HEADER
Date:

To: Honorable Chairman Bruno A. Barreiro
and Members, Board of County Commissioners

From: George M. Burgess
County Manager

Subject: Miami-Dade Transit�s (MDT) Financial Status

BODY
This report has been prepared to provide the Board of County Commissioners with a comprehensive review of Miami-Dade Transit�s (MDT) financial status. Over the last six months, staff has been working diligently to analyze the 30 year outlook for the People�s Transportation Plan. The information presented in this report will be submitted to the Federal Transit Administration (FTA) at the end of this month as part of the New Starts process. This plan addresses priority projects included in the People�s Transportation Plan, but will require the infusion of additional revenues, including a fare increase starting in 2009. Attached to this memorandum are two appendices: Appendix 1 provides details regarding the Pro Forma Development and a comparison of the previous Pro Forma and the FY 2008-09 Pro Forma revenue and expenditure assumptions; Appendix 2 is the FY 2008-09 Pro Forma assuming full federal funding.

The FY 2008-09 Pro Forma, which meets FTA guidelines, shows a balanced financial plan but requires some difficult decisions. Serious trade-offs both in the short and long-term must be considered in order to maintain the viability of the expansion program, and continued pursuit of Federal assistance requires the Board to accept, at least preliminarily, the reasonableness of certain expenditure and revenue assumptions affecting the future funding for public transit. Most of these assumptions are based on the information that has been presented over the last few months at the Transit Committee, including adoption of a $0.50 fare increase plus Operating Cost Index (OCI) or Consumer Price Index (CPI); progressive increases to MDT�s artificially low parking fees (currently $6.25 per month); unification of the transit system; an increase to the general fund support to public transit over the life of the financial plan; two cent increase to the Local Option Gas Tax (LOGT); and depending on the level of future increased general fund support, the substitution of the fare-free Golden Passport Program with a monthly fee and phase out of the current municipal contributions from the Surtax. Some of these options will also require future actions from our Citizens� Independent Transportation Trust (CITT).

While I understand that a fare increase is being proposed at a difficult time for the transit dependent population, there is no choice if we are to support our existing system, much less pursue the expansion program. Even with a fare increase public transportation is still an extremely cost-effective alternative for our traveling public. We must make a determination on the fare policy proposal which helps stabilize the short-term finances of MDT and sets the foundation for a future system expansion and accept some or all of the various revenue options shown above. While it is understood that no Board can commit a future Board to these revenue options, the FTA will expect some consent from the governing body in order to validate these assumptions, particularly since the rationale expressed for the February 2008 �Medium-low� rating was due in part to the history of MDT�s lack of fare increases. Acceptance of this report will signal the Board�s consent.

Of course, we must also remind ourselves that, even if all of the long-term revenue generating measures fell into place, a full Orange Line build-out would still require heavy lifting from our Congressional Members in a fiercely competitive arena. The New Starts process is a technical process, but it is also a political one. Even for projects with strong ratings, funding is not always forthcoming. The positive rating is one for eligibility only; FTA makes the recommendations, but Congress awards and appropriates these funds annually. This means that even though a project may have a Full Funding Grant Agreement (FFGA), this does not guarantee that the project will receive the full amount awarded or the annual allocation that might have been expected. On the other hand, pursuing an expansion program would bring a transit legacy to this region, and deliver on long-standing promises to the community. Transportation infrastructure is a critical component to economic development, and we must be diligent in our efforts to expand this County�s transit system.

New Starts Application Process and Orange Line Phase 2 Project Schedule
As part of the New Starts application process, the FTA requires the submission of annual financial plans that enable the FTA to evaluate an agency�s long-term financial capacity to construct and operate its proposed new fixed guideway project while continuing to fully operate and maintain its existing transit system. In September 2007, an updated New Starts Financial Plan was submitted to FTA incorporating adjustments to the Pro Forma that responded to FTA concerns.

