8.0  Financial Feasibility

This section of the SEIS/SEIR summarizes the cost and revenue projections for the various Central Subway Project alternatives and for the San Francisco Municipal Transportation Agency (MTA) as a whole.  The primary basis for this section is the MTA’s Central Subway FY [begin insertion] 2008 [end insertion] [begin deletion] 2009 [end deletion] New Starts [begin deletion] Report, [end deletion] Financial Plan, which was prepared in [begin insertion] 2006 [end insertion] [begin deletion] 2007 [end deletion] , [begin insertion] although this section also includes [end insertion] [begin deletion] in addition to [end deletion] updated costs estimates and revenue projections [begin insertion] for Project alternatives, which [end insertion] [begin deletion] that [end deletion] have been provided by the MTA and its consultants.  The analysis is not required for CEQA environmental review, but is presented for informational purposes as a financial plan is an important element of the federal and local project approval process.  [begin insertion] Total forecast o [end insertion] [begin deletion] O [end deletion] perating and capital costs are compared to [begin insertion] operating and non-operating [end insertion] revenue [begin insertion] s from federal, state and local [end insertion] sources to determine the financial feasibility of the Project alternatives.  The feasibility of the capital investment, as well as the ability of the MTA to support ongoing system-wide capital and operating needs, is factored into the determination. 

Typical of projects at this stage of financial feasibility analysis, capital and operating costs, as well as ridership, operating and non-operating revenues are preliminary and will be further refined throughout the Project’s development process.  Project cost estimates become more certain as Preliminary Engineering is completed and Project details and funding strategies become more certain.  This will lead to continuing refinements of the financial plan for the Project.  The MTA expects to update the Project financial plan in September [begin insertion] 2007 [end insertion] [begin deletion] 2008 [end deletion] .

8.1 Costs and available revenues

8.1.1 Capital Costs

This section describes the techniques, assumptions and methodology used for estimating the capital cost for the Project alternatives.  

Cost Estimation Methods

General Approach

Capital costs have been estimated according to the Federal Transit Administration (FTA) Guidelines for Preparation of a Capital Cost Estimate for New Starts Projects.  Detailed estimates of quantities for different cost categories are based on preliminary engineering drawings for tunnels and stations and typical section sketches, with contingencies consistent with the level of the design.  Cost estimates for various components of the Project or line items in the cost estimate have been developed based on a breakdown of labor, permanent materials, construction materials, plant and equipment required to construct or install a component of the project, indirect costs and margin plus any additional subcontractor costs.  All construction and systems costs include design contingencies to cover design development and uncertain market conditions at the time of bids.  Contingencies as applied to the direct construction cost do not cover changes to the currently identified scope of work.  A Project reserve or “unallocated contingency” is also applied to the entire Project cost.  Excluded from the capital cost estimates are subsequent reconstruction or replacement of facilities and components, as well as replacement of vehicles.  Annualized costs, which are discussed later, account for reconstruction and replacement and assume no finance charges.

Approach for Major Cost Categories

Cost estimates have been prepared for all Project Alternatives.  The cost estimate for the Alternative 2 was originally prepared in 2004 and escalated to 2007 dollars in accordance with construction industry published indices for escalation and reflects further refinement of the Project and construction methods since the 2004 estimate.  The Alternative 3A estimate is based on the estimate prepared in 2005 and escalated to 2007 with adjustments for refinements and construction methods.  The cost estimate for the Alternative 3B has been developed as a new “bottom-up” estimate in 2007. 

The estimating approach for construction of guideway and station components of the LPA and Modified LPA has been developed using heavy civil engineering estimating software where bid items were prepared for each component of the guideway and stations construction.  A “bottom-up” estimate was prepared by developing labor crew costs for construction; adding the costs of permanent and construction materials, plant and equipment used in the construction process; and contractor indirect costs plus contingencies consistent with the level of design.  Where appropriate, unit rates for major components of a structure or construction process (e.g. precast tunnel linings, muck haulage and disposal, escalators, elevators, ventilation fans etc) are based on manufacturer and supplier quotations.  The detailed methodology for each cost category is as follows:

Guideway & Track - Horizontal alignment plans on a scale of 1 inch to 400 feet and profiles on a scale of 1 inch to 80 feet have been prepared for all Project Alternatives.  Detailed quantity take-offs have been developed from cross section drawings for both surface guideway and underground elements of the guideway.  The estimate assumed new TBMs would be procured for excavation of the underground tunnels.  An extensive geotechnical site investigation program carried out during preliminary engineering defined the ground types allowing adjustments to be made for excavation rates and costs. The surface guideway and track costs were compared with known costs from the recently completed T-Third Line (Initial Operating Segment).

Stations, Stops, Terminals, & Intermodal Buildings - The unit costs for the underground stations and surface platforms have been developed in accordance with the general approach described above and compared against as-built construction costs for a number of recently completed transit systems.  Station architecture and finishes costs are developed from conceptual level architectural finishing drawings.  An allowance of two percent of the station construction costs is included for the provision of public art at each of the stations, as required by the San Francisco public arts policy.

Support Facilities: Yards, Shops, & Administrative Buildings - The Central Subway would use existing support facilities.  No allowance has been provided in the cost estimate for expansion of the facilities.

