Audit Report on the Financial Practices of the New York City Transit Authority
AUDIT REPORT IN BRIEF
The New York City Transit Authority (Transit Authority) was created in June 1953 to operate the City subway and bus systems previously operated by the New York City Board of Transportation. The Transit Authority is a public benefit corporation established under the State of New York Public Authorities Law. In 1968, New York State created the Metropolitan Transportation Authority (MTA) to oversee, maintain, and administer the mass transportation systems in the City as well as commuter transportation and related services within the Metropolitan Transportation Commuter District––New York City, Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester Counties. The MTA accomplishes these objectives through its subsidiaries: the Long Island Rail Road; the Metro-North Railroad; the Staten Island Rapid Transit Operating Authority; and the Metropolitan Surburban Bus Authority (Long Island Bus); and through its affiliates: the Triborough Bridge and Tunnel Authority (TBTA) and the Transit Authority.
Transit Authority operations are funded by passenger fares and operating subsidies. Passenger fares represent approximately 50 percent of the Transit Authority’s revenues. State and City subsidies as well as a portion of the surplus net income of the TBTA flow through the MTA to the Transit Authority to fund its operations. To fund capital projects, State legislation authorizes the MTA and TBTA to issue bonds on behalf of the Transit Authority. The proceeds of these bonds are used to fund the construction and rehabilitation of infrastructure and to purchase subway cars and buses. Funds dedicated to capital expenditures are also provided by grants from the City, State, and federal governments.
Given the fiscal difficulties reported by the MTA and the Transit Authority, and the concerns raised by the public about whether a proposed fare increase was justified, the Comptroller’s Office reviewed a preliminary budget proposal that was released on December 9, 2002, and a revised proposal on December 16, 2002. Unfortunately, the December 16 proposal contained a number of deficiencies that rendered it far from complete. (On December 18, 2002, New York City Comptroller William C. Thompson, Jr. sent a letter to the Chairman of the MTA advising him of the deficiencies in the December 16th proposal. See Attachment for a copy of the letter.) As a result, on January 15, 2003, the Comptroller’s Office began this audit of the Transit Authority’s procedures for recording and reporting financial and statistical data presented to the public.
The Transit Authority had adequate procedures for recording revenue and expenses. Based on our evaluation of Transit Authority internal controls and our review of its financial records for calendar years 2001 and 2002, we are reasonably assured that revenue derived from MetroCards, tokens, subsidies, and Other Revenue (from advertising, concessions, etc.) were properly deposited in the bank and accurately recorded on Transit Authority books and records. We are also generally assured that expenses incurred by the Transit Authority were appropriate, reasonable, and properly recorded.
However, the Transit Authority did not provide the public with complete, clear, and accurate information about its current and future financial position. The Transit Authority overstated its operating expenses on its financial statements for 2001 and on its draft financial statements for 2002, and its Fiscal Year 2003 Operating Budget Proposal lacked essential information. Specifically, the Transit Authority improperly included capital costs and interest expense on long-term debt as operating expenses on its financial statements; and its Operating Budget Proposal did not provide adequate details of its debt service, debt restructuring, and projected revenue and expenses. Overall, the errors in the Transit Authority’s financial statements combined with the shortcomings of the Operating Budget make it impossible for all concerned parties to assess the financial position of the Transit Authority and make an informed judgment about the necessity for a fare increase.
Indeed, after spending three months reviewing the initial and revised operating budgets and various other documents and having discussions with officials of the MTA and the Transit Authority, we were finally provided enough information to analyze and determine whether a fare increase is justified. Our analysis revealed two significant problems with the operating budgets that cause us to question the need for the fare increase. Specifically, the draft financial statements indicated that the Transit Authority ended calender year 2002 with approximately $300 million in the "MTA Investment Pool." However, we could not determine whether these resources were included in the budget plans and were considered on March 6, 2003, when the MTA Board voted to increase the basic Transit authority fare from $1.50 to $2.00. In addition, the Transit Authority’s "Fare Revenue Model," which the MTA used to project Transit Authority revenue from the fare increase in the revised budget, made assumptions regarding ridership that are questionable based on our review of historic ridership data.
Furthermore, based on our evaluation of available records, we determined that the ridership of the Transit Authority pays a significantly higher percentage of Transit Authority operating expenses when compared to the percentage of operating expenses paid for by the ridership of the commuter railroads and Long Island Bus. Moreover, after taking the fare increases into consideration, Transit Authority riders will pay more towards reducing the Transit Authority’s operating deficit than riders of the commuter railroads and Long Island Bus pay towards reducing the operating deficits of those systems.
Overall, we conclude that the Transit Authority’s financial documents issued prior to and after the March 6, 2003, meeting of the MTA Board were not adequate to provide the basis for sound policy-making. Our analysis revealed that financial statements and budget documents were incomplete, misleading, and obfuscating. The Transit Authority made important financial revisions only the MTA Board voted to increase the transit fare. We cannot determine whether those revisions, and possibly others yet to be revealed, will prove the necessity of a fare hike that affects more than seven million passengers a day. To ensure that the public can trust the integrity of decisions that so affect them, we recommend that the Transit Authority, in conjunction with MTA:
- Reevaluate the need for a fare increase based on the issues discussed in this report.
- Ensure that capital costs are properly reported on its financial statements in accordance with GAAP (Generally Accepted Accounting Principles).
- Ensure that future budget proposals contain complete, clear, and accurate information pertaining to the Transit Authority’s financial position. In that regard, the Transit Authority and MTA should appoint an independent task force to review Transit Authority budget proposals before they are presented to the MTA Board for approval. Also, the Transit Authority and the MTA should consider including members of the public as well as elected officials on the task force.
The MTA should:
- When considering future fare increases for the Transit Authority, the commuter railroads, and Long Island Bus, take into account the amount of operating expense already paid for by their riders.