Testimony
Audit Report on the Financial Practices
of the New York City Transit Authority
Committee on Transportation
New York City Council
Thursday, May 1, 2003
2 P.M.
(As Prepared for Delivery)

Good afternoon.

Thank you, Chairman Liu and members of the Committee for providing this opportunity for me to discuss the results of my audit of the Transit Authority.

In December, my office announced an audit of the Transit Authority’s procedures for recording and reporting financial and statistical data. I became increasingly concerned because transit officials appeared to be presenting a constantly shifting portrait of the Transit Authority’s financial status that seemed more convenient than accurate. Prior to the 2002 gubernatorial election, the MTA claimed a surplus, which would have made a fare increase unnecessary. Just after the election, the MTA began claiming a deficit, and as labor negotiations with transit workers began, they reported an even larger deficit. This confusing picture raised a red flag signaling something was not right.

After three months of analyzing the Transit Authority’s finances, I have concluded that the MTA has broken its public trust and misled New Yorkers with unclear and inaccurate reporting of its financial position. Based on these findings, it is clear that the MTA is an agency in serious need of reform.

I am not alone in this conclusion. Soon after we announced our audit of the TA, State Comptroller Alan Hevesi initiated a separate financial review of the Metropolitan Transportation Authority. Despite the fact that our offices did not share notes during our parallel investigations, we came to remarkably similar conclusions. This reinforces our main point: The MTA has not been forthright in presenting its financial position to the public.

As a first step toward restoring public confidence, the MTA Board should delay implementing the fare hike, convene new public hearings on the issue and then vote again – this time using accurate books and real numbers.

The issue is clear: Straphangers should not be asked to accept a fare hike without accurate evidence that one is necessary. That is currently not the case. We have found that the books used by the MTA’s Board to determine the need for an increase were incomplete, misleading and obfuscating. There is simply no way these books could have provided the board with the basis for sound policy making.

My audit made five key findings:

• First, it found an undisclosed $300 million account that was characterized as an “investment pool.” What this money was for, how it was spent and when it was spent remains a mystery, because the MTA refused to disclose this information.
  
• Second, the Transit Authority’s numbers just did not add up. We discovered that, contrary to Generally Accepted Accounting Principles, the Transit Authority improperly included capital costs and interest expense on long-term debt as operating expenses on its financial statements. Specifically, the TA’s financial statements overstated operating expenses by approximately $859,149,000 - or 16.1 percent of all reported expenses – in Fiscal Year 2001. In the draft Fiscal Year 2002 statement, the agency overstated expenses by approximately $852,905,000 – or 15.5 percent of reported operating expenses. This kind of accounting error gave the impression that the Authority’s operating deficit was actually larger than it was – and exaggerated the need for a fare hike.
  
• Third, the Transit Authority’s 2003 operating budget proposal was woefully incomplete. It lacked basic, critical information, such as the costs associated with the recent collective bargaining agreement and the additional revenues that transit officials believed a fare hike would produce. Conveniently, the board voted to approve a revised budget that included this information three weeks after approving the fare increase. The agency even tripped over its own numbers. The proposal contained conflicting deficits – on one page it put the deficit at $1.632 billion and, on another, $2.009 billion. The public, elected officials, and the MTA Board put their faith in a document that told two different stories.
  
• Fourth, the TA overestimated the drop in ridership due to the fare increase, contrary to its own historical data. This served to deflate future revenues and further justified their call for a 33 percent fare hike. The TA’s “Fare Revenue Model,” which it used to project revenue from the fare increase, assumed a 3.3 to 10 percent drop-off. But after the last fare hike in 1995, ridership decreased for only a few months before it began increasing. Total ridership in 1996 was actually higher than in 1995. And since that last fare hike, ridership has steadily increased, from 1.594 billion in 1995 to 2.175 billion in 2002 – a 36 percent increase. More accurate revenue projections may have led to a lower fare increase.
  
• Finally, my audit confirmed that New York City transit riders get shortchanged by paying a larger share of their system’s budget compared to their suburban counterparts, who ride the MTA’s commuter lines. While straphangers are financing 17.5 percent of the TA’s projected budget deficit, the riders of the commuter railroads and Long Island Bus will contribute an average of just 9.52 percent towards reducing those entities’ projected operating deficits. Clearly, New York City transit riders are paying much more than their fair share.

Given the results of my audit, it is clear that the MTA must act quickly to restore public trust.

First and foremost, the MTA Board must immediately reevaluate the need for the fare increase. The MTA, however, has, thus far, adamantly refused to do so. That is why, on Wednesday, my office filed an affidavit in support of a request for a temporary restraining order to stop the increase on the grounds that the public was kept in the dark regarding the MTA’s finances.

Additionally, the TA and the MTA must take other actions:

The TA must ensure that capital costs are properly reported on its financial statements in accordance with Generally Accepted Accounting Principles.

The TA must ensure that future budget proposals contain complete, clear and accurate information pertaining to its financial position. The TA and MTA should appoint an independent task force to review TA budget proposals before they are presented to the MTA Board for approval. This task force should include elected officials and members of the public.

And finally, the MTA should take into account the amount of operating expense already paid for by riders when considering future fare increases for the TA, the commuter railroads and Long Island Bus.

We need to change the MTA culture that leads its officials to believe that the system belongs to them – AND that they are accountable to no one.

I am gratified to hear that the MTA acknowledges many of the findings in our audit. Clearly, transit officials are contemplating reform only because our reports – and the public pressure that has followed -- forced their hand. That said, I welcome any changes that will lead to more accuracy and transparency in the agency’s finances. The MTA has an obligation to the public to be open and honest about the state of its finances. However, I await review of the MTA’s reform package to make sure that the substance matches the rhetoric.

I thank the City Council and Chairman Liu for their support on a matter that affects the nearly 7 million transit riders who use the system every day.

Thank you.