Sitework & Special Conditions - The special conditions consist of roadway modifications, utility relocations at the stations, portals and surface guideway footprints, traffic control, environmental remediation, demolition and reinstatement.  Lane modifications or the relocation of curbs and medians would be required.  Given that the majority of the guideway is deep underground, excavated using TBMs, there would be a relatively modest amount of utility relocation required for Alternatives 3A and 3B to support excavation and construction of the stations and portal.  The construction methods required for excavation and construction of Alternative 2 would require significantly more utility relocations.

Systems - The systems costs include signals (train control), communications and traction power.  The LPA would be similar in guideway length and fleet size to several transit projects currently in operation or under design.  The basis of the system cost estimate is experience with the existing T-Third Line.  Actual supplier bid prices in 2007 dollars have been used to develop unit costs.  The resulting unit costs are multiplied by the Project quantities to obtain the cost estimate.

Right-of-Way Acquisition, Land, Easements, and Existing Improvements - Market research determined the price of real estate parcels required at Chinatown Station, Moscone Station and for public parking spaces required at the Ellis/O’Farrell and Union Square parking garages (Alternative 2 would also include use of space in the Moscone Garage and Hearst Garage).  The costs reflected the value of the land in 2005 dollars, which is increased by 20 percent to reflect year 2007 costs.  The costs of easements required where the tunnels pass under private property are also included.  No adjustments have been made in the capital cost estimate for potential real estate cost savings related to joint development.

Vehicles - The patronage forecasting model and transit operations plan show that four additional rail cars (three plus one spare) would be required for the LPA (Alternative 3A).  The capital costs have been developed on a per car basis, based on recent light rail transit car purchases.

Professional Services – The estimate is based on a percentage of construction cost, including preliminary engineering, final design, project management for design and construction, construction administration, legal costs, permits, reviews by other agencies, survey testing, inspection and start up costs.  An allowance of 25 percent of construction costs has been allocated for all professional services.

Unallocated Contingency - Unallocated contingency covers unexpected changes or additions in the work scope and unanticipated costs above and beyond the assumed normal rates that occur during construction, particularly construction change orders and claims.  Eight percent on all items is included in the cost estimate.

Cost Estimation Results

Table 8-1 presents the capital cost estimates for the Enhanced EIS/EIR Alignment (Alternative 2), Fourth/Stockton Alignment Option A (Alternative 3A - LPA) and Fourth/Stockton Alignment Option B (Alternative 3B - Modified LPA) in both 2007 (constant) dollars and year of expenditure (YOE) dollars. The 2007 dollars cost estimates represent the cost of the alternatives if they were built this year and the YOE cost estimates escalate the costs to reflect the MTA’s estimated implementation schedule and the associated cost inflation.  When evaluating financial feasibility and comparing Project costs to available funding, which is usually expressed in year-of-occurrence dollars, the year of expenditure cost estimates are the most relevant.

Implementation Schedule

Preliminary estimates predict that utility relocations for the Central Subway will commence in [begin insertion] 2010 [end insertion] [begin deletion] 2009 [end deletion] with heavy construction scheduled to begin in [begin insertion] 2011 [end insertion] [begin deletion] 2010 [end deletion] .  [begin insertion] The start of revenue service [end insertion] [begin deletion] Completion of construction [end deletion] is scheduled for 2016 for Alternative 3B and 2017 for Alternative 2 and Alternative 3A.

The project delivery approach assumes design/bid/build for all contracts including stations, tunnels and underground guideway, systems, surface guideway and platforms.

Table 8-1

CENTRAL SUBWAY CAPITAL COSTS (IN $MILLIONS)

Source:  PB/Wong 2007

¹    Costs for Alternatives 3A and 3B do not include the North Beach Variant.  The North Beach Variant would add approximately $54 million (YOE$).

²    Alternative 2 and 3B would have four stations and Alternative 3A would have three stations.

Note:  Escalation is assumed to average approximately four percent per year over the duration of the project.

Comparative Discussion

Alternative 3A would extend light rail service along Fourth Street as a semi-exclusive double-track surface line for a short distance from the T-Third terminus at Fourth and King Streets.  The rail would transition to a subway (tunnel) between Townsend and Brannan Streets for the remainder of the Project’s 1.7-mile length.  Three underground subway stations are included in this alternative and four additional light rail vehicles (LRVs) would be required beyond the No Project/TSM Alternative. 

Alternative 3B is similar to Alternative 3A, but its cost estimates differ in part because of a shorter tunnel (with a longer surface line), four stations (the fourth is a surface platform), and a shorter (one year less) construction period than the other build alternatives.  Tunnel sections and subway stations are typically more expensive to construct than surface lines and surface platforms.  Alternative 3B is similar to Alternative 3A, but its cost estimates differ in part because of a shorter tunnel (with a longer surface line), four stations (the fourth is a surface platform), and a shorter ( [begin insertion] one year [end insertion] [begin deletion] six months [end deletion] less) construction period than the other build alternatives.

Other differences in Alternative 2 that affect the alternatives cost estimates include: operation as a surface line on both Third and Fourth Streets, south of Harrison Street; two portals (one on Third Street and one on Fourth Street) rather than one portal; a tunnel under Third Street [begin insertion] instead of [end insertion] [begin deletion] in addition to [end deletion]

Fourth Street, and five stations (four underground and one surface).  A detailed description of the alternatives and their differences can be found in Chapter 2.0.