FTA�s concerns centered around a number of key assumptions contained in the previous Pro Forma. These assumptions included ridership, fare revenue, federal funding, and operating costs. In November 2006, MDT was warned by the FTA that the �project is precariously on the fence with regard to maintaining its medium financial rating in both the Capital and Operating components, both of which are necessary to keep the Medium overall project rating in this year's report.� In addressing FTA�s concerns and utilizing more consistent and conservative assumptions in forecasting MDT�s capital and operating capacity, the September 2007 Financial Plan projected a significantly different financial picture for MDT, one which showed a $1.1 billion unfunded line item for the then undeveloped Infrastructure Renewal Program. It was this financial plan that received the overall Medium-low rating in February 2008. It is because of this lowered rating that we have spent so much time on this review.

Assuming a continued pursuit of Federal funding, the following section identifies the schedule milestones and highlights critical submittal dates which are anticipated to occur during the remainder of 2008 to progress the project into Final Design and toward a Full Funding Grant Agreement in 2009. These dates are consistent with the information reported to FTA and reflect a schedule which cannot accommodate slippage through the FFGA milestone activity in 2009. It should be noted that the project schedule�s critical path runs through the right-of-way acquisition activities, which have not progressed pending resolution of the financial plan issues.

North Corridor Critical Submittal Dates
MDT Submits FY 2010 New Starts Update Report to FTA 7/30/2008
MDT Submits Financial Plan and backup to FTA 8/1/2008
MDT Submits FY 2010 New Starts Report 9/5/2008

North Corridor Schedule Milestones
Begin FTA Risk Assessment April 2008
Begin FTA Financial Capacity Assessment August 2008
Supplemental Environmental Assessment - FONSI October 2008
FTA Financial Capacity Draft Assessment Completed November 2008
FTA Risk Assessment Completed November 2008
FTA Approval to Enter Final Design (FD) December 2008
FTA FY2010 New Starts �Medium� Rating February 2009
Begin Right-of-Way Acquisition 3rd Qtr 2009
Execution of Full Funding Grant Agreement 4th Qtr 2009

Notes:
A. All quarters refer to calendar year.
B. Subsequent schedule dates through project completion are dependent on the completion of the tasks noted above.

Recurring Revenue and Expenditure Gaps at MDT
MDT�s long standing financial issues have been recently exacerbated by a slowing economy, escalating fuel costs and a People�s Transportation Plan (PTP) that promised more than it can deliver. And, the County received a reminder from the Federal Transit Administration (FTA) during the 2007 New Starts process � confirming what we have always known � that proper operations, maintenance and rehabilitation funding of a unified transit system is critical to the existing operations and future expansion of our transit system. I have stressed this repeatedly. Not only did the PTP promise more than could be delivered through the surtax revenues alone, no one could have predicted the rapid increase in fuel prices, construction costs and the escalation of real estate prices at the time the program was developed. Exhibit 1 of the enabling ordinance contemplates the study and development of rapid transit lines, doubling the bus fleet, nearly doubling the number of bus service miles and hours, and pumping millions of surtax dollars in major highway and road improvements, while at the same time providing 20 percent of surtax revenues to municipalities that existed prior to the authorization of the PTP for municipal transportation improvements and providing fare free transit on Metromover and to seniors.

The aggressive expansion outlined in the enabling ordinance of the PTP, however, ignored MDT�s historical lack of funding for infrastructure renewal and the recurring operating revenue-expenditure gap of approximately $20 million annually, a condition exacerbated by lack of revenue from passenger fares which have been kept artificially low. Currently, approximately 33 percent of all boarding passengers pay no fare, meaning they are subsidized by the County at an average of $3.96. This figure represents the average system cost of transporting each boarding passenger � the per passenger boarding cost on Metrobus is $3.81 and $4.72 on Metrorail. Only 25 percent of all boarding passengers pay the full $1.50 base fare. Yet even at the full fare, an average subsidy of $2.46 per passenger is required to cover the per passenger cost to MDT. The remaining estimated 42 percent include passengers boarding with discount passes, i.e., grade school and college passes, corporate passes, the Transportation Disadvantaged program and others.

This means that the projected fare box revenue of $91.4 million for FY 2007-08 covers only approximately 21 percent of the operating and maintenance costs of the department. This is a relatively low fare box recovery rate when compared to other transit agencies. MDT differs from its peers with the fare-free category for seniors and with fare-free Metromover service. MDT�s farebox recovery ratio has lagged behind national data by about 10 percentage points. A similar trend is seen for the large urban area data. MDT�s farebox recovery ratio has shown continued general decline while national data has flattened in recent years. Growth in the free and reduced fare programs such as the Golden and Patriot Pass has exceeded all growth estimates and has contributed significantly to lower ridership productivity per revenue mile system-wide at MDT. Our transit department tops the list as one of the more generous transit properties in the country. While we are all aware that these are worthwhile services, I have periodically reminded you that they come with a considerable cost.

