Budget.

Growth per Year: This policy requires that growth in the cost-per-hour of service from year-to-year be kept at or below the rate of inflation. The 2018 Tax Budget assumes no inflation in “Other Expenses”. This indicator of $145.5 per hour of service is 6.5 percent higher than the 2017 projection and higher than the estimated 1.7 percent to 2.0 percent inflation rate. Operating costs must continue to be monitored and held down.

CAPITAL EFFICIENCY

Debt Service Coverage: The 2018 Tax Budget estimates the debt service coverage to be 2.23 due to deferring the debt service until 2018, and is expected to meet the Board policy minimum of 1.50. The trend for 2019 through 2022 will decline and is estimated at -3.53 in 2022. Effective budget execution must maintain reasonable fund balances above the $15 million level, if this objective is to be met for the long term.

Sales & Use Tax Contribution to Capital: Current Board policy requires that a minimum of 10.0 percent and a maximum of 15.0 percent of Sales & Use Tax receipts be applied to the capital needs of the Authority. These funds are used to meet the Authority’s annual debt service payments, to provide the local match for grant funded capital projects, and to fund Routine Capital and Asset Maintenance projects included within the RTA Capital Fund. This indicator is expected to exceed the maximum of 15.0 percent in 2018 and continue through 2022. Without State assistance, the Sales & Use Tax revenue falls and the percentage of the Sales Tax contribution will increase to meet the capital needs.

Capital Maintenance to Expansion:  Several years ago, RTA Board members recognized that our emphasis must be to maintain the Authority’s existing capital assets. They revised this objective to a policy guideline of 75 percent to 90 percent of the Authority’s capital projects. The Authority’s emphasis continues to be the maintenance of existing assets, as opposed to expansion projects. This measure is projected to end 2017 at 93.5 percent, again finishing above the maximum guideline. At 94.5 percent in 2018, this ratio will remain above the policy guideline, as the focus of the Authority’s capital program is on achieving a state of good repair (SOGR) in its capital infrastructure that requires significant investments in upgrading and improving existing assets, as opposed to expansion projects.

CAPITAL IMPROVEMENT FUNDS

The majority of the Authority’s capital projects are funded with Federal and State grants that, in most cases, require a 20 percent local share. The funds needed to meet the local requirements of these grants, as well as for 100 percent locally funded capital projects, are provided through the retention of investment earnings, contributions from Sales Tax & Use proceeds as well as debt sales.

Transportation is a capital-intensive business and the Authority’s focus has been on addressing various State of Good Repair (SOGR) projects. In recent years, improvements in RTA's financial position led to a reduction in the use of formula grant funds to support the Operating Budget through the use of preventive maintenance reimbursements. This led to the re-prioritization of these funds for capital improvements to address many deferred SOGR projects throughout the Authority.

Financial resources are allocated through a capital review process, which prioritizes both budget and funding of requested capital projects. It continues to maintain the focus of the Authority’s long-term capital plan, as well as it continues to reflect on existing and future financial and operational constraints facing the Authority.

Some SOGR projects, either completed or currently underway, include:

  • Rehabilitation of West 30th-98th Street Track.
  • Installation of a CNG fueling station at Triskett Station and associated CNG infrastructure improvements to modify and upgrade the facility.
  • An upcoming Red Line track reconstruction project on the West Side for track located at West 30th-West 98th Street
  • Major substation replacements at W. 65th Station, Warrensville, Puritas and East 120th Street.
  • New construction of the SCADA and Fiber Optic System software/hardware upgrades throughout the rail system.  

The goal is to keep reimbursed preventive maintenance as low as possible to allow badly needed projects to move forward and upgrade infrastructure and facilities in a sustainable way. Unlike recent capital programs, which relied upon continually changing funding levels established by temporary Congressional extensions to transportations bill, the new transportation bill -- Fixing America’s Surface Transportation (FAST Act) -- provides a level of certainty over the next several years for the Authority’s formula grant awards. The FAST Act provides close to $2.5 million more formula funds to the Authority for use in its capital program, though the Act did not renew funding for the Work Access program and other grant programs to reimburse operating expenses.