8.1.2 Operating and Maintenance Costs

Cost Estimation Methods

General Approach

Once the Central Subway is complete, the T-Third line would operate as a new line from the southern terminal at the Caltrain Bayshore Station through the Central Subway to the northern terminus in Chinatown (T-Third Long Line). [begin insertion] A second independent line ( [end insertion] [begin deletion] The [end deletion] T-Third Short Line [begin insertion] ) [end insertion] is anticipated to operate between Chinatown and a turnaround loop near 18th Street [begin deletion] and the T-Third Very Short Line is planned to operate between Chinatown and Fourth and Berry Streets [end deletion] .  Service levels are planned for single car [begin deletion] train [end deletion] s [begin deletion] on the T-Third Long and Short lines and two-car trains on the T-Third Very Short Line [end deletion] operating at [begin insertion] five [end insertion] [begin deletion] six [end deletion] -minute peak period and 10-minute midday frequencies on each line.   [begin deletion] For Alternative 3B (the LPA as selected in February 2008), t [end deletion] [begin insertion] T [end insertion] his would require three additional LRVs, plus one spare, for a total of four additional LRVs [begin deletion] in 2030 [end deletion] . [begin deletion]  For Alternative 2, it would require six additional LRVs (five peak plus one spare) and for Alternative 3A, it would require three additional LRVs (two peak plus one spare).  [end deletion] It would also require the MTA to bring the spare ratio on the LRV fleet to the 20 percent recommended by FTA.  Service changes to Muni bus routes would also be implemented in conjunction with Central Subway service start-up.  When the operation of the T-Third line into the Central Subway begins, the Castro Shuttle would be restored.

Basis for [begin insertion] Rail [end insertion] Estimating Operation and Maintenance Costs

[begin insertion] Light rail operating expenses were estimated in four major cost categories:  vehicle operations, vehicle maintenance, non-vehicle maintenance, and general and administrative.  Total MTA costs including the Central Subway Project were estimated by using FY2005 MTA data to calculate cost ratios (e.g., $37.13 per train revenue hour for vehicle operator salaries and wages) for subcategories of the four major categories and multiplying the ratios by an appropriate cost driver (e.g., revenue car miles, number of service and inspection yards, etc.).  The MTA has assumed that rail operating and maintenance (O&M) costs increase at a rate of 3.5 percent per year on average. [end insertion]

[begin insertion] Basis for Other Costs [end insertion]

[begin insertion] MTA system operating expenses for motor bus, trolley bus, and cable car were estimated using the same major cost categories and methodology as rail costs.  Similar to the rail costs, the MTA has assumed that bus and cable car O&M costs increase 3.5 percent per year on average. [end insertion]

[begin deletion] The system wide Operations and Maintenance (O&M) expenses were estimated by applying the results of an O&M cost model developed for the Transit Effectiveness Project (TEP) and the FY 2009 Central [end deletion]

[begin deletion] Subway New Starts Report submission to the FTA. [end deletion]

[begin deletion] The O&M cost model is disaggregate and resource build-up in structure, consistent with the approach suggested by the Federal Transit Administration (FTA).  Line item costs are determined according to the quantity of service supplied and other system characteristics.  Expenses are classified as fixed and/or variable (a driving variable drives the variable costs).  Costs are broken out by class so appropriate inflation rates can be applied to project future costs for labor, fringes, and energy costs, which historically have varied significantly from each other. [end deletion]

[begin deletion] The O&M cost model was calibrated and unit costs computed based on the SFMTA FY 2006 actual operating expenses, staffing costs, and levels of service provided.  The following inflation factors were applied to FY 2006 dollars to forecast unit costs in year-of-expenditure dollars. [end deletion]

· [begin deletion] Salaries and Wages: San Francisco Consumer Price Index - All Urban Consumers (CPI-U) + 0.5%, based on historical growth in salaries and wages [end deletion]

· [begin deletion] Health Benefits: Historical growth in healthcare expenses of 10% [end deletion]

· [begin deletion] Other Benefits: San Francisco CPI-U - All Items [end deletion]

· [begin deletion] Fuel and Lubes: Crude Oil Price: West Texas Intermediate - Sweet Wellhead [end deletion]

· [begin deletion] Materials & Supplies: San Francisco CPI-U - All Items [end deletion]

· [begin deletion] Propulsion Electricity: San Francisco CPI-U - Electricity [end deletion]

· [begin deletion] Other: San Francisco CPI-U - All Items [end deletion]

Factors That May Alter Operating Cost Estimates

[begin insertion] Altering the following variables in the operating plan for the Central Subway Project would change the operating cost forecasts:  number of peak cars; car revenue miles; train revenue hours; subway stations; one-way route miles; and number of service and inspection yards.    [end insertion] [begin deletion] The O&M cost model estimates unit costs using a variety of variables, including peak vehicles, revenue bus/train hours, weekday peak revenue bus/train hours, revenue vehicle miles, ridership, manned stations, wayside or surface platforms, maintenance garages, power sub-stations, miles of trolley wire lines, and track miles.  Some of these variables were broken out to associate mode-specific costs to the mode-specific variable.  Any change in the value of these variables would affect the forecast of O&M costs for the baseline and the build alternatives. [end deletion]

Cost Estimation Results

The projected incremental operating costs for both the T-Third line (IOS) and Central Subway Alternatives are summarized in Table 8-2 in year of expenditure dollars [begin deletion] (YOE) [end deletion] .   [begin insertion] All Project a [end insertion] [begin deletion] A [end deletion] lternatives [begin deletion] 3A and 3B [end deletion] are expected to result in a net operating cost savings relative to the No Project/TSM Alternative [begin deletion] , however, Alternative 2 would result in a net-operating increase [end deletion] .  The 2016 figures represent the cost at the startup of the Central Subway operations, while the 2030 figures are for a selected forecast year.

