The Next PERS-type Pension Fiasco?
Tri-Met Tangles with Pensions and Payroll Taxes
By John A. Charles
In
1999 TriMet initiated an experimental shuttle in the Cedar Mill neighborhood
on Portland’s west side. Cedar Mill is a low-density area with many
hills and cul-de-sacs, making it impractical for traditional fixed-route
bus service. TriMet contracted with Sassy Cab Company to use two vans
to provide specialized service within the neighborhood. Riders were required
to call a day ahead of time to make reservations, and they would be provided
door-to-door transit anywhere within the neighborhood. The price was the
same fare required for a TriMet bus or light rail ride. A primary (if
unstated) purpose of the service was to boost ridership on TriMet’s
Westside light rail line by bringing riders to the Sunset Transit Center.
Sassy received $12,700 a month for which they provided service throughout
the Cedar Mill region for 14 hours a day, five days per week. The company
made a small profit from this work.
Although the private sector service was working well, TriMet brought it
in-house in September 2002. This
was a requirement of its labor contract with the Amalgamated Transit Union
(ATU). Expenses immediately increased by 18 percent and service was cut
by 50 percent. Under Sassy the service was all-day; now it’s only
during the morning and afternoon peak periods. The Sassy service cost
$24 per driver-hour; the unionized service is costing $49 per driver-hour.
Given TriMet’s willingness to use labor priced at 100 percent above
the market rate, one might surmise that the agency has a lot of cash.
In fact, however, the opposite is true; TriMet is facing a fiscal crisis.
The agency currently has a bill pending in the Oregon legislature to raise
its regional payroll tax from the current rate of $6.22 per thousand of
payroll to $7.22 over a ten-year period. That tax is TriMet’s largest
source of revenue and brought in more than $155 million last year.
Why would the agency refuse to use less expensive outside labor? Because
TriMet managers don’t really have a choice. They gave away their
rights to decide a decade ago.
THE SUMMER OF ’94
The roots of TriMet’s financial crisis go back to February 1994,
when TriMet management and the ATU reached a verbal agreement on a new
contract that would vastly increase costs for the agency over the next
10 years. The agreement, negotiated behind closed doors, reduced the agency’s
ability to contract out work to lower-cost firms, increased wages, and
dramatically raised the long-term cost of employee benefits.
Senior TriMet staff negotiated the contract. The terms of the agreement
were so secret that for months even the TriMet board did not know what
had been promised to the union. When details became known, it immediately
created tension between Loren Wyss (Board Chairman for 8 years) and General
Manager Tom Walsh, who had approved the settlement. Wyss thought that
the ATU had received most of the benefits of the contract while giving
up nothing in return.
The rift grew over subsequent months. Walsh sent a four-page memo in May
1994 to Bob Stacey of Gov. Barbara Roberts’ office: “Tri-Met
needs either a new board president or a new general manager.” In
early August, Wyss was summoned to the governor’s office to discuss
the conflict. Midway through the meeting
Wyss resigned.
At the time, Walsh claimed to have had no prior contact with the governor,
who appoints the seven TriMet board members. Six days later, after the
Oregonian published a story quoting from the May memo, it was clear that
he had helped orchestrate Wyss’ ouster.
In December of that year, both the ATU and the TriMet board ratified the
contract. A few days later, in a scathing letter to the editor of the
Oregonian, Wyss predicted that the labor agreement would doom TriMet to
rising costs and declining productivity. He wrote:
“...the contract just approved by Tri-Met union employees will protect
all its members from additional contributions to their pensions for 10
years. It will also guarantee 3 percent minimum wage increases in the
future, no matter what happens to the economy or to other public budgets.
“And that’s not all. Unused sick leave should add annual year-end
bonuses of $500 to $1,000 for those with perfect attendance records; every
single dollar of health, welfare, dental and vision plans will be paid
for by the public employer; retirement age will decline to 58 within 10
years; and nonunion operators who have helped keep down the cost of shuttle
lines will be forced to join the union, at large increases in wage expense.
“It now appears that the Amalgamated Transit Union has succeeded
in pulling off one of the greatest coups in the history of public employment
in our city, while the press is focused on the voting of a few public
officials. Who is guarding the public interest in this issue? Where is
the discussion?
“If there is one predictable reason for transit to fail its mission,
it is the burden of fixed costs, which this contract guarantees.”
THE DEATH SPIRAL BEGINS
During the mid-1990s, as the Portland economy went through the most sustained
period of growth in history, cash from the payroll tax poured into TriMet’s
offices in record amounts. At the time of the union contract signing in
1994, the payroll tax was bringing in $89.5 million per year. Within eight
years it had gone up to $155.5 million. This accounted for 57 percent
of all operating revenues in Fiscal Year (FY) 2001-02.
