Summary of Report

Agenda Item No. 4

To: Finance-Auditing Committee/Committee of the Whole
Meeting of May 23, 2002
From: Joseph M. Wire, Auditor-Controller
Celia G. Kupersmith, General Manager
Subject: APPROVE ACTIONS RELATIVE TO ESTABLISHMENT OF A SHORT-LIST OF TOLL OPTIONS AND DISCUSSION OF AN INITIAL FINANCIAL PLAN
Recommendation

The following recommendations were approved by the Finance-Auditing Committee and will go to the full Board of Directors on Friday, May 24 at 10:00 am for consideration.

The Finance-Auditing Committee recommends that the Board of Directors approve the following actions:

a) Approve the staff recommendation to narrow the twelve toll options considered to date to three: Toll Option G: $5 Cash/$4 Fastrak; Toll Option I: $5 Cash/$5 Fastrak; and Toll Option J: $5 Cash/$3 - $4 Fastrak ramped up over five years. This short-list of toll options would undergo further review by staff and by the general public through a series of Public Open Houses scheduled for June 3, 4, and 5, 2002. Approval of this short-list of toll increase options does not in any way indicate a Board member's endorsement of any specific toll increase.

In addition to above options outlined in this staff report, the Finance-Auditing Committe recommended that one option to add to the short-list: Option G2 - $5 cash/$4 FasTrak with three-year incremental increase to $5.
b) Authorize a Board workshop to be held on Thursday, May 30th at 9 a.m. in the Board Room at the Golden Gate Bridge to allow for further discussion by the full Board of Directors on the financial condition of the District and various opportunities for improving this financial condition by means of a toll increase as well as various options for significant cost savings through service reductions.

This matter will be presented to the Board of Directors at its May 24, 2002 meeting for appropriate action.

Summary

After serious and extensive analysis of the financial data developed over the past few months, several conclusions are reached as part of an Initial Financial Plan. These conclusions are preliminary and subject to change. Significant modifications, however, are not expected to occur:

1. The Initial Financial Plan shows that none of the twelve toll increase options under study will be sufficient to fund a five-year sustainable financial plan at current expense levels.
2. It is necessary to increase the toll and to aggressively pursue major new revenues sources and to reduce expenses significantly over the next several months in order to achieve a balanced five-year budget.
3. The level of cost savings needed is significant. While small expense reductions will help, it is necessary to cut major services and programs provided by the District and to capture these savings every year on an on-going basis. 4. Even with aggressive assumptions such as raising transit fares by 10% each year, implementing parking fees, adding new revenues such as bridge sidewalk access tolls and commercial bridge tours, and deferral of important capital projects, it is not possible to achieve a balanced budget without significant reductions to yearly operating costs. 5. The Initial Financial Plan is limited to a five-year period. Beyond the five year horizon, it is difficult to project with any degree of reliability the detailed expense needs of the District. It is reasonable, however, to assume that any revenue enhancements and expense reductions put into place now will benefit the District's future beyond the next five years. 6. Choosing a toll option is a major step toward a sustainable financial plan. Additionally, the Board will have to select a package of revenue and expense options that staff would begin implementing over the coming months. Together, these make up the Initial Financial Plan for the District.

Background

The District has known for several years that its existing revenue streams are not sufficient to allow the current levels of service to continue into future years. The economic recession that began last year simply exacerbated the situation.

Last November at a Board workshop on the District's financial future, it was determined that the District needed to create a new long-term financial plan. In February 2002, staff presented an analysis of the financial challenges facing the District and was granted permission by the Board to undertake a comprehensive review of options for raising Bridge tolls and transit fares. In March, staff presented an initial forecast of revenue needs for the next ten years. In April, staff presented the planning analysis of twelve toll increase options and a preliminary FY 2003 Budget. In May, staff presented a plan for a study of potential fare increases on Golden Gate buses and ferries as well as other transit revenue enhancements. Several public Open Houses have been held and public comments received through a variety of means have been considered in the development of an initial five-year financial plan.

The financial analysis brings together several large projects that have been underway since the Board workshop:

- Needs Assessment: A ten-year projection of District project and service needs, the existing revenue streams to meet these needs, and the shortfalls in financial resources required to maintain current service levels and existing assets.
- Preliminary FY 2003 Budget: The detailed budget for FY 2003 that presents budget needs based on maintaining current service levels. The preliminary budget also provides options to reduce expenses, if deemed necessary and appropriate.
- Toll Increase Options Planning Analysis: An analysis of financial, economic, and social impacts of twelve major toll options.