Comparative Discussion

Due to a faster and more direct alignment, Alternative 3A creates an annual reduction of [begin insertion] 2,400 [end insertion] [begin deletion] 40,300 [end deletion] LRV car hours on the Central Subway Corridor and a system-wide annual [begin insertion] reduction [end insertion] [begin deletion] increase [end deletion] of [begin insertion] 27,800 [end insertion] [begin deletion] 11,900 [end deletion] car hours when compared to the No Project Alternative.  Alternative 3A would also reduce the number of system-wide annual bus hours by 76,400.  Alternative 3B would save the same number of annual bus hours, however, it would [begin insertion] increase [end insertion] [begin deletion] reduce the [end deletion] annual LRV car hours by [begin insertion] 6,000 [end insertion] [begin deletion] 39,000 [end deletion] on the Central Subway Corridor while [begin insertion] reducing [end insertion] [begin deletion] increasing [end deletion] by [begin insertion] 19,400 [end insertion] [begin deletion] 13,200 [end deletion] system-wide LRV hours compared to the No Project/TSM Alternative.  Alternative 2 [begin deletion] would result in [end deletion] [begin insertion] yields [end insertion] an annual [begin insertion] increase [end insertion] [begin deletion] decrease [end deletion] of [begin insertion] 7,100 [end insertion] [begin deletion] 33,100 [end deletion] LRV car hours, a system-wide annual [begin insertion] reduction [end insertion] [begin deletion] increase [end deletion] of [begin insertion] 18,300 [end insertion] [begin deletion] 19,100 [end deletion] car hours, and would reduce the number of system-wide annual bus hours by 76,400 when compared to the No Project/TSM Alternative.

Table 8-2

CENTRAL SUBWAY Incremental Operating Costs (in YOE$ MillionS)

[begin deletion] Note:  YOE is Year of Expenditure. [end deletion]

Source:  [begin insertion] MTA, May 2007 [end insertion] [begin deletion] AECOM Consult, Inc. April 2008. [end deletion]

8.1.3 Project Funding

Capital Sources

Project Specific

A total of [begin insertion] $432.2 [end insertion] [begin deletion] $473 [end deletion] million in state and local capital funding has been committed to the Central Subway Project.  In addition, the MTA is currently seeking $762.2 million in federal “New Starts” funding, for a total of [begin insertion] $1,194.4 [end insertion] [begin deletion] $1,235 [end deletion] million in capital funding identified for the Project.  These sources are discussed in this

section [begin deletion] .  Only Alternative 3B is fully funded; [end deletion] [begin insertion] and [end insertion] the [begin insertion] steps that the MTA is taking to overcome the capital [end insertion] funding shortfall [begin deletion] s for the other alternatives [end deletion] are discussed in Section 8.1.4.  MTA’s funding plan for [begin deletion] the [end deletion] Central Subway Project [begin insertion] alternatives are [end insertion] [begin deletion] is [end deletion] displayed in Table 8-3.

Table 8-3

Central Subway Capital Funding Plan (in SMillions)

Source:  MTA Central Subway [begin deletion] FY200 [begin insertion] 8 [end insertion] 9 [end deletion] New Starts Financial Plan

FTA Section 5309 “New Starts.”  The Section 5309 New Starts program administered by the Federal Transit Administration (FTA) provides discretionary capital grants for construction of new fixed guideway systems or extensions to existing fixed guideway systems.  To receive a New Starts grant, projects must complete a planning and project development process that consists of Alternatives Analysis, Preliminary Engineering, and Final Design phases.  The funding program is discretionary and highly competitive, with funding decisions made on the basis of New Starts Criteria specified in law and regulation.  Near the completion of Final Design, highly-rated projects are eligible to receive a Full Funding Grant Agreement (FFGA), which defines the scope of the Project, specifies requirements with which the Project sponsor must comply to receive New Starts funds, identifies the multi-year federal financial commitment to the Project, and signals federal intent to seek the specified amounts of funding through future appropriations.