Current Challenges
Despite the department�s fiscal challenges, there have been a number of successful strategies that have been implemented to maintain a safe, reliable and efficient transit system. As you are aware, the department has been meticulously evaluating its bus service using industry service standards to eliminate and adjust service that has shown indications of ridership that falls below these standards. Since April 2006, MDT has adjusted bus service from approximately 36 to 32 million miles -- over 4 million miles of service which represents approximately $36 million in savings annually in bus services. Every million miles of bus service implemented costs MDT approximately $9.5 million annually (excluding capital costs). The department has also been using technology more effectively. The recently implemented Trapeze software has allowed the department to plan and implement bus routes by optimizing resources, including minimized overtime usage. Further, maintenance and operational enhancements have resulted in unprecedented improvements in on-time performance and reliability of Metrobus, Metrorail and Metromover service.

While the foregoing departmental improvements are significant in terms of short range budgeting, these savings are minimal over the long term and cannot mitigate the pressure that the expansion program will have on our long range financial plans. Once all costs are adjusted, a net total $9.4 billion in needs remains beyond existing revenues (the surtax, grants and current levels of general fund support and gas taxes) over a 30 year period. The previous Pro Forma projected a positive balance of $304.6 million at the end of the 30 year period but relied heavily on a series of aggressive fare increases to achieve this result. The differences between the previous and FY 2008-09 Pro Formas can be attributed to, among other things, projections of a lower growth rate for surtax revenue due to current economic conditions (an approximate $3.3 billion decrease in projected revenue from the previous Pro Forma); a reduction in the number of proposed fare increases (an approximate $7.7 billion decrease in projected revenue from the previous Pro Forma); a decrease in the projected federal contribution based on recent guidance from the Federal Transit Administration (FTA) (an approximate $2.1 billion decrease in projected assistance from the previous Pro Forma), and the impact of the incorporation of costs associated with the Infrastructure Renewal Program (an approximate $1.8 billion increase in expenditures not contemplated in the previous Pro Forma). While these increases in expense are offset by other factors as noted in Appendix 1, it is evident that very different funding approaches are now required to sustain the Orange Line build-out. We have discussed through this year�s budget process the need to close the projected short term departmental revenue-expenditure gap; however, a comprehensive approach must be adopted in order to realistically address departmental revenue needs over the long term. This year�s Pro Forma projections clearly identify and define the difficult policy choices and trade-offs that we have been discussing over the last few months.

MDT Proposed Budget
The FY 2008-09 budget continues to reflect a two-tier transportation system which is comprised of the existing pre-PTP service that is funded with the County�s General Fund MOE as well as related farebox revenue, and new and expanded service, implemented post-PTP, that is funded by surtax revenues along with its portion of farebox. This is the result of the persistence of our non-unified approach to funding the transit system. In 2004 we began discussions of a unified transit system in earnest with the circulation of the �White Paper�. The �White Paper� emphasized the need to have the Surtax support not only new and/or improved services but also to help support services in place at MDT before November 2002. I have stated repeatedly that the Surtax must be treated as an additional revenue source among the many that support our unified transit system, and that we cannot have the mindset that there are two public transit systems �one that existed before the referendum and another comprised of all new and improved service occurring after the referendum.

This flawed funding scheme has finally caught up with our transit system. As a result of funding constraints related to fuel, maintenance and the early aggressive expansion of bus service post-PTP, we are recommending a decrease in bus revenue service miles by 4.5 million miles, which will move MDT from the current 32.6 million miles to 28.1 million miles of service. The reduction in miles will affect the existing service that was in place prior to the PTP. As recently as last month, revenue miles were reduced by nearly 3 million miles. These adjustments were mainly on routes that did not meet service standards. However, due to the inherent limitations in the use of Surtax funding, the proposed reduction will necessarily be primarily based on cost-cutting measures aimed at arriving at a sustainable level of service. Heretofore, the surtax has been charged only for the percentage of operations and maintenance attributable to the expanded transit service which, as of the June line-up, was at 19.2 percent. When service cuts were implemented in prior line-ups, there was never a crediting to the General Fund for route adjustments on pre-PTP service. Rather, the percentage was adjusted off the top of the total system miles, resulting in continual decreases in surtax support. Again, this occurred even when non-surtax routes were cut.