The 2018 through 2022 estimated capital expenditures are predicated on year-to-date outlays, obligations and projected commitments, as well as, the approved five-year Capital Improvement Plan. Projected grant revenues include current, as well as expected, traditional and non-traditional grant awards and are based on a continuation of current FAST Act funding levels.

Over the next five years, the Authority’s capital program will continue to focus on various State of Good Repair (SOGR) projects throughout the system. These include:

  • An on-going bus replacement program to replace buses throughout the system.
  • On-going station rehabilitation to meet FTA ADA key station deadlines.
  • The replacement and upgrading of equipment.
  • The last of the planned light rail crossing improvements.
  • Rehabilitation work at various Authority facilities.
  • A continuation of an aggressive track reconstruction program to address slow orders and upgrade the track conditions throughout the Authority.

BOND RETIREMENT FUND

The General Fund is the source of fund transfers necessary to make the principal and interest payments for the Authority’s outstanding debt service. The Bond Retirement Fund transfer is the debt service less the investment income earned in the Bond Retirement Fund. The interest and principal payments on outstanding debt are taken from the debt amortization schedule. 

In 2017, a decision was made to defer the $30 million sale of additional debt until 2018. Total expenditures of $19.1 million are expected in 2018. At the end of 2018, one current debt series - the 2008A Bonds -- will be retired. It is anticipated that a new debt sale of $25 million will be issued in early 2020 to support the capital program with a second debt issue of $25.0 million planned for early 2022. Several years ago, debt levels were of concern. The Authority restructured, reduced costs, and increased fund balances. It is now in a much stronger position financially.  Rating agencies have recognized that strength. RTA received ratings of AAA from Standards & Poor and Aa1 from Moody’s.

INSURANCE FUND
The Insurance Fund is structured to reflect a combination of self- and purchased insurance coverage. Projected activities in 2018 include a combined $2.1 million for premium outlays and claims payments. This will require a $2.1 million transfer from the General Fund to maintain the current Fund balance above a minimum of $5.0 million, as recommended by RTA Risk Management Department.

SUPPLEMENTAL PENSION FUND
Authority employees who were employed by predecessor transit systems are covered by supplemental benefit payments. Activities expected within this fund in 2018 include $9,900 of revenue from investment income, a $75,000 transfer from the General Fund to maintain the Pension Fund at the recommended balance, and projected benefit payments of $65,000.

LAW ENFORCEMENT FUND
In 1988, RTA became involved with the Northern Ohio Law Enforcement Task Force (NOLETF), a multi-jurisdictional force formerly known as the Caribbean/Gang Task Force. RTA's involvement was prompted by the increased gang activity found in and around the rail system and the need to obtain intelligence in this area. In addition to the benefits of intelligence-gathering and improved inter-department relations, RTA derives revenue from seized and confiscated monies and/or properties of convicted drug dealers prosecuted by the Task Force.  

Revenue obtained through the NOLETF may be expended for non-budgeted items for law enforcement purposes.  Furthermore, certain guidelines have been instituted by the State Attorney General's Office for the reporting and disbursement of funds.  At this time, the expenditures projected in 2018 through 2022 are funds currently encumbered for protective equipment, and various supplies and materials to support law enforcement activities.

RESERVE FUND
In 2017, the Authority established the Reserve Fund to help protect the Authority from future economic downturns and cost increases. The Reserve Fund retains funding for five accounts: Compensated Absences, Fuel, Hospitalization, Rolling Stock, and budget years with 27 pay periods. The transfer made to the Reserve Fund in 2017 was $9.2 million. There is no transfer budgeted for 2018.

ALL FUNDS
As a result of projected financial activities, the All Funds Balance is expected to increase by $3.5 million, or 4.9 percent. If State assistance is not received in 2019, the ending balance would fall to $28.0 million.  However, if the State enacts Senator Dolan’s Amendment, it would provide an additional $20 million for 6 years.