The MTA is seeking [begin deletion] a minimum of [end deletion] $762.2 million in Section 5309 New Starts funding.  The MTA started receiving New Starts funds for the Central Subway Project in FY 2003.  To date, the MTA has received $45.3 million in New Starts funds as follows: $1.5 million in 2003; $8.9 million in 2004; $9.9 million in 2005; [begin insertion] and [end insertion] $25 million in 2006 [begin deletion] , and $11.74 million approved for 2008 [end deletion] .  These funds were allocated for preliminary engineering and environmental review.  The Central Subway Project [begin insertion] still [end insertion] needs to complete Preliminary Engineering and enter Final Design before it is eligible to receive an FFGA, and the federal government’s allocation of New Starts funding to-date does not guarantee that the Central Subway Project will receive an FFGA.  A project must also have a “Medium” or higher Overall Rating, have a “Medium” or higher Cost Effectiveness Rating, and be able to be implemented within the available Section 5309 program resources to receive an FFGA.  In FTA’s FY 200 [begin insertion] 8 [end insertion] [begin deletion] 9 [end deletion] New Starts Report to

Congress, the Central Subway Project (Alternative 3 [begin insertion] A [end insertion] [begin deletion] B [end deletion] ) received a “Medium” Overall Rating, a “Medium” Local Financial Commitment Rating, a “Medium” Project Justification Rating, a “Medium [begin insertion] -Low [end insertion] ” Cost Effectiveness Rating, and a “High” [begin deletion] Transit [end deletion] [begin deletion] Supportive [end deletion] Land Use Rating. 

The MTA is currently performing value engineering reviews to lower the capital cost and to improve the Central Subway’s Cost Effectiveness Rating.

State Traffic Congestion Relief Program (TCRP).  The San Francisco County Transportation Authority (SFCTA) has committed $14.0 million in State of California Traffic Congestion Relief Program (TCRP) funds to the Central Subway Project through a Program Supplement for the TCRP funds.  A $140 million TCRP allocation was made to the Third Street Light Rail Project, of which $126 million was used for the T-Third line (IOS).

State Regional Improvement Program.   The SFCTA has committed $92.2 million in State Regional Improvement Program funds to the Central Subway Project.  This commitment was made in the Regional Transportation Plan and Resolution #04-62.

State Infrastructure Bonds (Prop. 1B).  Working in cooperation with MTC, the MTA has secured $200 million in state infrastructure bond funds for the Project; $100 million of revenue-based funds, which have been approved by the MTA, and $100 million in population-based funds, which have been approved by MTC.

Local (San Francisco County Transportation Authority) Sales Tax.   The SFCTA committed $126.0 million in Local Proposition K Sales Tax funds to the Central Subway Project in the Proposition K Expenditure Plan.  Proposition K, which began collecting revenues in April 2004, is a one-half cent sales tax program approved by San Francisco County voters in November 2003. 

Systemwide

The MTA’s 20-year Capital Improvement Program (CIP), covering FY2006-FY2025, is divided into two parts, a State of Good Repair CIP and an Enhancement/Expansion CIP.  [begin insertion] Muni [end insertion] [begin deletion] The MTA [end deletion] has either planned, programmed, or been awarded funding for all capital projects in the State of Good Repair CIP, which includes the capital projects needed to maintain the current level of service as well as the Central Subway Project Alternative 3 [begin insertion] A [end insertion] [begin deletion] B [end deletion] .  The MTA’s estimated State of Good Repair CIP expenditures and capital funding forecast are shown in Tables 8-4 and 8-5, respectively.

As shown in Table 8-5, the MTA projects $4.0 billion in capital funding will be available for the State of Good Repair CIP.^[1]  This funding projection includes approximately $416 million in other local funding sources, which are to be determined.  Tables 8-4 and 8-5 reflect the 2006 cost estimate for Alternative 3A

Table 8-4

Twenty-Year Capital Plan - State of Good Repair Expenditures

(in YOE $millions)

Source:  MTA Central Subway FY2008 New Starts Financial Plan, Figure 11.

of $1.410.8 million, compared to the current Alternative 3A cost estimate of $1.418.1 million.  Representing 0.2 percent of the State of Good Repair CIP, the change in cost is negligible within the scope of the larger program, and is well within the margin of forecasting error.  No additional capital funding beyond the State of Good Repair CIP was projected as of 2006; however, the MTA is updating its funding forecast and the MTA’s funding agencies estimate that an additional $2.2 billion, for a total of $6.2 billion, might be available for capital improvement projects during the life of the 20-year CIP based on a review of recent regional funding history.[2]  These estimates are shown in Table 8-6.  If the MTA receives more than $4.0 billion during the life of the current CIP, the MTA could pursue projects in the Enhancement/Expansion CIP or make other capital investments, although these projects could be deferred if sufficient funding does not become available.  A list of the CIP projects and short descriptions can be found in the MTA FY2006-2025 Short Range Transit Plan.[3]

Table 8-5

Twenty-Year Capital Plan - State of Good Repair funding projections

(in $millions Year of occurrence)

Source:  MTA Central Subway FY2008 New Starts Financial Plan, Figure 11.

Table 8-6

CAPTIAL FUNDING ESTIMATES BASED ON CURRENT FUNDING LEVELS

(in $millions Year of Occurrence)

Source:  MTA Central Subway FY2008 New Starts Financial Plan, Figure 9.