Using this methodology, it is impossible to address the recurring historical $20 million revenue expenditure gap. Annual shortfalls will only be heightened as the percentage of PTP contribution becomes smaller as compared to the overall size of the bus system. The only way to address this shortfall, then, is to ensure that future service reductions are predominantly made on the existing pre-PTP service. The General Fund support to MDT will not decrease; however, it will be applied to a smaller number of service miles �a redefined and sustainable pre-existing system. As a result, newer PTP funded routes with less ridership than pre-PTP routes will continue, while pre-PTP routes experience service cuts. This is because there is sufficient surtax revenue to cover PTP bus service operations and maintenance costs, along with increased inflationary costs, however, the maintenance of effort, even with an annual 3.5 percent increase and the accompanying fare box revenue, provides us with an unsustainable pre-existing system in the face of escalating fuel and other costs.

In total, a snapshot of the proposed budget for FY 2008-09 includes an operational budget for the department of $379 million. MDT�s staffing will be reduced by approximately 700 positions, which includes positions from bus, rail and administrative support. Recommended adjustments to Metrorail include running four car trains after rush hours; adjusting service headways to 7.5 from 6 minutes during weekday peak periods and to 15 from 10 minutes during weekday off-peak periods; and implementing 30 minute headways one hour earlier during the week (6:30 p.m. instead of 7:30 p.m.) and adjusting weekend headways to 30 minutes from 15. Fuel will be budgeted at $4 per gallon based on current market conditions, and the Department will formalize an Infrastructure Replacement Program (IRP) (budgeted at $7 million) to maintain existing infrastructure at minimum required standards. Should the proposed fare increase be adopted, the FY 2008-09 budget for MDT could sustain restoration of some service miles, however, the persistence of the two-tiered system would still result in cuts to the existing pre-PTP service. Continuing increases in fuel or other operational costs could also negate the restorative impact of the fare increase.

FY 2008-09 Pro Forma
Miami-Dade Transit (MDT) and staff from the Program Management Consultant (PMC), the Office of Strategic Business Management (OSBM) and my Office have developed an updated Pro Forma after extensive analysis. The objective of updating the Pro Forma is to assess annually MDT�s financial resources and question their sufficiency and application over a 30-year period. Rather than produce a Pro Forma at the end of the calendar year, this year we decided to align it with the budget development cycle. This year�s projection assesses MDT�s financial capacity until the year 2037 to build and operate the Orange Line, while continuing to operate and maintain its existing system. However, the FY 2008-09 Pro Forma incorporated an unprecedented review of departmental financial requirements, and this process accounts for the length of time that staff has dedicated to its development. This updated process emphasizes a comprehensive approach to the integration of revenues and expenses, both capital and operating, for major transportation investments down to the unit cost of each item of expense.

Staff has worked diligently over the last several months proofing every number in the current and proposed MDT budget, an exercise which was necessary to develop a thorough set of baseline assumptions from which to grow the 30 year projections (Appendix 2). The FY 2008-09 Pro Forma also takes into consideration the current economic weaknesses at the national, state and local levels. These weaknesses have a negative impact on the overall County budget in the coming years and, as noted above, MDT is no exception, being forced to reduce costs in an effort to operate within available resources. However, utilizing more consistent and conservative assumptions in forecasting MDT�s capital and operating capacity, the FY 2008-09 Pro Forma projects a significantly different financial picture for MDT than the last Pro Forma distributed to the Board of County Commissioners in February 2007. As noted above, that previous Pro Forma projected a positive balance (revenue less expenses) of $304.6 million at the end of the 30-year period based on a healthy surtax projection, significant and regular fare revenue increases amounting to over $7 billion, and substantially fewer operational and infrastructure requirements. In contrast, the FY 2008-09 Pro Forma is only balanced through the infusion of $9.4 billion in new revenue and aggressive expenditure adjustments from a variety of sources. However, the FY 2008-09 Pro Forma does not rely as heavily on fare increases and incorporates capital and operational requirements for continued participation in the FTA funding process. Highlights of the modeling changes and assumptions yielding these very different financial pictures are noted in Appendix 1, along with a detailed explanation of elements considered in the development of the FY 2008-09 Pro Forma and a comparison of the previous Pro Forma and the FY 2008-09 Pro Formas.

