Related Links

Agenda Item # 5

BOARD MEMORANDUM

RECOMMENDATION:

Approve the amendment of FY 2003-04 and FY 2004-05 operating and capital Budgets.

BACKGROUND: 

On June 5, 2003, the Board of Directors approved VTA’s first biennial budget for FY 2003-04 and FY 2004-05. The mid-year budget review is an opportunity for the Board and the public to evaluate VTA’s actual performance after five months of operations. It also serves as a forum for VTA management to report to the Board any major budgetary changes that have been implemented since budget adoption and to request resource reallocations that are warranted due to changes caused by both internal and external factors.

DISCUSSION:

The FY 2003-04 and FY 2004-05 Recommended Budget was adopted with five provisions. The Board directed staff to defer the proposed 21% service reduction until January 2004 and to explore the feasibility of the limited, temporary use of future 2000 Measure A revenues to fund most, if not all of the proposed service reductions contained in the Recommended Budget.

Following the Board’s request, VTA filed a validation action to establish the permissibility of using 2000 Measure A revenues in Santa Clara County Superior Court in July 2003. On September 24, 2003, a Superior Court Judge ruled that VTA could use 2000 Measure A revenues to fund current operations. This enabled Bond Counsel to conclude that VTA can also use the proceeds of debt secured by and payable from 2000 Measure A to fund current operations.  This favorable court ruling impacted our two-year Adopted Budget in two ways. We need to increase the operating expense budget by $23.4 million and $46.1 million, representing the added costs from deferring indefinitely the proposed 21% service reduction in FY 2003-04 and FY 2004-05 respectively. At the same time, we need to increase the revenue budget by $32.2 million and $46.1 million to reflect the proceeds of debt (i.e., funding resources or budgetary revenues) secured by 2000 Measure A sales tax receipts to fund the increase in operating expense above the Recommended Budget.

In addition to this major revision, we also need to make other changes to revenues, expenses and capital projects to incorporate changes in the economy and our operations, as well as availability of more detailed information that has emerged since budget adoption. Exhibit 1 shows the recommended FY 2003-04 and FY 2004-05 Revised Operating Budgets. We project a surplus of $60.4 million in FY 2003-04 and a deficit of $4.3 million in FY 2004-05. Exhibit 2 highlights the projected reserves balances at the end of both fiscal years. They are $81.8 million and $72.5 million respectively.

The following table summarizes the major amendments proposed for the operating budgets:

Exhibit 1

Exhibit 2

Exhibit 2 separates on-going revenues and expenses from one-time revenues and expenses.  It demonstrates that even though Reserves have improved, there is still a structural deficit between $75 million and $100 million dollars.

REVENUES

2003 Bond Program

Since a Superior Court Judge had ruled that VTA could use 2000 Measure A revenues to fund current operations, we proceeded to increase the operating expense budget by $23.4 million and $46.1 million, representing the added costs from deferring indefinitely the proposed 21% service reduction in FY 2003-04 and FY 2004-05 respectively. At the same time, we increased the revenue budget by $32.2 million and $46.1 million to reflect the proceeds of debt (i.e., funding resources or budgetary revenues) secured by 2000 Measure A sales tax receipts to fund the increase in operating expense from October, 2003.

Measure A Repayment Obligation

The anticipated issuance of the 2001 Series A Bonds, which would be used to reimburse VTA for expenditures on portions of Tasman East, Vasona and Capitol 1996 Measure B Light Rail Projects, could not be completed in FY 2002-03. We rebudgeted the $29.3 million we expected to receive in FY 2002-03 in FY 2003-04.

Financing Transactions

VTA is currently engaged in two financing transactions:

• Subleasing the existing 50 UTDC light rail vehicles; and
• Completing a lease to service contract on the new 100 Kinkisharyo low-floor light rail vehicles.

The original total benefit estimate of these two transactions was $33.02 million, covering budget years FY 2002-03 through FY 2004-05.

Due to delays in completing the transactions and other factors, which are explained in the following sections, we need to increase our financing transaction budget by $24.12 million in  FY 2003-04 but reduce $3.09 million in FY 2004-05. The revised budgets for the two transactions are:

• Subleasing of UTDC Light Rail Vehicles: We budgeted $8.02 million in FY 2002-03 for subleasing our existing vehicles to Sacramento RT and Utah Transit Authority; however, the transaction could not be completed in FY 2002-03 due to protracted negotiations. The revised budget reflects shipments of the rail vehicles beginning in FY 2003-04 and continuing in    FY 2004-05.
• Lease to Service Contract on Low-Floor Vehicles: The closing of the first tranche, anticipated to occur in FY 2002-03, did not finalize until August 2003, (i.e., FY 2003-04). Together with the second tranche completed in August and a third tranche completed in December, we need to adjust the FY 2003-04 budget to $29.43 million, an increase of $21.13 million from the original budget. The three tranches only cover 66 vehicles and represent an increase of $4.43 million over the original three-year budgetary goal that contemplated the entire 100 vehicles. However, we need to eliminate our budget assumption of an additional $8.4 million in FY 2004-05 associated with the remaining light rail vehicles due to pending legislation that would disallow such transactions. Nonetheless, we will continue to pursue aggressively these types of transactions in the event the legislation does not preclude them.