Operating Sources

Project Specific Transit Farebox and Non-farebox Operating Revenue Sources

[begin insertion] In 2030 t [end insertion] [begin deletion] T [end deletion] he MTA [begin deletion] ’s [end deletion] estimate [begin insertion] s that the [end insertion] [begin deletion] of [end deletion] additional [begin deletion] annual [end deletion] fare revenues [begin insertion] by [end insertion] [begin deletion] from [end deletion] the Central Subway Project [begin insertion] would be [end insertion] [begin deletion] is [end deletion] $ [begin insertion] 9.0 [end insertion] [begin deletion] 7.0 [end deletion] million [begin insertion] per year [end insertion] for Alternative 3A, based on the estimated change in ridership and an increase in the average fare that is consistent with the MTA’s estimate for inflation ( [begin insertion] 3.2 [end insertion] [begin deletion] 2.3 [end deletion] percent per year).  Alternative 3B is [begin insertion] predicted [end insertion] [begin deletion] projected [end deletion] to generate slightly less incremental annual revenues of $ [begin insertion] 8.8 [begin deletion] [end deletion] [end insertion] [begin deletion] 6.6 [end deletion] million and Alternative 2 is expected to generate $ [begin insertion] 11.6 [end insertion] [begin deletion] 5.6 [end deletion] million more than the No Project/TSM Alternative.  The operating revenue estimates are shown in Table 8-7.  MTA has assumed that the Central Subway Project will generate the same non-farebox operating revenue as the No Project/TSM Alternative.

[begin insertion] TABLE 8-7 [end insertion]

[begin insertion] 2030 Central Subway Operating Revenues (Nominal$) [end insertion]

[begin insertion] Note:       Estimates developed using MTA methodology from MTA Central Subway FY2008 New Starts Financial Plan, Figure 15 and updated MTA boarding estimates. [end insertion]

[begin deletion] TABLE 8-7 [end deletion]

[begin deletion] 2030 Central Subway Operating Revenues (YOE$) [end deletion]

[begin deletion] Note:  YOE is Year of Expenditure. [end deletion]

Estimates developed using MTA methodology from MTA Central Subway FY2009 New Starts Financial Plan and updated MTA boarding estimates.

Systemwide

The MTA has estimated the amount of revenue available for operating and maintaining the New Starts Project while maintaining the existing and proposed level of service.[4]  This estimate is shown in Table 8-8.  It also assumes two new revenue measures [begin insertion] requiring third party approval [end insertion] .  The first of these is an increase to the parking tax of 10 percent, from the current rate of 25 percent to a proposed rate of 35 percent [begin insertion] .  The MTA’s analysis assumes it would be approved by voters in FY2008 [end insertion] [begin deletion] that was approved by voters in November 2007 [end deletion] and [begin deletion] will begin to [end deletion] generate additional revenues in FY2009.  The second new revenue source MTA staff is currently pursing is the [begin insertion] development of a Transit Operations fee. [end insertion] [begin deletion] proactive management of parking collections in on-street meters and off-street parking facilities generating an expected increase of $30 million annually. [end deletion]

[begin insertion] The MTA’s operating financial plan is based on its estimates of long-term growth trends rather than the budget estimate or requirements for any given year. [begin insertion] [5] [end insertion]    The MTA has indicated that deficits or surpluses shown in Table 8-8 are for planning purposes only, and are intended to flag years in which revenue [end insertion]

[begin insertion] DELETED Table 8-8 [end insertion]

[begin insertion] MTA 20-Year Financial Plan Including Central Subway Alternative 3A [end insertion]

[begin insertion] (YOE $Millions) [end insertion]

[begin insertion] [end insertion]

[begin insertion] Source:  MTA, 2007 [end insertion]

[begin deletion] NEW Table 8-8 [end deletion]

[begin deletion] MTA 30-Year Financial Plan Including Central Subway Alternative 3B [end deletion]

[begin deletion] (YOE $Millions) [end deletion]

[begin deletion] [end deletion]

[begin deletion] [end deletion]

[begin deletion] [end deletion]

[begin deletion] Source:  AE Com April 2008 [end deletion]

[begin deletion] NEW Table 8-8 (Continued) [end deletion]

[begin deletion] MTA 30-Year Financial Plan Including Central Subway Alternative 3B [end deletion]

[begin deletion] (YOE $Millions) [end deletion]

[begin deletion] Source:  AECOM Consult, Inc. April 2008 [end deletion]

[begin deletion] [end deletion]

[begin insertion] enhancements or cost cutting measures are needed, or to alert the MTA to years in which contributions to a Contingency Fund or service enhancements may be possible.  [end insertion] By law, the MTA must have a balanced operating budget every year.

The [begin insertion] surplus/deficit line [end insertion] [begin deletion] annual cash balance [end deletion] is not an indication that the MTA has the ability to build up a capital reserve or channel surplus operating revenues into capital projects.  However, the agency does have a policy of Capital Reserve Fund and a MTA Board of Directors resolution establishing a policy of designating operating surplus or one-time revenues, as deemed prudent by the MTA Executive Director, into this reserve.  As of August 2006, $15 million in remaining proceeds from the Breda lease/leaseback financing were available in the Reserve Fund.  Additionally, the MTA had an undesignated cash reserve account of $11 million at the close of FY06, which is available for appropriation. The Agency is able to carry surpluses forward into subsequent years.  The FY07 budget also includes $10 million in an operating reserve.  In total, approximately $36 million is potentially available for a Contingency Fund.