Addressing the Needs
A clear starting point to address the funding needs at MDT is improvements in the operations of MDT and its service delivery. Reductions to the high cost per-rider of bus service has already begun. Similarly, there are economies that can be realized through labor cost concessions negotiated during current collective bargaining discussions. While these are not easy subjects, relatively minor changes in our bargaining agreements would go a long way towards providing operating and maintenance cost savings. For example, under the current Collective Bargaining Agreement (CBA), when a bus or rail operator uses leave time for sick or vacation, overtime is paid based on bus or rail service schedules. This contractual nuance alone represents an estimated $45 million cost over the 30-year period.

In addition, there is a need to re-examine the level of transit services provided, the current route structures and other aspects of our transit system to rationalize the system. We must be assured that buses are not being operated with light passenger loads and that service is adjusted in accordance with these demands. MDT will re-intensify this type of analysis with the implementation of the new fare collection system, which will produce accurate data on demand to assist transit planners in properly allocating scarce service resources. There also needs to be a willingness to discontinue lightly used routes, to substitute smaller buses in low demand routes, and to stop daily service earlier if need be. MDT has already brought many of these difficult recommendations to the Board. We intend to further examine service standards. Even though current MDT service standards are a good start, there is no confirmation that these are in fact the best standards for this region or for MDT. For example, one of MDT�s standards is �net cost (or subsidy) per passenger�. Yet, our established policy for fares, as evidenced by the Golden Passport and Patriot Passport, is one that de-emphasizes the collection of a fare. We must evaluate the reasonableness of current service standards, and measure their yields against adopted Board policies. These standards pre-date the existence of most of our free and reduced fare programs, and will need to be updated as the data from the fare collection system reveals where real passenger demand is in this County and what the accompanying transit service standards should be as we develop a truly �right-sized� system for Miami-Dade County. There needs to be an approach adopted that provides service only when there is a reasonable level of demand.

Even with improved management of the system, increases in funding are necessary to avoid serious curtailment of transit services. While the bottom line financial picture is challenging, this year�s exhaustive scrutiny of the Pro Forma can give us greater confidence in our projections as we plan MDT�s future; however, it has also revealed the significant limitations of the current funding streams to MDT. The FY 2008-09 Pro Forma confirms what we have emphasized all along �that in spite of the recent infusions of the general fund maintenance of effort support and the dedicated funding provided by the half-penny, our transit system is still under-funded. Over the past several months, OSBM and MDT have explored measures that would help to overcome the financing problems faced by MDT. Some of these were presented at the request of various Board members at the Transit Committee meetings in recent months. Various options for resolving the situation have been reviewed, and consultations have been held with several other transit properties in arriving at these options. In the longer run, the financial demands of MDT and it strategic expansion program will require substantial re-thinking and a real examination of the commitment of this region to a mass-transit program.

MDT was asked to explore the funding levels of its peer agencies undergoing expansion programs on the magnitude of the Orange Line, an exercise which confirmed what we have known for some time: that the PTP was over-promised based on a half-percent tax given the magnitude of its expansion plan. In its peer review, MDT found that agencies undergoing mass-transit expansions on the scale of the Orange Line receive at least a full penny of support. A simple principle of transit finance that emerged from the period of national expansion of transit systems in the 1970s and 1980s is that a metropolitan area with a mature transit system that is seeking to implement a regional fixed guideway network must have the equivalent of a full 1.0 percent sales tax in the region it serves. Examples of this are found in the transit systems in Atlanta, Cleveland, Houston, Dallas, Denver, Salt Lake City, Los Angeles, and San Jose. All of these systems secured a 1.0 percent sales tax and have proceeded to implement a regional fixed guideway network. Most have relatively small reliance on state funding. MDT, with the equivalent one-half of that amount, is funded significantly below these peer systems. Accomplishing the extent of overall service coverage and premium transit services outlined in the PTP with such a relatively limited source of dedicated funding we now know requires additional resources.

