The MTA loses six billion dollars a year and nobody cares

Photo from 2005 NYC Transit Strike

New York City is the center of capitalism and financial markets, however, hiding underneath the towering skyscrapers is an organization that defies the free market forces by siphoning off increasing amounts of city and state taxpayer dollars. This organization is the Metropolitan Transport Authority (MTA), which loses on average more than $6 billion per year dating back to 2009. If the MTA were a company in a functioning free market, it would have filed bankruptcy and restructured a decade ago. Instead, the city and state increase taxpayer subsidies and debt year after year, while acquiescing to union demands, resulting in one of the highest costing, least productive transit systems in the world.

The MTA’s cost of labor is greater than all its total revenue

The average salary of an MTA employee is nearly $90,000

Salaries, benefits, and retirement at the MTA are out of control. In 2015, the MTA spent $9.85b on employee salaries, retirement, and post-employment benefits. This is one billion dollars more than the $8.4b in total revenue the MTA collected. Before paying any other business expenses, the MTA is already losing money.

An analysis of MTA salary data on, excluding salaries below the lowest contractual union wage, shows that out of 62,507 MTA employees, the average 2015 salary was $89,779. The vast majority of these employees are bus operators, train conductors, station agents, maintenance personnel, and cleaners. Analysis conducted on 2010 salaries of bus/rail operators and maintenance personnel shows that MTA salaries range from 18% to 60% higher than other US metro systems (i.e. Chicago, SF, LA, Miami) with very few exceptions.

The MTA spent over $876m on overtime in 2015

Because the MTA Bus Company did not provide its overtime accounting, total overtime in 2015 is actually greater than $876m. This number is even more egregious when you consider that only a subset of roles is responsible for the vast majority of overtime due to union constraints and inflexible work rules that will be detailed in a later section. Exhibit 1 below shows that in 2015, there were three hourly employees who worked so much overtime they grossed a higher salary than the MTA Chairman, Thomas Prendergast.

Exhibit 1: Top 4 Salaries at MTA in 2015

The $876m overtime bill in 2015 represented 15% of payroll, which is nearly double the 8% benchmark of average private nonfarm manufacturing overtime tracked by the US Bureau of Labor Statistics. In 2010 when the MTA’s total overtime bill was $560m, or 13% of payroll, the MTA vowed to crack down, however the overtime issues have only been exasperated.

High absenteeism drives more overtime

Truancy resulting in last minute scheduling is a large driver of overtime at the MTA. Over a quarter of MTA employees use more than 15 sick days per year. This is in addition to the 20 annual vacation days employees receive after three years of service. Employees also receive their birthday as a holiday.

There’s a certain percentage of employees who take the mental health day. They wake up and say ‘I don’t feel like working today.’
Thomas Prendergast, Current MTA Chairman

Excessive usage and abuse of the Family Medical Leave Act (FMLA) is another driver of unplanned absences. Once an employee is approved under the act, he or she may take up to 60 unplanned/unpaid sick days per year. FMLA usage is not periodically reported by the MTA, however is 2010 it was revealed to be at 9% in the bus division and 20% in the Staten Island bus division.

MTA employees do not have a “Cadillac” health plan, it’s a Porsche

The MTA’s health and dental coverage is among the best of all comparable US transit systems and corporations. MTA employees pay 2% of their gross pay, excluding overtime, for health insurance. While the cost for an individual employee is in-line with the US average, the contribution for a family is significantly subsidized as seen in Exhibit 2 below. After paying the 2% salary contribution for insurance, MTA employees pay virtually nothing for any medical services for the entire family, with the exception of a $15 co-pay. Comparatively, the Chicago Transit Authority (CTA) has a deducible and 10% co-insurance, and the Los Angeles MTA has a very small deductible, but 20% co-insurance.

Exhibit 2: Comparison US metro health coverage vs US national average

Not to be outdone by the MTA’s health insurance plan, the MTA’s dental plan is even better. Employees pay no premium and the plan covers 100% of all procedures including crowns, root canals, and surgery up to $1,800 per person per year, and full orthodontics for 24 months.

