VTA
Board Memorandum

Date:
September 23, 2003

To:
Ad Hoc Financial Stability Committee
Santa Clara Valley Transportation Authority
Board of Directors

Through:
Peter M. Cipolla
General Manager

From:
Scott D. Buhrer
Chief Financial Officer

Subject:
Additional Operating Financial Scenarios


Additional Scenarios of Sample Plan 2000 Measure A Projects & Potential Revenue Sources


FOR DISCUSSION PURPOSES ONLY


BACKGROUND:

At the September 10th Ad-Hoc Financial Stability Committee meeting, VTA staff presented a number of operating financial scenarios intended to facilitate discussions about incremental increases to VTA's current sales tax as a potential new source of local revenue to present to voters for consideration in 2004.

As we illustrated in the September 10th board memorandum, VTA's ability to move forward with long range plans depends upon our ability to secure a new source of revenue. We further concluded that even with a new source of revenue, we simply cannot do everything.

In addition to the Operating Financial Scenarios, VTA staff also presented a Sample Plan of Major 200(1 Measure A Projects & Potential Revenue Sources, which illustrated the magnitude of the projected cash deficits for the program, currently forecasted to be $2.9 billion by FY 2013.

In response to comments received and discussions that occurred at the September 10th Ad-Hoc Financial Stability Committee meeting, VTA staff has prepared additional scenarios.

Prior to the preparation of the additional operating scenarios, a couple of revisions were made to the information previously provided. For all of the scenarios, we have revised the FY 2003 sales tax to reflect actual receipts for the year. Also, In Scenarios 2 and 4, the board memorandum stated that BART would begin service in December 2014 when the actual assumption is that it will begin service in December 2013. Consequently, the data sheets for Scenarios 3 and 4 included the BART subsidy beginning in FY 2015 rather than FY 2014. Although the revisions affected the totals, there is no change to the conclusions presented in the memorandum.

We could continue to prepare a litany of scenarios, but it is our understanding that the charge of the Ad-Hoc Financial Stability Committee is to focus on the building of a consensus and then make recommendation(s) regarding a realistic new revenue source(s) that could be achieved.

In every scenario we have run, it is clear that the Board of Directors will need to establish priorities because we will not be able to deliver everything that everybody wants. How to allocate scarce resources is a decision that must be made by the Board of Directors.


DISCUSSION:

For ease of comparison to the September 10th scenarios (original, or staff scenarios) we used the same scenarios as the starting point to which the new requested assumptions were added.

The key baseline scenario assumptions are:

• 1/2-cent sales tax projections reflect the low, or conservative forecast results of the taxable sales analysis prepared by Steve Levy, Executive Director of the Center for the Continuing Study of the California Economy. See Attachment 1 for his memo to VTA.

• No new revenues at the end of the 2-year approved budget.

• Assume we will reach a 20% Farebox Recovery Ratio by FY07 through cost efficiencies, a 2% annual ridership increase and the following increases in average fare per boarding: FY 2005 - 15%, FY06 - 17%, and FY 2007 - 20%.

• 21% service reductions are not implemented.

• Bus service stays at current levels (355 peak buses) indefinitely.

• Light rail service stays at 15-minute headways indefinitely.

• Tasman East begins service in July 2004.

• Vasona begins service in January 2006.

• Majority of shuttle service to be absorbed by VTA beginning in FY 2005.

• Beginning in FY 2006, wage escalation is set to equal inflation rate of 3.5%.

• Rate of diesel bus replacements with ZEB's assumed at 15% beginning in FY 2007, per minimum CARB requirement (versus the current Board policy of 100% replacements.)

• Caltrain operating subsidy increased to $16.9M beginning in FY 2006 and escalated at 3.5% thereafter.


Guardino Scenarios


Carl Guardino, President and CEO of the Silicon Valley Manufacturing Group, asked to see a scenario illustrating the impact a 25% farebox recovery ratio would make on VTA's operations.

If the baseline ridership growth assumptions are held constant then the average fare per boarding would need to increase by 25% per year until FY 2007 in order to reach a 25% farebox recovery ratio. The ability to increase ridership while increasing the average fare per boarding per year by 25% will be extremely challenging.


Guardino Baseline Scenario

The Guardino Baseline Scenario includes the revised baseline assumptions and assumes a farebox recovery ratio of 25% is reached by FY 2007 through increases in the average fare per boarding of 25% per year from FY 2005 to FY 2007.

The results of this scenario indicate that with a 25% farebox recovery ratio, VTA would experience continued annual deficits, with accumulated deficits growing to $800 million by FY 2025.


Guardino Scenario 1

The Guardino Scenario 1 includes the revised baseline assumptions and the following additional assumptions:

• New 1/4-cent sales tax beginning FY 2006.