Proposed Fare Policy and other Revenue Adjustments
The FY 2008-09 Budget was prepared with a view towards the operation of a system that lives within its means while dedicating funding to existing infrastructure needs. However, operation within currently available resources in the face of several uncontrollable factors, such as the increasing price of fuel, leaves MDT�s expenditure projections with an inherent vulnerability year after year. Right-sizing transit service is complicated by revenue projections that do not grow at the pace of operating expenses that are annually affected by inflation. This forces MDT to evaluate service levels based on revenue projections alone and not the optimum �right-sized� level of service. Given that 70 percent of MDT�s operating costs are driven by labor and that, in the last two years, fuel costs have increased by 89 percent, from $2.14 to $4.04, the only meaningful long term adjustment that can be made to offset increasing expenses over the coming years in the face of a constrained revenue stream is the elimination of service miles.

A reliable revenue stream that keeps pace with inflationary expenditures is critical to the success of any operation, and is essential to the maintenance of the existing and expanded transit service in this County. Foremost among the policy choices before you is the establishment of a systematic fare policy structure. Prior to the $0.25 fare increase in 2005, MDT had not instituted a fare increase since 1991. The lack of a fare policy that keeps pace with inflationary costs, such as an Operating Cost Index (OCI) or Consumer Price Index (CPI), has contributed to the department�s recurring deficit at the end of each fiscal year. Having no fare increase for such a long period of time is highly unusual in the transit industry, even for agencies with dedicated funding sources.

It is important to note that for the purposes of the Federal submission, a CPI projection was used in developing the FY 2008-09 Pro Forma shown in Appendix 2 and not the OCI index currently before the Board. This is because FTA guidelines standardize fare increase adjustments at the CPI rate because increases beyond CPI may affect ridership projections used in the travel demand models used to evaluate expansion projects. The requirements of the travel demand model and their significant impacts on service levels and accompanying O&M costs included in the FY 2008-09 Pro Forma are discussed in further detail below. While the OCI ties fares to a variability factor that is directly tied to transit expenses, we cannot grow fares at this rate for the purpose of Federal planning projections. The OCI is an inflationary indicator that measures the price change in a market basket of goods and services used in the operations and maintenance of transit services. This indicator focuses on price change and not on the change in volume of a particular item. Hence, inefficiency on the part of a local transit agency in managing its operations would not contribute to inflating the OCI from year to year. The application of and impact of adoption of the proposed OCI fare policy on the Pro Forma is described in further detail in Appendix 1 and has a net effect of adding $1.6 -$1.9 billion in revenue over the 30 year period. Transit properties nationwide are experiencing similar increases in transit related expenses, which continue to outpace available revenues. Many of MDT�s peer transit properties are moving in the same direction, reducing service to cover increased costs and establishing systematic fare policies. Also, federal, and some local, transit related revenues are showing a decline because they are derived from the Local Option Gas Tax which is based on consumption and not price. As a result, the bias in fare policy (and the recommendation from the Transit Committee before you) has been towards the OCI as the inflationary cost index since it is tied directly to transit costs. The County could adopt the OCI methodology for increasing rates, which would give MDT the ability to use OCI as a maximum and CPI as a minimum actual growth factor over time.

Due to the growth challenges associated with the LOGT, the FY 2008-09 Pro Forma shows that, after 2009, the LOGT growth projections to MDT cannot be sustained at 1.5 percent. This is because the slow down of this revenue has been such that the 1.5 percent growth to MDT overtakes any available revenue. Hence, growth after 2009 is now assumed at 0.5 percent in the FY 2008-09 Pro Forma. This issue will need to be revisited in the absence of a unified system, since 1.5 percent growth to MDT is a part of the current loan for existing services; however, increased General Fund support proposed in the FY 2008-09 Pro Forma, beyond the current 3.5 percent, would more than compensate for the 1 percent loss of LOGT.

