The Independent Budget Office appreciates the opportunity to testify at this hearing regarding the proposed inclusion of a full Second Avenue Subway in the MTA Capital Plan for 2000-2004. IBO recently issued a report on New York City Transit's fiscal condition, prepared at the request of Councilmember Gifford Miller. At a time when there is renewed interest in subway expansion and how it could be funded, we believe that it is important for elected officials and the general public to have a clearer understanding of the reasons behind the Transit Authority's recent surpluses, as well as the prospects for the future.

Today, I will briefly summarize the findings of our study as it relates to the resolution under consideration. I note that IBO does not have a position as to whether or not the Second Avenue subway or any other particular transit project should be built. Our report concluded that because NYC Transit's surpluses will most likely not continue past this year, they should not be considered as a likely funding source for system expansion.

New York City Transit has experienced substantial changes in recent years. Ridership is up sharply due to strong economic growth and discount policies that have lowered the effective fare. The total number of subway and bus trips increased 17 percent between 1996 and 1998. However, passenger revenues fell by almost 9 percent during the same period, as riders took advantage of the savings provided by free transfers and unlimited ride passes. During this same period there was an increase of 28 percent in tax revenue dedicated to public transit, and NYC Transit continued its successful efforts to contain costs. The combined effect of these revenue and cost trends is that NYC Transit has had large budgetary surpluses in recent years: $433 million in 1996, $314 million in 1997, and $454 million in 1998.

Looking ahead, IBO expects that slower growth in dedicated tax revenue and the need to increase service in response to greater ridership will cause NYC Transit's budget surpluses to decline in 1999 and disappear during the 2000-2003 period. Updating MTA's forecast for NYC Transit, we project that the 1999 operating surplus will be $91 million (about 2 percent of total expenses). Deficits begin in 2000, and reach $429 million (9 percent of expenses) in 2003.

IBO constructed two additional scenarios by varying the revenue and expense assumptions used by the MTA in its forecasts. Under our more optimistic scenario, one that assumes further success in cost containment and continued growth in dedicated tax revenue, NYC Transit would have a surplus of $302 million in 1999 and would just balance its budget over the 2000-2003 period. Under our more pessimistic scenario, one that assumes that dedicated tax revenues remain constant from 1998 to 1999 and then decline to their 1997 level, NYC Transit would have a surplus of $49 million this year and then run large deficits. The deficit would reach $890 million (20 percent of expenses) in 2003.

In order to deal with these deficits, the transit agency would have to consider one or more of the following initiatives: further cost savings that might include service reductions or increases in productivity; additional governmental operating subsidies; and fare increases.

On the capital side, NYC Transit has spent around a billion dollars per year since 1982 to modernize its rolling stock and bring the rest of its infrastructure to a state of good repair. As a result, the physical condition of the subway system is greatly improved, although much work remains to be done. It is our understanding that the forthcoming capital plan will continue spending on system rehabilitation at roughly the current level.

An increasing share of the capital spending for New York City Transit comes from the operating budget, either as debt service on bonds or as direct transfers. The MTA projects that New York City's debt service payments to support the current level of capital spending-which does not include major system expansion-will double between 1997 and 2003.

Given that IBO does not expect New York City Transit to continue running large surpluses, we believe that it is unrealistic to assume that transfers from the agency´s operating budget can fund new subway construction. Moreover, diverting money from the existing capital budget into new construction would endanger the Transit Authority's efforts to bring the entire subway system to a state of good repair. IBO thus concludes that major expansions of the subway system would require large increases in existing revenue streams, and/or entirely new funding sources.

Thank you for the opportunity to testify on this matter. I would be happy to answer any questions you might have.