Through the combination of these three projects, the comprehensive financial analysis provides a detailed five-year projection of the District's finances. The analysis presents options that, if selected, can be developed to increase revenues or decrease expenses to create a viable and stable five-year financial plan. A general analysis of financial need beyond the first five years is also available in the March 7, 2002 report to the Finance Committee. Due to the uncertainty of the longer-term financial horizon, staff has focused on developing a sustainable five-year financial plan.

The Initial Financial Plan

The staff has developed an Initial Financial Plan, summarized in Attachment A. It successfully lays out a balanced five-year financial plan through implementation of a toll increase and other assumed revenue increases, such as fares and grants. It also includes assumed expense reduction such as transit service decreases, elimination of non-essential District programs and deferral of capital projects.

As with any projection that tries to predict future events, this Initial Financial Plan is vulnerable to events such as economic booms and busts, changes in state and federal law, and changes in customer trend. The five-year period for the plan was chosen to limit the impact of these potential swings and variables.

There are numerous options in the Initial Financial Plan that can either add or subtract revenues and expenses. The District's Board of Directors has direct control of some of the variables in the Initial Financial Plan, while other variables may be out of direct control. If something happens that is out of our control, there are solutions within direct control of the District to help balance the bottom-line. For example, if the assumption that the District is able to garner more federal and state revenue is not realized, then the District can delay less essential projects pending the ability to fund them.

"Road-Map" to the Initial Financial Plan

This section provides a "road map" for understanding the attached two-page summary of the Initial Financial Plan. It includes an explanation of each of the lines marked in the plan with a letter such as A, B, C, etc. on the left-hand side of the page.

The first section includes Line Markers A, B, and C, and states the needs of the District under the following assumptions.

Line Marker

A. Operating Revenues: The operating revenues do not include a toll increase or any fare increases beyond the ones already approved by the Board for FY 2003. It includes the same underlying assumptions as are included in the March 7th Needs Assessment.
B. Expenses: The expenses are made up of two parts: 1) operating expenses, and 2) the District's share of capital expenses. These two calculate total expenses the District faces in each year.
1) The operating expenses are projected based on using the preliminary FY 2003 budget in FY 2003 and adjusting the following years by known expense increases (negotiated wage increases, pension contributions, etc.) and an inflationary cost increase. It is also assumed that the District will begin making financial contributions to the pension plans of all employees. After FY 2003, it includes the same underlying assumptions that are included in the March 7th Needs Assessment.
2)

The annual capital program of projects is the amount of resources needed to fund the District's share of the projected capital budget for that year. The capital budget is a prioritized set of projects from the 10-Year Needs Assessment produced earlier. The constrained program includes a mix of essential Bridge, Transit, and Administration projects that serve to minimally maintain and sustain existing services and facilities. The proposed program includes projects that:

- Complete the Golden Gate Bridge Seismic Retrofit program
- Maintain the structural integrity of the Bridge
- Minimally support existing Bridge and Transit operations
- Provide a constrained program of safety and security enhancements
- Provide operating efficiencies

This capital program is constrained to fall within available resources and assumes the current level of staffing available to carry out the projects following the District's procurement policies. It reduces the District capital requirement in the first five years from the March 7 projection of $306 million to a constrained $213 million. It is important to note that the cost of deferring some capital projects is estimated to increase the 10-Year need by $49 million due to inflation.

C. Operating and Capital Budget Shortfall: This is the amount that projected expenses exceed projected revenues. The final financial plan needs to include increased revenues and/or decreased expenses of this amount in order to be a sustainable plan.

The second section includes Line Markers D, E, F, and G and identifies near-term options for meeting the financial shortfall. The near-term options are shown to occur in FY 2003 and produce most of their change in revenues or expenses in FY 2003. The strategies listed are initial and preliminary and are subject to final Board approval before implementation.

D. Near-Term Options to Eliminate Shortfall: These are options that can be implemented in the next few months.
E. Funding of Projects with Reserves: The District has set aside reserves to fund capital projects and address operating needs. This option assumes that all reserves except those set aside to meet operating emergencies (currently $7 million) or legal liabilities (currently $36.6 million) would be spent. Under current expense levels, District reserves available for operations and capital projects will be depleted in one year if no other revenues are forthcoming.
F. Toll Option G: The baseline staff recommended toll option is Toll Option G: $5 Cash/$4 Fastrak. This represents the mid-range between the three short-listed toll options. Please note that the Initial Financial Plan includes the expenses associated with the Fastrak discount such as the additional transaction charges and transponder tags that would be required if this toll increase option was implemented. The increased expenses are assumed to be partially offset by a decrease in the cost of manual toll collection.
G. Near-Term Decrease in Expenses: These are reductions to the preliminary FY 2003 budget that can be realized in FY 2003. They include reductions to proposed and existing programs and would also reduce costs in future years. Line Marker G lists two types of possible reductions, the actual programs to be reduced would be decided during the Board's review of the preliminary FY 2003 budget. The Initial Financial Plan assumes that District expenses will be reduced by a significantly larger amount over the long-term. That reduction, which would also start in FY 2003, is discussed in Line Marker K below.

