Metro’s cash crunch

From last week, a story about how times are tough at Metro.

Facing a $49 million budget shortfall this fiscal year, the Metropolitan Transit Authority has begun to slow construction on two light rail lines and may embrace more drastic measures in the coming months as uncertainty grows over a $800 million grant from the Federal Transit Administration.

Senior Metro officials emphasized that they did not anticipate any cuts to services due to the financial pressures and expressed confidence the FTA grant needed to pay for an estimated 30 miles of additional rail in Houston is forthcoming. But they nevertheless have begun to weigh the impact of continued delays on construction plans that anticipated completion in 2013.

“There’s going to be some tough choices that we’ll be making here, no doubt,” Metro Chairman Gilbert Garcia said.

So far, officials said, the work that has been put off has been minimal on the North line, which is expected to run from north Houston to the Texas Medical Center and Reliant Park. Metro has delayed road reconstruction work on Fulton Street and has put off awarding a contract for the expansion and construction of a rail facility on Fannin at the south end of the line near Reliant Park and the 610 Loop.

All things considered, this could be worse. I directed some questions at Metro about this and another story (more on that in a minute), and one of the things I got back was this statement from Metro’s Raequel Roberts:

It’s important to clarify the financial report given in [this] board meeting.

In actuality, METRO does not have a cash shortfall.

METRO began FY 2010 with $136 million in its fund balance and had originally projected ending the year with $68 million. Current projections show that balance coming in at $87 million, which is a $49 million reduction from the beginning balance.

This represents far more than the 15 percent of its operating budget that METRO keeps in its fund – or “rainy day” – balance.

Of critical note to our customers, this means there will be no service reduction or fare increase.

In other words, this isn’t any different than what the city of Houston has done the past two years, and what the state will almost surely do next year. Obviously, you can’t keep this up forever, but the whole reason to have a reserve fund is to cushion the bump during hard times. According to Metro’s Chief Financial Officer Louise Richman, with whom I had the chance to speak earlier this week, sales tax collections were higher than what they had projected for this year, so the trends are in the right direction. In addition, the work that Metro had been doing on the North and Southeast lines that they will be suspending is work that is supposed to be paid for by the FTA funds they’re waiting for. Metro was basically fronting itself the cash to get started on this work in anticipation of getting the funds later, but as it is taking longer than expected they’ll have to wait. Put all that together, and assuming the FTA funds come through in a still somewhat timely fashion, and things look a lot better.

Of course, there was also an Examiner story from last week about Metro’s investment portfolio, which could affect its ability to get those funds:

The decline in unrestricted cash could spell problems for Metro beyond the obvious ones.

As a condition of receiving funding as part the Federal Transit Authority’s New Starts program, which includes the already-under-construction North and Southeast lines, an applicant must receive at least a “medium” accumulated rating based on five categories.

One of the categories, “current operating financial condition” requires a liquidity ratio (cash, accounts receivable and nonrestricted investment portfolio vs. current liabilities) of at least 1-to-1 to avoid receiving a “low” rating for that category.

Based on the June 2010 unaudited report, Metro’s rating for 2009 appeared to be about 0.79-to-1, having fallen from 1.55-to-1 in 2007 to 1.03-to-1 in 2008, according to Metro financial reports for those years.

The main reason why I contacted Metro to ask about this stuff was because I didn’t see a comment from them in the story. There’s an updated version now in which CFO Richman discusses the cash balance, and the liquidity ratio is corrected to be 0.86 to 1 instead of 0.79, but the main question I had was whether or not this particular metric meant disqualification for the New Start funds, and they said no, it does not. CFO Richman also reiterated what Metro CEO George Greanias said in that updated story, that the “quick ratio” isn’t the only metric used, and she went into some more detail about how liquidity can be determined. I was not in a position to be able to take notes while she was speaking to me, and I’m not quite able to reconstruct it all from my memory, but the gist of it was that they strive to make conservative calculations that still leave them above the 1-to-1 mark, that they make these calculations both with and without certain federal funds and required expenditures, and that they feel confident that they are still meeting the FTA guidelines. The bottom line for me was that I asked if what was reported in this Examiner story was a cause for concern regarding the FTA funds they’re waiting for, and they said no, it was not. So there you have it.

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