• Farebox recovery ratio of 25% is reached by FY 2007 through increases in the average fare per boarding of 25% per year from FY 2005 to FY 2007.

The results of this scenario indicate that with a new 1/4-cent sales tax and a 25% farebox recovery ratio, it would be feasible to implement all of the scenario assumptions; however, the current Board goal of a 15% operating reserve would not be met until the end of FY 2008. As most are aware VTA staff have recognized the need to increase this to a 20% to 25% reserve.


Guardino Scenario 2

The Guardino Scenario 2 Includes the revised baseline assumptions and the following additional assumptions:

• New 1/2-cent sales tax beginning FY 2006.

• Farebox recovery ratio of 25% Is reached by FY 2007 through increases in the average fare per boarding of 25% per year from FY 2005 to FY 2007.

The results of this scenario indicate that with a new 1/2-cent sales tax and a 25% farebox recovery ratio, it would be feasible to implement all of the scenario assumptions. This scenario also indicates there would be capacity to underwrite additional services beyond the baseline.


Guardino Scenario 3

The Guardino Scenario 3 includes the revised baseline assumptions and the following additional assumptions:

• A new 1/2-cent sales tax beginning in FY 2006.

• BART operating subsidy of $48M (FY 2001 dollars) beginning in December 2012 (escalated at rate of sales tax growth.)

• DTEV to Eastridge is completed and begins service in July 2009.

• Farebox recovery ratio of 25% is reached by FY 2007 through increases in the average fare per boarding of 25% per year from FY 2005 to FY 2007.

The results of this scenario indicate that with a new 1/2-cent sales tax and a 25% farebox recovery ratio, it would be feasible to implement all of the scenario assumptions. It also indicates there would be capacity to underwrite additional services beyond the baseline, although less than in Scenario 2.


Guardino Scenario 4

The Guardino Scenario 4 includes the revised baseline assumptions and the following additional assumptions:

• A new 1/2-cent sales tax beginning in FY 2006.

• BART operating subsidy of $48M (FY 2001 dollars) beginning in December 2013 (escalated at rate of sales tax growth.)

• DTEV to Eastridge is completed and begins service in July 2009.

• ZEB replacement of diesel buses increased from 15% to 100%, per current Board policy, beginning in FY 2007, which result in increased operating costs and requires substantial additional capital costs for facility upgrades.

• Farebox recovery ratio of 25% is reached by FY 2007 through increases in the average fare per boarding of 25% per year from FY 2005 to FY 2007.
The results of this scenario indicate that with a new 1/2-cent sales tax and a 25% farebox recovery ratio, it would be feasible to implement all of the scenario assumptions. It also indicates there would be capacity to underwrite some additional services beyond the baseline, although less than Scenarios 2 and 3.


Mossar Scenarios


Boardmember Mossar asked staff to evaluate the level of service that could be restored with the surplus revenues implied in Scenarios 2, 8, and 4.

We realize that increases to service levels would be expected to occur at the same time as new sales tax revenue begins in FY 2006, but what we found when preparing these scenarios is that if we implemented large service increases all at once, we were unable to reach the operating reserve policy of 15% in a reasonable time frame. Therefore, we phased in the increases over 2 years beginning in FY 2006.

The first 15% to 20% of service increases could probably be added without impacting infrastructure capacity, (depending on Board direction in other issues such as zero emission bus replacement policy.) Beyond that, we would need a new service plan to determine where hours of service would be added and impacts on facilities and, at some point, the need for new facilities. We did not attempt to quantify the impact for these scenarios.


Mossar Scenario 2

The Mossar Scenario 2 includes the baseline assumptions and the following additional assumptions:

• A new 1/2-cent sales tax beginning in FY 2006.

• Light rail service headways are reduced from 15 minutes to 10 minutes.

• Caltrain operating costs are increased 15% beginning in FY 2006. (Staff did not quantify what service levels are assumed in this increase.)

• Caltrain capital costs are Increased 15% beginning in FY 2006.

• Bus service restored to levels allowed by remaining surplus after above assumptions were implemented.

The results of this scenario indicate that, mathematically, bus service could be increased by approximately 1,138,587 hours or 82% over a 2-year period beginning in FY 2006, but the exact amount would depend on infrastructure capacity issues such as required facility modifications and new facilities necessary to support the new increased levels. Therefore, we believe the bus service increase would be materially smaller if we had more time to analyze the impact.


Mossar Scenario 3

The Mossar Scenario 3 includes the baseline assumptions and the following additional assumptions:

• A new 1/2-cent sales tax beginning in FY 2006.

• BART operating subsidy of $48M (FY 2001 dollars) beginning in December 2013 (escalated at rate of sales tax growth.)

• DTEV to Eastridge is completed and begins service in July 2009.