When adding in the cost of health and dental insurance premiums, the average salary of an MTA employee exceeds $100,000, without even considering pension costs.

Unfunded pension and post-employment benefit liabilities pose a substantial future risk

Exhibit 3: MTA 2015 operating revenue and expenses (in millions)

While employee salaries and wages are the highest operating expense, pension (retirement), and other post-employment benefits are increasing at an even faster pace. Since 2009, pension and other post-employment benefits have increased at an annual rate of 4.4% and 6.4% respectively.

In the current state, the MTA is able to cover these costs with subsidies from the state and city government. However, in the future, either subsidies will be drastically increased resulting in higher taxes, or fares will increase faster than inflation. As of November 2014, the MTA had a $17.8b unfunded liability for post-employment benefits, and then reallocated and suspended future contributions to the reserve in order to pay for the new union labor agreement. There are also several underfunded pensions, including the LIRR pension that had a funding level of 26.8 percent as of Jan. 1, 2012. An 80 percent level is considered optimal for funds to be able to pay future claims.

Inflexible and inefficient union work rules cost the MTA billions of dollars per year

The Transport Workers Union (TWU) has a rich history, starting with its founding during the Great Depression when the private transit companies were abusing the nations dire situation, which consisted of underpaying, overworking, and mistreating their employees. Today many of these issues have been rendered moot thanks to increased transparency in the work place, government protections combined with an accessible justice system, and a wide variety of available jobs. Over the years, the union has grown in power with its ability to shutdown the city of New York, resulting in capitulation by management and the city and a plethora of work rules that stifle productivity.

Cost of construction for the MTA is 2–7x more expensive than any comparable subway system in the world

The extension of the 7 line from Times Square to the Javits Center cost $1.6 billion per mile. It would be the most expensive in the world if not for the first phase of the Second Avenue subway, which is estimated to cost $2.7 billion per mile of new tunnel. Compare this to the cost of other new tunnels worldwide in London, Tokyo, Berlin, and Paris, which cost respectively $700m, $560m, $400m, and $368m per mile. What is this discrepancy attributed to? According to Michael Horodniceanu, president of the New York City Metropolitan Transportation Authority’s capital construction division: “work rules.” Citing the example of the city’s revered sandhogs, he said the MTA employs 25 people for tunnel-boring machine work that Spain does with nine.

Pay raises for union employees are stipulated by collective bargaining agreements, not performance, and union employees reach maximum pay after five years

By structuring pay raises based on tenure, capping after five years, union employees are not incentivized to work any harder than a level just above what would result in termination. The average tenure of an MTA employee is 13.8 years, far above the national median of 4.6, which demonstrates how “good” of a job this is. In the past, the MTA attempted to tie pay to performance, but the union rejected it. This generalization does not apply to all employees as some want to progress to higher roles.

The MTA cannot decrease the number of conductors per train

The concept of excessive conductors is a multi-faceted issue that has present and future implications. Currently, the LIRR has conductors that punch every riders ticket. This process became obsolete last century from the use of turnstiles or the honor system along with heavy fines for dodgers, as in Europe. Also, there are several train lines, such as the L, that have an advanced driving system requiring only one operator. In 2005, the MTA removed the second conductor from the L, but the union forced the MTA to bring the second conductor back. For 11 years, taxpayers have paid for someone who does absolutely nothing on the L train.

The future ramifications are more drastic. Around the world, over 15 subway systems have at least one fully automated line, including systems in Malaysia and the Philippines. The MTA currently has approximately 7,000 train conductors and operators being paid an average salary of $100,000 including benefits. If the MTA were to invest in driverless trains, they would save $700m annually, not including future pension and post-employment costs.

Union rules require overtime for work over eight hours per shift

Overtime for shifts over eight hours is a significant contributor to the nearly $1b overtime bill the MTA had last year. There are a significant number of professions that allow, if not require, work days over eight hours (e.g. medical professionals, truck drivers, construction workers, call service reps, EMTs, ect.) and do not pay overtime unless the employee exceeds 80 hours over two weeks. Due to the nature of transit and overnight maintenance, 12 hour shifts are required for many jobs at the MTA.