8.1.4 Capital and Operating Shortfall

Based on the MTA’s estimates of the capital cost for Alternative [begin deletion] 3B, this is the only alternative that is fully funded.  Both Alternative 2 and 3A would have funding shortfalls based on the current funding plan. [end deletion] [begin insertion] 3A, $424 million in local capital funding is still unidentified.  The Central Subway is expected to result in a net operating surplus on a project-level basis. [end insertion]  

[begin insertion] If the MTA identifies $424 million in local capital funding, it estimates that it will have sufficient funds for its 20-year State of Good Repair Capital Improvement Program, which includes the capital cost of the Central Subway Project (Alternative 3A).  Alternative 3B is estimated to have a lower capital cost and would therefore result in a smaller shortfall whereas Alternative 2 would result in a larger shortfall due to its higher capital cost. [end insertion]

Systemwide, the MTA estimates that Muni will [begin insertion] have an [end insertion] [begin deletion] not experience [end deletion] [begin insertion] [end insertion] operating shortfall [begin deletion] s [end deletion] [begin insertion] beginning in 2011 that continues through the end of the evaluation period [end insertion] .  [begin insertion] Although a cumulative 20-year budget deficit of $2.6 billion is shown in Table 8-8, t [end insertion] [begin deletion] T [end deletion] he MTA is required to have a balanced operating budget every year pursuant to the City Charter.  To the extent that the MTA experiences operating shortfalls during a fiscal year, operating expenses have typically been constrained through the use of hiring freezes, salary savings (whereby budgeted positions remain unfilled) and other personnel cuts.  If there is still a shortfall, the MTA limits Muni’s operating and maintenance costs to the total amount of available revenues.

8.1.5 Additional Revenue Sources

The MTA has identified the following sources as having potential to fill shortfalls identified in the previous section.

Federal Funding

The MTA has indicated that it may seek additional Section 5309 New Starts funds for the Central Subway Project.  FTA considers the amount of Section 5309 New Starts funding available when it signs a Full Funding Grant Agreement [begin insertion] , and outside of New York City, the largest FFGA awarded has been $750 million [end insertion] .  The Central Subway Project’s ability to secure the $762.2 million it is currently seeking or any additional funding will depend in part upon the availability of Section 5309 New Starts resources at the time the FFGA would be signed.

New Non-Federal Funding

MTC adopted Resolution 3434 on the Regional Transit Expansion Program (RTEP) of Projects, which includes the Central Subway.  The RTEP is a coordinated regional approach to prioritizing investments in new rail and express/rapid bus projects.  It sets forth the expansion priorities for the Bay Area.  Placing the Central Subway Project in the recommended program of projects indicates a level of commitment in the region to funding the Project.

MTA staff is currently in discussion with City policy makers regarding the possibility of including the Central Subway in a large, citywide capital bond proposal planned for the ballot in FY 2009.  San Francisco voters have historically supported the city’s Transit First policy.  Two general sales tax measures failed a public vote in 2004; however, the reauthorized Proposition K sales tax dedicated to transit was approved by 75 percent of voters in [begin deletion] 2003 and Proposition A, which secured parking revenues for use by the MTA was passed in November 2007 [end deletion] .

The MTA has also indicated that it may seek additional commitment of STIP funds through the SFCTA’s programming function.  This happened with the Transportation Congestion Relief Program and Regional Measure 2 (RM-2), which was passed in March 2004 and raised bridge tolls in the region to $3.  A portion of the new revenues is dedicated to the MTA capital and operating needs.  The MTA also has real property assets that it is considering for joint development.  The MTA owns two parcels of land, currently serving as bus yards, that could be developed, as well as numerous parking garages and lots located throughout the City.  The MTA believes there is also potential for transit-oriented development along the Central Subway corridor itself, especially near the stations.

Although the MTA estimates that the Central Subway Project would generate a net operating savings, the Project would be eligible to receive operating funds from Proposition K sales tax revenues if its operating costs increased.  Projects constructed with Proposition K funds are eligible to receive funding for the incremental additional operating costs incurred because of the Project. [begin deletion]   In addition, as a result of Proposition E, the MTA would receive a base amount of revenue from the General Fund annually, which stabilizes the annual budgeting process. [end deletion]

8.1.6 Risk and Uncertainty

Several cost and revenue risks could influence the final financial results and will play an important role in the further refinement of the underlying assumptions.  Risks can be broken down into several main categories:

Cost Risks

Both capital and operating costs are subject to inflation uncertainty related to the global markets for raw materials such as concrete and steel, energy, and labor.  For example, the recent volatility of fuel prices could affect the magnitude of operating expenditures for providing existing and programmed transit services.  This could greatly impact rubber-tired or diesel-fueled operations as well as electrical surcharges for operations.

There is a design and schedule risk that is inherent to any major construction work.  At this stage, subsoil conditions are not known with a high level of certainty.  There might also be some changes in Project scope, bid quantities or unexpected utility relocation.

The Project cost estimate includes cost contingencies. If the Project budget exceeds this built-in contingency, the MTA would have to rely on a special Contingency Fund.  The MTA staff is seeking to develop a Contingency Fund in order to cover unpredicted revenue shortfalls in the Project or the operating budget.

