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Wall Street Journal


New York's Subway Woes Could Have Been Avoided

April 25, 2009

By Nicole Gelinas

Get ready for a return to 1970s-style chaos.

Unless the state intervenes, in five weeks New Yorkers will face steep fare hikes on buses, subways and commuter rail lines. They'll also face deep cuts in train and bus service. Those who work late will suffer long waits in stations with no employee on duty, inviting unease, disorder and crime.

The state's Metropolitan Transportation Authority (MTA) is facing a $2 billion shortfall this year, with bigger deficits looming in the future. Its officials are planning a huge 30% fare hike while they await action from the political class. How city and state leaders respond will have far-reaching consequences. But the forecast does not look good: With shrinking tax revenues going toward outdated public-sector benefits and social spending rather than to core public services, New York appears to be on a path to ruin frighteningly similar to the 1970s.

The deterioration of the transportation's physical assets could begin in just a few months, capital-spending documents show. The MTA's aging infrastructure needs ceaseless investment -- about $4 billion a year -- just to maintain its current operations. The authority will get about $1.3 billion in federal stimulus money for capital projects, but that's simply not enough to stave off cuts for new rails, signals and the like.

The MTA has borrowed partly because labor has consumed cash. Politicians and MTA officials say that the authority's deficit is a direct result of unanticipated economic forces. But that's not the whole story.

True enough, the depression in New York's main industry, finance, is doing its damage. But it was an unanticipated bubble in that industry over the past five years that hid the MTA's problems. Thus, in 2007 alone, the authority raked in $1.6 billion in real-estate related taxes that, along with other levies, subsidize its fares. That was nearly double what the authority expected.

But the governor and the state legislature (which are responsible for the MTA's leadership) did not use this windfall for capital improvements. Instead, this money papered over labor and debt costs that were growing out of control. Now that bubble-related tax revenue has fallen off, we can see what was covered up. In 2004, for example, servicing the MTA's debt cost $848 million. Three years from now, it will hit $2.3 billion a year, even without much new construction.

That is just the tip of the iceberg. Five years ago, the MTA's labor costs were $5 billion. Now they are nearly $7 billion. The big drivers have been pension and health-care costs, up 42%.

MTA employees, even those who perform what might be called retail jobs, like station clerks, can retire as early as 55 with generous pension and health benefits. This is not compensation for a lifetime of low wages. Average pay for the MTA's union workers is more than $60,000.

The blunt truth is that New York City and state spent the good years giving its public employees generous raises, without asking for benefits concessions in return. City benefits costs, too, have piled up to an unsustainable $13 billion annually. That's a third of the city's tax revenue. Political leaders did nothing about it. When the transit union went on strike nearly four years ago to protect its pension benefits, Gov. George Pataki caved in and kept the status quo.

Gov. David Paterson and Gov. Pataki before him (let's just leave out the farce of Eliot Spitzer) didn't even need the unions' cooperation to reduce pensions costs for new workers. Lawmakers could have passed legislation that would have cut benefits and increased contributions without union input. They didn't.

Instead the state expanded its Medicaid program, which now costs the city $5.6 billion a year, up 44% over the past seven years. The city, under Mayor Michael Bloomberg, similarly ramped up education spending by 70% to nearly $21 billion. Education spending has shot up 42% faster than spending on the MTA, even though public-school enrollment shrank while MTA ridership soared.

So now we're stuck with the same subway system that we had when the financial bubble era started -- even though faster commutes to the outer boroughs are feasible and would improve people's lives.

The MTA is planning back-office cuts that will save it about $300 million a year by 2012. That's fine, but by then pension and health benefits will have increased by more than that amount. The service cuts the MTA has planned will save about $200 million or so annually. But cutting service will not stem out-of-control costs. If the MTA ceased all service, it would still have to pay all of its employees' pension obligations and service its massive debt.

City and state officials have tried to come up with a bailout plan. But what the governor wants is to impose $2 billion in new taxes and fees -- including a new payroll tax on all employers in the city's five boroughs, Long Island, and five upstate counties served by the MTA. It's hard to see how that will help create jobs in New York. Meanwhile, if the public infrastructure that supports the private sector decays, it will only be harder for private businesses to revive themselves and the metro area's economy.

A rate hike in some form is certain (and inflation-linked hikes are appropriate). But the real fix will only come if the state prioritizes the MTA in its budget by cutting spending elsewhere to free up transportation funding. City and state officials should stand together to demand labor reforms, including raising the retirement age and increasing pension contributions for new workers, and requiring all city and state employees to pay more for their health benefits.

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