Preventive Maintenance

According to the latest information, VTA will receive $40.8 million from the FFY 04 Section 5307 Federal Grant for our Preventive Maintenance Program. It represents an increase of $10.5 million over our original estimate. In addition, we have applied for the FFY 04 and FFY 05 FTA Section 5311 Non-Urbanized Area Formula Program for the first time and expect to receive $87,000 and $58,000 in these two years respectively. 

Fares

The adopted fare revenue budget, including revenue from the Eco Pass program, was developed based upon the assumption of having the 21% service reduction. Although the reduction will not be implemented, we do not expect an increase in fare revenue as our ridership has been experiencing a significant decline in the current fiscal year. Year-to-date system-wide ridership as of September 2003 was 18.8% less than that of the same period in FY 2001-02. Accordingly, we lowered our original ridership forecast by 0.2% in FY 2004-05. We expect fare revenue to increase by 10.9% from FY 2003-04. It represents a decrease of 6.0%, or $1.8 million, from the adopted estimate as a result of lower ridership and postponement of the next fare increase in July 2004 to January 2005.

Other & STA

• We revised our estimate for rental income up by $336,000 in FY 2003-04 and $346,000 in FY 2004-05. The increase is largely attributable to $300,000 in rental income generated from leases acquired from UPRR in the BART corridor purchase.
• In FY 2003-04, we adjusted interest income up by $390,000 to reflect the actual experience in the first six months.
• We added $150,000 for administering fund swap agreements for the 1996 Measure B program in FY 2003-04.
• MTC has revised our FY 2003-04 STA allocations upward by $139,000.

EXPENSES

Deferral of 21% Service Reduction for At Least 18 Months

We increased the operating expense budget by $23.4 million and $46.1 million, representing the added costs from deferring at the least 18 months of the proposed 21% service reduction in      FY 2003-04 and FY 2004-05 respectively.

3% Service Reduction

The Board of Directors approved a 3% reduction, effective January 5, 2004 at the October 2, 2003, meeting. In the past, we would have reallocated the savings to new routes or expansion of existing ones. In order to conserve our resources, we will retain these savings in FY 2003-04 and FY 2004-05. The savings from the 3% service reduction are $3.4 million in FY 2003-04 and $6.4 million in FY 2004-05.

Below is a table showing the latest projections for service miles and hours:

FY 03 Budget Carryforward Items

We increased the FY 2003-04 budget by $853,000 to account for FY 03 carryforwards, which consists of operating encumbrances for one-time activities, which were not completed by year-end and were not rebudgeted in FY 2003-04.

Reorganizations

• Transportation and Maintenance Division -- The division has developed a strategic departmental restructuring and staffing reduction plan with the goal of improving while simultaneously improving the services provided by VTA. The plan is the result of a thorough evaluation process whereby reporting relationships and position counts were reviewed on the basis of business necessity, productivity and quality of service.
• Technology Department – The department has been reorganized to enhance efficiencies and effectiveness while reducing cost. The plan is to consolidate VTA’s technology projects within one department and staff it appropriately. It eliminated eleven employee and three consultant positions.

Transfers

We transferred $550,000 of interest, bond premium and marketing expense budgeted in the Enterprise Fund for the $82.0 million 2002 Bond and Grant Anticipation Note to the 2000 Measure A program. 

Cost Savings & Other Changes

• In order to tighten budgetary control and ensure accurate forecast of resources needed, we have been performing more stringent variance analyses – comparing actual data to budget. Cost Center Managers are asked to offer budget reductions when appropriate. The variance adjustments proposed as of November 2003 totaled $6.4 million in FY 2003-04 and $92,000 in FY 2004-05.
• In FY 2003-04, $830,000 has been transferred out of VTA Contingency Fund to fund urgent needs of three current capital projects. We need to replenish the fund by the same amount.
• A $44,000 increase for property and casualty insurance is needed in FY 2003-04.
• $77,000 was added to VTA Contingency Fund as approved by the Board in FY 2001-02.
• An additional $75,000 is needed for legal fees on the financing transactions in FY 2003-04.
• Two new positions were created for $73,000 in FY 2003-04 and $176,000 in FY 2004-05.

Reinstated Construction Division Proposed Deletions

In the FY 2004-05 adopted budget, we budgeted the reduction of staff working on the Tasman East and Capitol Light Rail Projects that are expected to be completed in July 2004, totaling $6.4 million in salaries and benefits and $6.0 million in reimbursements. As we are proceeding with the preliminary engineering phase of the Silicon Valley Rapid Transit Project and the Downtown East Valley Project, the proposed reduction in staffing will not occur. Consequently, the FY 2004-05 staffing level of the Construction Division will remain at the FY 2003-04 level and the budgets will be reinstituted in FY 2004-05 accordingly. The funding will come from the 2003 Bond Program.