Revenue Risks

As discussed in Section 8.1.3, the Central Subway Project must [begin insertion] improve its [end insertion] [begin deletion] receive a [end deletion] federal New Starts Cost Effectiveness Rating [begin insertion] from “Medium-Low” to [end insertion] [begin deletion] of [end deletion] “Medium” [begin deletion] from the FTA [end deletion] to receive a Full Funding Grant Agreement [begin deletion] (FFGA) [end deletion] , [begin insertion] which is needed to [end insertion] and receive a significant portion of the Project’s capital funding.  [begin insertion] The MTA is working to reduce the Project’s capital cost as well as preparing an Action Plan to resolve [end insertion]

[begin insertion] issues that the Federal Transit Administration has indicated need to be addressed.  Even with a Medium rating for Costs [end insertion] [begin insertion] Effectiveness, there is no assurance of New Starts funding. The New Starts program is scheduled to expire in 2009 unless it is reauthorized by Congress, and many other projects nationwide are competing [end insertion]

[begin insertion] [end insertion]

[begin insertion] for available funds.  [end insertion] [begin insertion] The level of New Starts funding the MTA is seeking for the Project is unpreced [begin deletion] ented outside of New York City. [end deletion] [end insertion] [begin deletion]   Finally a New Starts FFGA does not guarantee that the annual grant for [end deletion] [begin insertion] Even if the MTA receives a New Starts funding commitment form FTA, there is also a risk that [end insertion] New Starts funds will be appropriated [begin deletion] by Congress [end deletion] in accordance with the funding schedule in the FFGA.

If operating costs for the Central Subway Project result in a net increase, the Central Subway Project would be eligible to receive operating funds from Proposition K sales tax revenues.  Projects constructed with Proposition K funds are eligible to receive funding for the incremental additional operating costs incurred because of the Project.

Proposition E [begin deletion] , approved by the San Francisco voters in 2000, [end deletion] created a Municipal Transportation fund that is dedicated to transit operations.  All MTA revenues flow into this fund, which is separate from the City’s General Fund.  Proposition E provides the MTA with more control over its budget and fare policy than it previously had, and it also established a more predictable funding base; however, it also created a number of financial challenges.  If the General Fund contribution increases or decreases by the same percentage as overall city revenues, there is no guarantee that the General Fund will make up future shortfalls in fare, parking, sales tax, or other revenues.  The MTA must fund the future cost of existing liabilities such as workers’ compensation and judgments and claims, and there are no provisions to have the General Fund cover inflation, fringe benefit increases, or cost of living allowances that represent a significant portion of the MTA’s annual cost increases.  Finally, there are only limited provisions for funding new activities that are required under Proposition E such as human resources functions, procurement, and service standards data collection and analysis.

Finance Risks

[begin insertion] The MTA has indicated i [end insertion] [begin deletion] I [end deletion] f federal capital funds are not received according to the amounts or schedule as planned, or if the federal funding stream is lengthened beyond the projected cash flow, the MTA [begin insertion] would [end insertion] [begin deletion] will [end deletion] pursue additional bond financing through the City and County of San Francisco and/or financing through the SFCTA.  If state or local capital funds were reduced or delayed, the MTA has indicated that it would rely on a Contingency Fund and/or other local sources to be determined.

Additional finance risk lies [begin insertion] mostly [end insertion] in variations in interest rates [begin deletion] , construction costs, and ridership on the existing system [end deletion] [begin insertion] that could affect the total capital cost estimate [end insertion] . [begin insertion]   Both long term and short-term borrowing are dependent on this variable. [end insertion] [begin deletion]   These risks can be mitigated through staging the construction of the project, controlling the growth of service, raising fares, redefining the scope of the project, and introducing short and long term financing strategies. [end deletion]

Effect of Sensitivity Analysis

[begin insertion] A downside sensitivity analysis on the MTA 20-year Financial Plan, with operating and capital revenue reduced by 5 percent and operating and capital expenditures increased by 5 percent was developed.  These projections increase the 20-year budget shortfall from $2.6 billion to $5.0 billion. An upside sensitivity analysis on the 20-year Financial Plan with revenues increased by 5 percent and expenditures decreased by 5 percent shows the MTA with a 20-year deficit of $0.3 billion.  [end insertion] [begin deletion] An uncertainty analysis using a “Monte Carlo” simulation was undertaken to assess the financial risks of the project on MTA over a 30-year period.  This simulation tool provides a probability distribution of potential project financing out-comes that reflects all possible outcomes of risk variable values.  The Monte Carlo simulation determined that the mean of the average annual revenue required over the 30-year period of analysis is $134 million for a mean 30-year a total future capital revenue of $4 billion required to sustain MTA programs.  The MTA would not experience a deficit over this period. [end deletion]

Any year with a projected deficit would require balancing with a combination of new revenue sources, use of the reserve funds, and/or expenditure reductions, the latter in accordance with FFGA requirements.

[1]     MTA Central Subway FY2008 New Starts Financial Plan, Figure 9. 

[2]     MTA Central Subway FY2008 New Starts Financial Plan, p.10-13, Figure 9 and Figure 10.

[3]     http://www.sfmta.com/cms/rsrtp/documents/ShortRangeTransitPlanFy20062025-Web.PDF

[4]     Maintaining existing service levels is required to receive a Federal New Starts Full Funding Grant Agreement.  

[begin insertion] [begin insertion] [5] [end insertion] [end insertion] [begin insertion]     MTA Central Subway FY2008 New Starts Financial Plan, p.10-27. [end insertion]