Other examples of inflexible and inefficient union rules:

  • “swing shift”: a period of time that lasts up to four hours where bus drivers receive half pay between morning and evening shifts. Many spend it playing pool in bus depots. Additionally, drivers who call out sick get paid for their 12 hour “run” instead of the two, four hour shifts they would normally work
  • Bus drivers cannot be scheduled in two different boroughs on the same day
  • Employees may not perform the same job with someone of a different title because they are not being paid the same salary; groups must be scheduled to only include people of the same titles
  • Subway cleaning workers cannot be asked to replace light bulbs or do any painting
  • Station agents (in the booth) are not allowed to clean the floor of the subways, even as simple as picking up a piece of trash or cleaning a spill

…this is only a sample. The number of rules and constraints set forth by the collective bargaining agreement is substantial. One can only speculate how many billions of dollars it costs the taxpayers of New York City and State.

I think we have a series of work rules and practices that have developed over many years that are all about how people effectively get paid for not working.
Jay Walder, Former MTA Chairman 2009–2011

Increasing debt and taxpayer subsidies are keeping the MTA afloat

Knowing that the MTA loses more than $6 billion per year, one may wonder “why aren’t they bankrupt?” or “where are they getting the money to pay for this?” The answer is a combination of debt and government subsidies.

The MTA has more debt than approximately 30 countries

Currently the MTA has $34.5b debt. In 2015, debt service cost $2.2b, which represented 17% of its $13.5b operating budget. The MTA is solely reliant on subsidies and would default on their debt if subsidies were ever not approved. The increasing debt and debt service requires increasing subsidies every year.

New York City and State taxpayers subsidized over $5.5b in 2015, double the $2.8b in 2004

It is alarming that subsidies for the MTA have increased 100% in 11 years. It is even more concerning for NYC residents, because while state subsidies have increased 5.1% annually since 2009, city subsidies have increased 23.1% annually over the same period.

Exhibit 4: MTA 2015 non-operating revenues / grants (in millions)

In 2015, New York State and NYC gave the MTA subsidies of $4.1b and $1.4b, respectively. By dividing the subsidies by the number of taxpayers in NYS and NYC, each state taxpayer paid a $459 subsidy and each city taxpayer paid a subsidy of $825 (includes state subsidy).

While it might seem fair to pay $2.75 for a ride on the metro, the hidden cost is in your tax bill. In effect, New York City and State residents are subsiding the cost of the subway for tourists and lining the pockets of the MTA union.

The metro system upon a hill

The New York and Hong Kong Metro systems are a stark comparison

A highly effective, efficient, and affordable subway system is not a quixotic idea. A shining example today is the Hong Kong’s Mass Transit Railway (MTR). Last year, the MTR recorded EBITDA of $2.45b on $5.38b of revenue. The MTR is a highly diversified public-private partnership (PPP), whose largest segment is the Hong Kong metro, but also provides consulting services for international metro systems and is a property developer and landlord for properties on or near the subway. Exhibit 5 below shows a comparison of the HK MTR and the NYC MTA.

Exhibit 5: Comparison of Hong Kong MTR and MTA

Lack of investment in technology is directly attributable to the MTA’s inefficiency

A major difference between the MTR and MTA is that the MTR heavily invests in technology. The MTR uses an A.I. system that helps optimize the use of space for the limited time of overnight maintenance and cleaning. The MTR also uses a variety of RFID technology, infrared cameras, and a high tech metro card, which itself generated a $12m profit in 2014.

Comparatively, the MTA still runs trains with technology that dates back to the 1930’s. With regards to overnight maintenance, the MTA, in 2016, schedules requests that must originate via fax, requires weeks of meetings, and finally inputs the schedule into a 30+ year old proprietary system.

If MTA management knows what’s wrong, why can’t they fix it?