At this point, it is clear that in order to achieve the goals established by the PTP and complete the projects identified as priorities by this Board, significant increases in dedicated revenues will have to be implemented. It is my recommendation that this be in the form of an additional two cents of LOGT funding and an increase in the maintenance of effort from the general fund. I recommend that the maintenance of effort be converted to a millage equivalent, rather than a set percentage increase, and that the millage equivalent be increased in a phased manner, beginning in 2010. The current MOE is equivalent to approximately 0.57 mills. I also recommend that in order to properly fund the infrastructure maintenance needs of the current system - which have been deferred far too long - and support the debt service issuances necessary for the system expansion, the MOE for FY 2009-10 be increased to 0.6 mills and be increased by 0.1 mills each year until 2013. Of course, this commitment will have to be balanced against other property tax supported activities when setting future year millage rates, and could be offset by an increase in the surtax. Adoption of a policy of an increased general fund subsidy or surtax may offset the need to adjust the Golden Passport program and other things that have been considered. For purposes of the Pro Forma, this has been shown as a revenue source titled �increased general fund support/surtax.�

FTA Process and Impact of the Travel Demand Model on the FY 2008-09 Pro Forma
As noted above, the FY 2008-09 Pro Forma assumes that Orange Line Phases 2 and 3 will receive FTA New Starts funding. In order to allocate its limited annual appropriation of discretionary New Starts funding, the FTA annually evaluates dozens of competing transit projects from across the country. The full New Starts evaluation process, which takes years for any single project to complete, is an essentially two-pronged evaluation. It is important to discuss this evaluation because of the enormous impact it has in generating what may be an unsustainable service level for MDT. It is also a major factor driving the need for identifying future revenue sources for MDT.

* Project Evaluation: FTA assesses each project on its own merits and attempts to quantify how well the project is likely to perform. FTA�s goal is to provide its limited funding to only the �best� projects. FTA uses a number of factors in making this assessment, but the primary metric is the Cost-Effectiveness Index (CEI). The CEI is essentially a cost-benefit measure which compares the annual capital and operating costs of the proposed project to the amount of travel time savings it produces for transit users. A lower CEI represents a more cost-effective project. FTA annually sets CEI thresholds which determine project rankings. The official published CEI is $23.99 per user benefit hour; however, FTA has informally advised us that this year�s CEI will be revised to $24.49 per user benefit hour.

* Agency Evaluation: In addition to evaluating the proposed project, FTA evaluates the financial capacity of the project sponsor or operating agency. Thus, in addition to funding only the �best� projects, FTA strives to ensure that it provides grant funding only to those agencies which are most likely to successfully implement their projects. In particular, FTA looks for assurance that the agency has the financial wherewithal to continue to operate and maintain its existing services; to invest in the renewal of its existing infrastructure; to successfully construct the proposed project; to operate and maintain the proposed project; and eventually, as the project ages, to reinvest in the proposed project.

Two items are particularly critical in FTA�s two-pronged evaluation approach:
* Definition of the Baseline Alternative: The assessment of cost-effectiveness depends heavily on the definition of the baseline alternative, that is, the measure of transit user time savings used in the CEI calculation is the increment between a �baseline� transit network which does not have the proposed project and a transit network which includes the proposed project. Thus, the definition of this baseline is critical and is usually the subject of significant discussion with FTA. Changes to this baseline, once established, are not made lightly, and they can have a significant impact on the CEI of a project even if the project specifications themselves remain unchanged.

* Internal Consistency: The assumptions about transit level of service (miles and hours of service, number of peak vehicles, etc.) which drive the travel demand model and produce the estimate of travel time savings are also key inputs to the financial model and the estimate of operating costs. This concern is critical in understanding the development of the FY 2008-09 Pro Forma:

* To have a project that meets FTA�s Cost Effectiveness Index threshold, ridership and transit user hours saved must be sufficiently high. This has been achieved in the planning process by assuming that Metrobus service slows in response to future projected highway traffic congestion. This results in higher incremental transit user hours saved with the Orange Line Phase 2 (North Corridor) �build alternative�.