• Light rail service headways are reduced from 15 minutes to 10 minutes.

• Caltrain operating costs are increased 15% beginning in FY 2006. (Staff did not quantify what service levels are assumed in this increase.)

• Caltrain capital costs are increased 15% beginning in FY 2006.

• Bus service restored to levels allowed by remaining surplus after above assumptions were implemented.

The results of this scenario indicate that, mathematically, bus service could be increased by 777,538 hours, or 50% over a 2-year period beginning in FY 2006, but the exact amount would depend on infrastructure capacity issues such as required facility modifications and/or new facilities necessary to support the new increased levels. Therefore, we believe the bus service increase would be materially smaller if we had more time to analyze the impact.


Mossar Scenario 4

The Mossar Scenario 4 includes the baseline assumptions and the following additional assumptions:

• A new 1/2 cent sales tax beginning in FY 2006.

• BART operating subsidy of $48M (FY 2001 dollars) beginning in December 2013 (escalated at rate of sales tax growth.)

• DTEV to Eastridge is completed and begins service in July 2009.

• ZEB replacement of diesel buses increased from 15% to 100%, per current Board policy, beginning in FY 2007, which result in increased operating costs and requires substantial additional capital costs for facility upgrades.

• Light rail service headways are reduced from 15 minutes to 10 minutes.

• Caltrain operating costs are increased 15% beginning in FY 2006. (Staff did not quantify what service levels are assumed in this increase.)

• Caltrain capital costs are increased 15% beginning in FY 2006.

• Bus service restored to levels allowed by remaining surplus after above assumptions were implemented.

The results of this scenario indicate that, mathematically, bus service could be increased by 361,000 hours or 26% over a 2-year period beginning in FY 2006, but the exact amount would depend on infrastructure capacity issues such as required facility modifications and/or new facilities necessary to support the new increased levels. Therefore, we believe the bus service increase would be materially smaller if we had more time to analyze the impact.


Summary of Mossar Scenarios

The magnitude of service changes affects VTA support service costs and the infrastructure required. At some level of change, all costs become variable, but as a rule of thumb, for every 1% increase in bus service above the baseline, we would be adding 13,885 hours and approximately $1.43 million dollars.

One of the things that these scenarios illustrates is that the Board will have to make decisions associated with timing of new services that would be implemented in conjunction with any new revenues. More specifically, the Board will need to give direction as to the time frames within which VTA should strive to restore its operating reserves to levels consistent with board approved policy (i.e. 15%) and further, whether the currently approved operating reserve goal should be revised (I.e. upward.)

We cannot put off saving for another "rainy day" until, for example, FY 2015, which we believe to be an unreasonably long period of time.


Springer/Mossar Scenarios


Boardmembers Springer and Mossar also asked staff to prepare scenarios that would illustrate the impact of discontinuing all light rail service.

By looking at the Baseline Scenario and Scenario 3, one could infer that ceasing the operation and maintenance of light rail could save $60 million per year beginning in FY 2005. This amount is not realistic because failure to operate and maintain the light rail system would violate provisions of our grant agreements and may trigger demands for repayment of hundreds of millions of dollars contributed in aid of construction by the federal and state governments. The savings from eliminating light rail would also be overstated because a large portion of our federal formula grants are generated by "fixed guideway miles."

We do not believe further analysis of this scenario is warranted.


Brownstein Scenario - 2000 Measure A Program


Bob Brownstein, Policy Director of the South Bay Labor Council, requested a scenario that would identify the amount of sales tax revenue bonds that could be generated using the implied surpluses in Scenario 3. This scenario includes the baseline assumptions and the following additional assumptions:

• New 1/2-cent sates tax beginning in FY 2006 would be in perpetuity.

• BART operating subsidy of $48M (FY 2001 dollars) beginning in December 2013 (escalated at rate of sales tax growth.)

• DTEV to Eastridge is completed and begins service in July 2009.

• Master Sales Tax Bond Indenture for new 1/2 cent sales tax would have substantially the same provisions as that of the master indenture for the existing 1/2-cent sales tax revenue bonds (i.e. 3x coverage required to avoid funding debt service and bond fund reserves.)

• Debt service (principal and interest) payments are made from the implied Scenario 3 surplus funds (i.e. from the operating/enterprise budget.)

• Interest rate of issued bonds is 6%.

• Amortization period is 30 years.

The maximum amount of debt outstanding is limited by additional bonds tests that exist within our indenture. It is calculated by taking the prior year's actual sales tax receipts and dividing that number by the maximum annual principal and interest payments that will be due in any given year for existing and any proposed additional financing, which is referred to as the Debt Service Coverage (DSC). For example, if we are receiving $135M per year in sales tax and our maximum annual principal and interest obligation is $45M, debt service coverage would be 3.0x, which means that 33 cents of every sales tax dollar we receive will go to pay our principal and interest obligation. To be able to capture the increase in bonding capacity that generally occurs with rising sales tax receipts, we assume issuing a series of bonds on an annual basis.