The third section includes Line Markers H, I, J, and K and discusses some of the long-term options available to the District to meet its long-term needs. All of the options presented are preliminary in nature and subject to change by the Board of Directors. Changes to this list could occur over the life of the final adopted financial plan as new options and opportunities become available.

H. Long-Term Options to Eliminate Shortfall: These are options that can take up to a year to be implemented because of their complexity, the impact of federal or state regulations, or the need for extensive collaboration with outside entities. Many will also require extensive public review prior to implementation. All of these options are currently included in the Initial Financial Plan. If, for some reason, the assumed savings do not materialize, a new savings opportunity will have to be created to increase revenue or decrease expenses accordingly.
I. Long-Term Increases in Revenues: This is not an exhaustive list, but includes many of the options the District can consider. The list includes options that are within the District's control as well as others that will require collaboration and/or agreement by outside entities, which may or may not be forthcoming.

Included in the Initial Financial Plan:

- Increase transit fees by 10% each year, including GGT bus services within Marin County, and increase parking fees. These options and their revenue increase estimates may change based on findings in the analysis on Transit Fares and Fees, which will be prepared over the next few months.
- A 20% expansion of advertising fees, which would require approval of various types of advertising on District assets which, in the past, was not desired. Details would be developed in the coming months.
- Implementation of a $1 bike and pedestrian bridge access toll. A complete study would need to be performed before a final estimate would be available. An initial estimate is provided for planning purposes only and does include an offset for an estimated cost of collecting the new toll. No specific methodology for toll collection has been selected but several are under review and will be reported on in mid-summer as the analysis draws to a conclusion.
- Tours of the bridge could be provided similar to those provided at the Sydney Harbour Bridge in Sydney, Australia. This would require development of a plan to provide public access to currently off-limits sections of the bridge. A complete plan would need to be developed before a final estimate could be given.
- Assume 100% grant funding for Phase III of the seismic retrofit of the bridge, which would require over $40 million in additional federal and state grant funds beyond the $120 million already assumed. Failure to receive the funds would require delay of the project.
- Assume 80% grant funding of two large bridge projects (floor beam repair and north end painting). This would require over $80 million in additional state or federal grant funds. No grant funds for these projects were assumed in the original Initial Financial Plan. Failure to receive the funds would require delay of the projects until funding is available. If these grant funds and the funds for Phase III are forthcoming, this would reduce the overall District cost of the five-year capital budget to $90 million, down 58%.

Potential Options Not Included in the Initial Financial Plan:


- Assume 80% grant funding of all major bridge projects. This option assumes a permanent funding stream from the State for bridge capital projects. This would require extensive collaboration between the District and the State to enable the District to regularly receive state funding from programs that fund bridge capital projects. No grant funds for these projects were assumed in the original Initial Financial Plan.
- Establish new funding streams from the local counties for transit operating expenses. This would require extensive collaboration between the District and the counties it serves to enable the District to regularly receive local funding for transit operating expenses.
- Establish a higher fare revenue cost recovery ratio, which would require either higher fares or reduced levels of service. As transit service costs rise over time, fares would have to rise by the same or greater percentage.
J. Necessary Decreases in Expenses to Balance Financial Plan: If all of the above steps are taken, this is the amount of further savings that would still need to be found to achieve a balanced financial plan for five years.
K. Estimated Reduction Necessary to Balance Financial Plan: The amount remaining that must still be addressed through additional service expense reductions. This number is an estimate of the District-wide reduction in services that would be necessary to balance the financial plan. This represents the smallest reduction to expenses possible to balance the financial plan. While there are some years where the totals are negative and some where they are positive, District reserves would be used to offset expenses during these years. The balanced plan described in this report would reduce existing reserves available to spend on capital projects to zero, as discussed in Line Marker E. Reserves set aside to fund operating emergencies and legal liabilities would remain fully funded.

Fiscal Impact

There is minimal fiscal impact associated with the staff recommendation to hold a Board workshop on May 30th and to narrow the number of toll options under review.

Attachment "A"