* However, slower Metrobus speeds also result in the need to provide more peak buses, bus vehicle-hours, and bus vehicle-miles. This accounts for the bus service �ramp-up� to 42 million miles of service described above beginning in 2015 through 2030. The ramp-up is required through 2030 because FTA is measuring the CEI of the Phase 2 North Corridor in 2030, which is the �design year� for the project. The design year is the analysis year for FTA based on the Metropolitan Planning Organization�s Long Range Transportation Plan Update cycle. More Metrobus service is required in the design year for two reasons:

o This bus service accommodates additional ridership on routes feeding Metrorail stations (this accounts for approximately 20 percent of the ramp-up needs); and

o Increased bus service is projected to be needed to account for slower overall vehicle operating speeds resulting from increased highway congestion (this accounts for approximately 80% of the ramp-up needs).

In other words, in order to accommodate the Phase 2 North Corridor ridership demands, and to meet the equivalent of today�s MDT service headways, a ramp-up in service to at least 42 million miles would be required by the year 2030. However, assumption of these additional operating costs in the FY 2008-09 Pro Forma requires an additional $3 billion in revenue.

Faced with this significant cost driver, staff has evaluated the impact on the FY 2008-09 Pro Forma of foregoing Federal funding. Given that the federal contribution is limited to $700 million, it seemed that the O&M costs associated with drawing down the federal funding might ultimately cost the County more than would be gained. This is particularly significant since updated Phase 2 North Corridor project costs will be received after the FTA submission is due this year. To date, FTA policy has maintained the $700 million federal contribution limit. Continuing to plan MDT�s future based on FTA requirements could ultimately cost the County more than that contribution is worth. Further, the Phase 3 East-West project costs must still undergo significant refinement, and would also be subjected to the scrutiny of the travel demand model. Insertion of the East-West�s projections into the travel demand model could also generate an additional bus service ramp-up requirement for MDT. Depending on that required level of service, federal funding for the Phase 3 East-West could also end up costing MDT more than the potential draw, particularly if the $700 million cap is applied as it was for the Phase 2 North Corridor planning. An East-West bus ramp-up is not contained in the current projections because of the planning stage in which the East-West project currently finds itself, and because it would be beyond the planning horizon of the FY 2008-09 Pro Forma. Certainly any bus service ramp-up would undoubtedly provide better service levels to the public, although their sustainability would be the subject of future debate. Commitments to the $0.50 fare increase with an OCI or CPI adjustment will still be required under a non-Federal build-out scenario, however, there would be some flexibility as to the other revenue options.

Conclusion
There is not a more critical time for our transit system. Enormous challenges are before us at a time when public transportation is becoming more and more critical. The options outlined in this report do not represent easy choices, but the funding requirements for a modern transit system are enormous. Despite the long-range financial requirements, approval of a systematic fare policy is critical for the short-term. The initial fare increase of $.50 and the establishment of a systematic fare policy are necessary to help MDT keep pace with inflationary costs, such as the volatility in fuel prices, on the existing system. Nearly all transit properties nationwide are experiencing similar escalations in fuel and labor costs and they are addressing them by increasing fares and adjusting service. MDT has been under clear instructions to make it a priority of the department to implement efficiencies to control costs. However, no amount of efficiencies can make up for the funding projections before us today. While this short-term fare measure requires the Board�s immediate attention, there are significant long-term issues that still need to be vetted by the Board.

If the Board should decide not to commit to these revenue alternatives, the only other options that would sustain an expansion plan would involve the development of less costly modal approaches to the expansion program. We are all aware that the per passenger boarding cost is higher on rail than on bus ($4.72 vs. $3.81). The County could begin looking at less costly transit alternatives for Phases 2 and 3 of the Orange Line such as Bus Rapid Transit and Express Bus service. These alternatives are prevalent in several major cities around the country and use technologies that have adequately addressed other community�s mobility needs and congestion issues. If there is no agreement on the fare policy and revenue options before you, MDT will move forward with looking at these alternatives as the only cost-feasible options for a sustainable expansion program. We must either provide more resources to transit or temper our plans to our available resources.

As was stated at the outset, we must make a determination on the fare policy proposal which secures the short-term future of MDT and sets the foundation for a future expansion and accept some or all of the various revenue options shown above. Whatever our direction today, pursuit of a transit expansion program is critical to the future of this region. It will profoundly impact the quality of life for our residents and impact our continued viability as a tourist destination. A program on the magnitude of the Orange Line has the potential of bringing this County into the arena of world-class cities with true mass-transit networks. I look forward to engaging you and the CITT as we set a future course for our transit system.