The results of this scenario indicate that we could generate approximately $1.3 billion of gross bond proceeds between FY 2006 and FY 2013, which could be made available for 2000 Measure A projects. New debt service costs ranging from $15.2 million in FY 2006 to $92.9 million in FY 2013 would he added to the VTA enterprise fund, substantially reducing VTA's capacity to underwrite additional services beyond the baseline.

As a "rule of thumb", given the assumptions used in this scenario (i.e. 6% interest and 30-year amortization), VTA could generate approximately $13.765 million of gross bond proceeds for every $1.0 million of sales tax receipts available throughout the period of time necessary to amortize the bonds (i.e. 30 years).

Mr. Brownstein also asked to see more optimistic sales tax forecast. Attachment 1 provides a comparison of CCSCE's All Low, or conservative, projections, which we used in all of the scenarios, and CCSCE's All Middle projections.

When you compare projections from FY 2008 through FY 2010, the All Low, or conservative projections are $127.7 million less than the All Middle projections. Through FY 2025, the All Low projections are $875.4 million less than the All Middle projections.


Springer Scenarios - 2000 Measure A Program


Boardmember Springer requested that staff prepare additional scenarios illustrating the impact a a 1-year and a 2-year delay to the start and completion of BART.

One-year Delay

For this scenario, the following changes were made to the Sample Plan of Major 2000 Measure A Projects & Potential Revenues:

• BART costs were moved out one year and escalated at the rate of 3.5%.

• The TCRP funds were moved out to coincide with the expenditures.

The results of this scenario indicate that delaying the completion of BART one year would add $162.2 million to the BART project costs and would have only a minimal impact on the shortfall because interest costs have not been included in the Sample Plan. In this scenario, the largest shortfall year changes from FY 2018 with an estimated $2.91 billion shortfall, to FY 2014 with an estimated $2.84 billion shortfall.

Two-year Delay

For this scenario, the following changes were made to the Sample Plan of Major 2000 Measure A Projects & Potential Revenues:

• BART costs were moved out two years and escalated at the rate of 3.5%.

• The TCRP funds were moved out to coincide with the timing of the expenditures.

The results of this scenario indicate that delaying the completion of BART two years would add $330.0 million to the BART project costs and would have only a minimal impact on the shortfall because interest costs have not been included in the Sample Plan. In this scenario, the largest shortfall year changes from FY 2013 with an estimated $2.91 billion shortfall to FY 2015 with an estimated $2.77 billion shortfall.



Springer/Brownstein Scenarios - 2000 Measure A Program


VTA staff prepared two other scenarios combining Boardmember Springer's scenarios with Mr. Brownstein's scenario.


One-Year Delay to BART with VTA Operating Bond Proceeds

For this scenario, the following changes were made to the Sample Plan of Major 2000 Measure A Projects & Potential Revenues:

• BART costs were moved out one year and escalated at the rate of 3.5%, which resulted in additional project costs of $162.2 million.

• TCRP funds were moved out to coincide with expenditures.

• Included net bond proceeds of $1.25 billion 1 that could be generated by implied surplus in Operating Financial Scenario 3.

The results of this scenario indicate that with a one-year delay to BART and the addition of bond proceeds; the current projected shortfall of $2.9 billion in FY 2013 would be reduced to $1.59 billion in FY 2014.


Two-Year Delay to BART with VTA Operating Bond Proceeds

For this scenario, the following changes were made to the Sample Plan of Major 2000 Measure A Projects & Potential Revenues:

• BART costs were moved out two years and escalated at the rate of 3.5%, which
resulted in additional project costs of $330.0 million.

• TCRP funds were moved out to coincide with expenditures.

• Included net bond proceeds of $1.25 1 that could be generated by implied surplus in Operating Financial Scenario 3.

The results of this scenario indicate that with a two-year delay to BART and the addition of bond proceeds; the current projected shortfall of $2.9 billion in FY 2013 would be reduced to $1.51 billion in FY 2015.


Conclusions

As previously stated, in every scenario we have run, it is clear that the Board of Directors will need to establish priorities because at this point in time our forecasts indicate that even with a new source of revenue we will not be able to deliver everything that everybody wants.


Attachments:
Attachment 1- Sales Tax Memorandum from CCSCE
Additional Operating Financial Scenarios
Additional Scenarios of the Sample Plan of Major 2000 Measure A Projects & Potential Revenues
Attachment 2- Comparison of Sales Tax Projections


Prepared by: Dolores Escalle, Sr. Financial Analyst


1 Net of 2% cost of issuance fee.