TriMet opened Westside light rail in 1998 and Airport MAX in 2001, initiated
construction on the North Interstate rail line, received political approval
for three more rail lines (at a likely cost of over $2 billion), and began
operating the Portland Streetcar. The good times seemed to be rolling.
Unfortunately, the economy began tanking in 2000. TriMet’s payroll
tax revenues peaked in FY 2000-01, then declined by three percent the
following year. Revenues increased by only 1.1 percent in FY 2002-03.
Yet labor costs were growing rapidly. According to agency records, between
1994 and FY 2003-04 the number of employees increased 25 percent, total
salaries and wages went up 75 percent, and the cost of health benefits
increased 179 percent. Annual pension costs for union members went up
242 percent between 1993 and 2002.
The total cost of all fringe benefits was 60 percent of payroll in 2001
and 65 percent in 2002; they are likely to exceed 70 percent in 2003.
In essence, employee benefits are rapidly cannibalizing the general fund
budget.
There is also a growing problem with unfunded pension liability. TriMet,
like many public employers, operates a “defined benefit” retirement
plan for most of its employees (separate from the state program, PERS).
This means once TriMet employees retire, they are eligible to receive
certain benefits such as monthly income and health insurance for as long
as they live. TriMet is required to put money into the pension fund every
year to ensure that enough cash is available to pay for the obligations
to current retirees. However, if the fund does not have enough money to
pay for all the estimated obligations to future retirees, that creates
what is known as an unfunded accrued liability.
In 1993 the unfunded pension liability for the bargaining unit plan was
$38 million. By 1997 it had grown to $61 million, and by June 30 of 2002
it was $112.4 million. The growth in liability has outpaced TriMet’s
growth in employment, as evidenced by the fact that in 1993 the unfunded
pension liability per TriMet employee was $18,630 and by 2002 it had increased
to $43,230.
TRIMET’S CITIZEN
ADVISORY COMMITTEE:
FROM WATCHDOG TO LAPDOG
Each year TriMet convenes an outside group called the Citizen Advisory
Committee (CAC) for the budget. The CAC is a seven-person group of volunteers
that reviews financial data each year prior to formal budget adoption
by the TriMet board. Individuals generally serve three-year terms, and
the committee meets approximately two times per month from December through
March. Each year the committee releases a report in April or early May,
commenting on various aspects of the proposed budget.
In 1995 Tony Rufolo, a professor from Portland State University who teaches
transportation economics, chaired the committee. When the committee’s
report was released that year, it had a harsh assessment of TriMet’s
performance. On the opening page the report states, “It does not
appear that simply providing additional service will achieve the ridership
goals that have been set by TriMet.” The report continues, “While
ridership has been growing, other forms of travel have been growing more
rapidly, so that TriMet serves a smaller share of regional trips. This
trend is clearly
the opposite of expectations generated by the
Strategic Plan.”
The committee report criticized the 1994 labor contract for raising costs
and reducing flexibility: “The CAC continues to believe that the
agency must look to alternative service provision for low-density areas
and must work more closely with local governments, employers, and others
in developing innovative methods to improve service. The recent labor
agreement that changed alternative service from a contracted status to
an in-house service is seen as a roadblock to achieving these goals. In-house
provision is more costly than contracting and greatly reduces flexibility
in providing alternative service.”
The committee was also concerned that TriMet was increasingly relying
on non-passenger sources of revenues to fund operations. The report notes
that TriMet had a stated goal of getting 30 percent of its operating revenue
from passenger fares, but that the goal had never been met and there appeared
to be no commitment to making it happen.
Professor Rufolo presented the report to the TriMet board at a public
meeting in April 1995, and he didn’t sugarcoat things. He said,
“We’ve seen the goals, and we’ve seen the strategic
plan. We just don’t see the connection between the two.”
The TriMet board was stunned by this review. Board member Shirley Huffman
told the Oregonian, “This
is the most frank of the budget reports that I have
ever read.”
Unfortunately, the CAC advice did not lead to any noticeable change at
TriMet. Apparently some people on the board rejected the message because
they didn’t like the messenger. Nita Brueggeman, a TriMet board
member at the time, says that although the CAC played “an incredibly
influential role in the formation of the budget,” Tony Rufolo “was
anti-public transportation so his dissertation wasn’t very helpful.”
Rufolo’s term on the CAC expired in 1995 and he left the committee.
Never again did the CAC provide such a blunt reality check. In 1996 the
report mentioned concerns (again) about the high costs of the 1994 labor
contract, and reiterated the desire to recover 30 percent of operating
revenues from the farebox (it was about 24 percent at the time). In each
succeeding year, the CAC reports became increasingly optimistic about
the future and less critical of the past.
