The City of New York Office of the Comptroller Bureau of Financial Audit
Audit Report on the Financial Practices of the New York City Transit Authority
FN03-141A
April 23, 2003
AUDIT REPORT IN BRIEF
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The New York City Transit Authority (Transit Authority)
was created in June 1953 to operate the City subway and bus systems
previously operated by the New York City Board of Transportation.
The Transit Authority is a public benefit corporation established
under the State of New York Public Authorities Law. In 1968, New
York State created the Metropolitan Transportation Authority (MTA)
to oversee, maintain, and administer the mass transportation systems
in the City as well as commuter transportation and related services
within the Metropolitan Transportation Commuter District––New
York City, Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk,
and Westchester Counties. The MTA accomplishes these objectives
through its subsidiaries: the Long Island Rail Road; the Metro-North
Railroad; the Staten Island Rapid Transit Operating Authority; and
the Metropolitan Surburban Bus Authority (Long Island Bus); and
through its affiliates: the Triborough Bridge and Tunnel Authority
(TBTA) and the Transit Authority.
Transit Authority operations are funded by passenger
fares and operating subsidies. Passenger fares represent approximately
50 percent of the Transit Authority’s revenues. State and City
subsidies as well as a portion of the surplus net income of the
TBTA flow through the MTA to the Transit Authority to fund its operations.
To fund capital projects, State legislation authorizes the MTA and
TBTA to issue bonds on behalf of the Transit Authority. The proceeds
of these bonds are used to fund the construction and rehabilitation
of infrastructure and to purchase subway cars and buses. Funds dedicated
to capital expenditures are also provided by grants from the City,
State, and federal governments.
Given the fiscal difficulties reported by the MTA
and the Transit Authority, and the concerns raised by the public
about whether a proposed fare increase was justified, the Comptroller’s
Office reviewed a preliminary budget proposal that was released
on December 9, 2002, and a revised proposal on December 16, 2002.
Unfortunately, the December 16 proposal contained a number of deficiencies
that rendered it far from complete. (On December 18, 2002, New York
City Comptroller William C. Thompson, Jr. sent a letter to the Chairman
of the MTA advising him of the deficiencies in the December 16th
proposal. See Attachment for a copy of the letter.) As a result,
on January 15, 2003, the Comptroller’s Office began this audit
of the Transit Authority’s procedures for recording and reporting
financial and statistical data presented to the public.
Audit Findings and Conclusions
The Transit Authority had adequate procedures for
recording revenue and expenses. Based on our evaluation of Transit
Authority internal controls and our review of its financial records
for calendar years 2001 and 2002, we are reasonably assured that
revenue derived from MetroCards, tokens, subsidies, and Other Revenue
(from advertising, concessions, etc.) were properly deposited in
the bank and accurately recorded on Transit Authority books and
records. We are also generally assured that expenses incurred by
the Transit Authority were appropriate, reasonable, and properly
recorded.
However, the Transit Authority did not provide
the public with complete, clear, and accurate information about
its current and future financial position. The Transit Authority
overstated its operating expenses on its financial statements for
2001 and on its draft financial statements for 2002, and its Fiscal
Year 2003 Operating Budget Proposal lacked essential information.
Specifically, the Transit Authority improperly included capital
costs and interest expense on long-term debt as operating expenses
on its financial statements; and its Operating Budget Proposal did
not provide adequate details of its debt service, debt restructuring,
and projected revenue and expenses. Overall, the errors in the Transit
Authority’s financial statements combined with the shortcomings
of the Operating Budget make it impossible for all concerned parties
to assess the financial position of the Transit Authority and make
an informed judgment about the necessity for a fare increase.
Indeed, after spending three months reviewing the
initial and revised operating budgets and various other documents
and having discussions with officials of the MTA and the Transit
Authority, we were finally provided enough information to analyze
and determine whether a fare increase is justified. Our analysis
revealed two significant problems with the operating budgets that
cause us to question the need for the fare increase. Specifically,
the draft financial statements indicated that the Transit Authority
ended calender year 2002 with approximately $300 million in the
"MTA Investment Pool." However, we could not determine
whether these resources were included in the budget plans and were
considered on March 6, 2003, when the MTA Board voted to increase
the basic Transit authority fare from $1.50 to $2.00. In addition,
the Transit Authority’s "Fare Revenue Model," which
the MTA used to project Transit Authority revenue from the fare
increase in the revised budget, made assumptions regarding ridership
that are questionable based on our review of historic ridership
data.
Furthermore, based on our evaluation of available
records, we determined that the ridership of the Transit Authority
pays a significantly higher percentage of Transit Authority operating
expenses when compared to the percentage of operating expenses paid
for by the ridership of the commuter railroads and Long Island Bus.
Moreover, after taking the fare increases into consideration, Transit
Authority riders will pay more towards reducing the Transit Authority’s
operating deficit than riders of the commuter railroads and Long
Island Bus pay towards reducing the operating deficits of those
systems.
Overall, we conclude that the Transit Authority’s
financial documents issued prior to and after the March 6, 2003,
meeting of the MTA Board were not adequate to provide the basis
for sound policy-making. Our analysis revealed that financial statements
and budget documents were incomplete, misleading, and obfuscating.
The Transit Authority made important financial revisions only after
the MTA Board voted to increase the transit fare. We cannot
determine whether those revisions, and possibly others yet to be
revealed, will prove the necessity of a fare hike that affects more
than seven million passengers a day. To ensure that the public can
trust the integrity of decisions that so affect them, we recommend
that the Transit Authority, in conjunction with MTA:
- Reevaluate the need for a fare increase based on the issues
discussed in this report.
- Ensure that capital costs are properly reported on its financial
statements in accordance with GAAP (Generally Accepted Accounting
Principles).
- Ensure that future budget proposals contain
complete, clear, and accurate information pertaining to the Transit
Authority’s financial position. In that regard, the Transit
Authority and MTA should appoint an independent task force to
review Transit Authority budget proposals before they are presented
to the MTA Board for approval. Also, the Transit Authority and
the MTA should consider including members of the public as well
as elected officials on the task force.
The MTA should:
- When considering future fare increases for the Transit Authority,
the commuter railroads, and Long Island Bus, take into account
the amount of operating expense already paid for by their riders.