The current CEO of the Hong Kong MTR is Jay Walder, the former Chairman of the MTA from 2009–2011 who was quoted above in the Union Work Rules section. Walder, who failed to fix any of the chronic issues facing the MTA, has transformed the MTR in to “probably the best-run metro in the world”, per Nigel Harris, managing director at the Railway Consultancy Ltd. This peculiar example of failure and success demonstrates that management is powerless to turn the MTA around in its current state.

Correction: Jay Walder is no longer the CEO of the MTR. He was forced to leave at the end of 2014 after announcing a delay and cost increase in a high speed rail project between mainland China and Hong Kong.

Let’s talk solutions

Controlled bankruptcy of the MTA

In 2009, President Obama’s administration helped GM pursue a “controlled bankruptcy” where the government temporarily nationalized the company and was able to restructure agreements with the United Autoworkers Union, swap debt for equity, and move to a leaner workforce. New York City and State need avant-garde leaders to pursue a similar bankruptcy, as it is likely the only way to fix the deeply flawed collective bargaining agreement and power structure between the TWU and MTA leadership. GM was transformed from a company that lost $80b in the four years proceeding bankruptcy to one that now has billions of dollars in profit every year.

Implement a public-private partnership (PPP)

The Hong Kong metro’s PPP is wildly successful. The government has a 76% stake, which means that the government receives 76% of the dividends paid, in addition to capital gains on the underlying $224b market cap entity. Currently, the Chinese government receives yearly dividends of $610m from the MTR, compared to the New York City and State governments, who subsidize the MTA more than $5.5b per year.

A PPP would allow a private company with transit expertise to manage the daily operations of the MTA. Additionally, it would open up the MTA to investment from PE/VC firms that would boost the MTAs productivity and CAPEX spending in exchange for higher returns in the future. By selling a fraction of the MTA, the state and city would immediately receive payment of tens of billions dollars that could be returned to taxpayers.

A significant constraint for the success of a PPP is a major overhaul of the collective bargaining agreement. With the current agreement in place, no firm would want to pay for a stake in a PPP that loses billions of dollars per year due to an inflexible union contract. There would also need to be some government constraints on changes to service. Because the MTA is crucial for poor and undeserved communities stretching from the Bronx to Jamaica, Queens, rules must be put in place that require certain stations to operate even if they are not profitable, which the government could subsidize, albeit at a much lower cost than today.

Increase ancillary sources of revenue

Operating in the second richest city in the world with daily ridership of over five millions passengers, the MTA has ample opportunity to create more revenue outside transit fares. However, the MTA’s advertising has not advanced much from half a century ago, consisting mostly of paper ads in trains. This is what you would expect from an organization that has no incentive to make a profit. Compare this to the MTR, who employs creative ads utilizing all available space.

Exhibit 6: MTR advertising examples in conjunction with JCDecaux

Wifi is another potential source of ancillary revenue. Everyone is so attached to their phones and wants to be part of the connected world all the time. Of the nearly five million daily commuters, a significant amount of them would likely be willing to pay a monthly fee to be connected to wifi throughout the metro system, including on the train. If the MTA were to invest in technology improvements throughout the system, adding wifi to trains would be well worth the investment for these future recurring revenues.

How can you make a difference?

This article is in no way intended to malign the people who work at the MTA or the Transport Workers Union (TWU), as they are all operating as anyone would expect given the circumstances. What must change are the archaic rules governing the MTA that perpetuate the current situation. Power must be taken away from the union so that salaries are based on the free market, not negotiations where government leaders bend over to the union at the expense of taxpayers. As importantly, the MTA must be able to operate a flexible workforce to lower overtime costs and eliminate unneeded positions. As long as the organization is not motivated to maximize shareholder value (whether that be taxpayers or private shareholders), it will continue to keep coming back to New York City and State for more of your money.

If you want change, email this article to your mayor and governor:

Email this article to Mayor De Blasio

Email this article to Governor Cuomo

Failure is not fatal, but failure to change might be.
John Wooden, UCLA ten-time championship basketball coach

Johnny Knocke is a former Strategic Initiatives MBA Intern with the MTA’s New York City Transit (NYCT) group and a graduate of Columbia Business School. No confidential information was disclosed in this article.