The 2003 report, released on May 14, is essentially a puff piece that
shows little in the way of independent thinking. For instance, in a section
on the Interstate MAX entitled “Business Vitality,” the report
states, “It was exciting to learn that more businesses exist today
along the Interstate MAX alignment than before construction began. All
of this in spite of the fact that construction has taken place in a depressed
economic environment! This demonstrates (a) the effectiveness
of TriMet efforts to support existing local businesses during the construction
period and (b) how light rail can serve as a catalyst encouraging economic
development, even during very difficult economic times.”
There is no mention of the multiple businesses that have been forced to
shut down due to the disruptive effects of rail construction. Nor is there
any apparent understanding of how many subsidies have been required to
entice development along Portland light rail lines, including 10-year
property tax abatements, grants, and reductions in system development
charges.
Elsewhere the report describes the Washington County commuter rail line
planned along the HW 217 corridor as a “nice ‘test case’
where a high-speed rail alternative closely parallels a major highway
and Interstate system.” In fact there is no “high-speed”
rail being planned in Washington County or anywhere else in Oregon. The
commuter line will average 36 mph with a top speed of 60 mph. The 18-mile
trip will take 30 minutes, not including waiting time.
Moreover, we already have a test case for rail paralleling an Interstate
Highway: Eastside MAX. After 16 years of experience, we know that it’s
not cost-effective and it doesn’t relieve highway congestion. It’s
not really necessary to learn this again.
Rather than looking out for taxpayers, the CAC was so excited about TriMet’s
proposed payroll tax increase that they even reprinted a glowing editorial
from the Oregonian in the report—the first time an editorial has
ever been included.
From 1996 to 2003, none of the CAC reports look at the problem of rising
labor costs. Mary Fetsch, TriMet’s communication director, confirms,
“The CAC has not discussed the issue of employee benefits.”
This is hard to fathom given the widespread media attention in the past
12 months to the $15 billion unfunded pension liability of the Oregon
Public Employee Pension System.
Today, Professor Rufolo comments, “Tom Walsh was furious with the
article that Gordon Oliver (reporter for the Oregonian) wrote and I was
told afterwards that the TriMet staff were instructed to ‘manage’
the CAC process better to avoid such critical statements in the future.”
If that’s the case, the strategy has clearly worked.
OPTING OUT OF TRIMET: SMALL IS BEAUTIFUL
The experience with the Cedar Mill Shuttle provides a rare glimpse into
the real-world differences between TriMet’s cost of service and
the competitive market. Additional insights can be gained by looking at
the track record of small jurisdictions that have used special provisions
of TriMet’s enabling statute to leave the service district. Wilsonville
withdrew from TriMet in 1988, Molalla and Happy Valley in 1989, Sandy
in 2000, and Canby in 2002. The results for these communities since then
show that smaller transit districts are far more cost-effective than TriMet.
Wilsonville provides a much higher level of service than was formerly
provided by TriMet, and customers get to ride without paying fares. Operating
revenues are paid through the same type of regional payroll tax that TriMet
uses, yet Wilsonville’s tax rate is less than one-half that of TriMet’s—$3
per thousand of payroll.
After Wilsonville first withdrew, it signed a contract in 1989 with Buck
Ambulance to provide door-to-door transit service. In 1991 the first passenger
van was purchased, and gradually over the course of the decade additional
equipment was bought and services expanded. Annual boardings were less
than 20,000 in 1992; they exceeded 160,000 in 2000. Service is provided
to Salem, Oregon City, Canby, and to connection points with TriMet buses.
Wilsonville has been able to expand without raising the payroll tax in
part because the districts cost per route has been declining. The cost
per hour of operations in 1992 was $78. It dropped to $62 in 1995 and
dropped further to $58 by 1998.
In Sandy the service between Gresham Transit Center and Sandy went from
peak-hour only under TriMet’s management to all day plus Saturday
service when the city took it over, and fares were eliminated. Operating
revenue is paid for by a local payroll tax that is slightly lower than
the former TriMet tax. In the three-plus years of operation, Sandy ridership
has gone up over 600 percent.
When Sandy
set up its service, it took competitive bids from private firms to operate
the shuttles. The city has one employee who works full-time as the transit
coordinator. Costs are low because there are few employees, virtually
no management bureaucracy, and the system is entirely road-based. That
means the city does not have special responsibilities to maintain infrastructure,
as it would if it used fixed rail; the road system is paid for by millions
of other users through their gas taxes and weight-mile fees.
BrainstormNW - June 2003
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