Changes in Reimbursements Methodology

Over the past several years, the composition of activities that VTA conducts, both directly and indirectly (e.g., Caltrain and paratransit) has changed. VTA has also significantly increased construction activities. As a result of these major changes, the Ad Hoc Financial Stability Committee recommended changes to our indirect cost allocation methodology to establish a more equitable basis for allocations.

Starting in FY 2003-04, based upon the recommendations from our consultants, we changed our cost allocation methodology to incorporate all costs – labor and non-labor – we expect to incur for operations, capital projects and direct services in the calculation of indirect cost rates. As a result, some current capital projects needed to be reforecast to anticipate a higher overhead cost allocation than previously planned.  For these projects, we need to augment their budgets so that they can absorb the unplanned increase. The funding of the increase will come from the 1996 Measure B Highway Program, the 2000 Measure A Program and locally funded project elements will be funded by transfers from operating cost centers. We propose to increase the reimbursements budget by $18.0 million in FY 2003-04 and $15.6 million in FY 2004-05.

We budgeted $3.8 million in the Adopted Operating Budget for capturing all non-reimbursable indirect costs for the 1996 Measure B Rail projects. We believe such costs should be capitalized. Accordingly, we transferred the budget from operations to a new capital project.

Indirect Costs Charging ADA, Caltrain, ACE, Highway 17 Express, Dumbarton Bridge Express and Light Rail Shuttles

As a result of implementing the new reimbursement methodology, we allocated VTA indirect costs of $2.2 million in FY 2003-04 and $2.3 million in FY 2004-05 to our direct services.

CAPITAL BUDGET

The Adopted Budget included 85 projects with a net VTA cost of $193.4 million. In the first five months, four projects were created and 24 projects were closed. The resulting net VTA cost became $162.6 million -- a reduction of $30.8 million.

This revised capital budget requests to augment three projects for additional work and increase the budget of 40 projects to reflect the impacts of the change in indirect cost allocation methodology for a net increase of $21.5 million. We also transferred the non-reimbursable indirect costs for Measure B program to a capital project.

  Below is the recommended revised capital budget for FY 2003-04:

PROJECT AUGMENTATIONS

Silicon Valley Rapid Transit Project

The project is nearing the end of the conceptual engineering phase and will result in designs that are approximately 10% complete.  The Environmental Impact Statement/Environmental Impact Report (EIS/EIR) has been prepared and the environmental clearance process will be completed in late 2004.  VTA is currently soliciting proposals from engineering consultants to begin the Preliminary Engineering phase of the project.

Preliminary Engineering involves further development of the project alternative selected during the planning and conceptual engineering efforts.  The objectives for this phase include the development of a configuration baseline, and advancing the design sufficiently to eliminate all significant unknowns before beginning Final Design work in 2005.  Preliminary Engineering can be conducted concurrently with the ongoing conceptual and environmental work, and will include the following activities:

• Developing the design to approximately 30% complete, and evaluate elements that affect cost or design feasibility.
• Finalizing station layout including parking, bus access, pedestrian linkages, and station facilities.
• Identifying joint development opportunities.
• Resolving utility conflicts.
• Defining performance specifications for procurement system elements such as BART revenue vehicles, fare machines, and other specialized equipment.
• Completing formal value engineering analysis to evaluate additional cost saving measures.
• Beginning right-of-way acquisition after EIS/EIR is complete.

During this phase, the project will also continue to conduct community outreach activities and develop the project design requirements to address community concerns regarding the impact of the project on local municipalities, residents, and businesses. Another key work product of the Preliminary Engineering phase will be detailed capital cost estimates and schedules that will support funding strategies for the subsequent phases of the project. There will also be a continuing need to comply with Federal New Starts requirements.

The $170 million for the preliminary engineering phase will come from federal grants ($2 million to date) and the remainder from the 2003 Bond Program using debt secured by and payable from the 2000 Measure A Sales Tax. Interest payments that become due prior to October 2006 are funded from a capitalized interest fund (which has been funded by bond proceeds).

Downtown East Valley Project

VTA completed a Major Investment Study (MIS) for the Downtown East Valley area of the City of San Jose to identify transportation needs within the area and to develop a plan for major transit investments that would meet those needs. Following this intensive 18-month study process and public involvement program, the VTA Board of Directors approved a Preferred Investment Strategy in August 2000, which included the following elements:

• Santa Clara/Alum Rock: Single car Light Rail Transit (LRT) or enhanced bus service in the Santa Clara /Alum Rock Corridor from the San Jose Diridon Station in Downtown San Jose to the Alum Rock Station on the Capitol LRT line.
• Capitol Expressway: LRT along the entire length of Capitol Expressway from the Alum Rock Station on the Capitol LRT line to Eastridge Mall and continuing to the existing Guadalupe LRT line.
• Monterey Highway: Bus Rapid Transit (BRT) on Monterey Highway from the San Jose Diridon Station in Downtown San Jose to the Santa Teresa Station on the Santa Teresa–Baypointe (Guadalupe) LRT line.

These three projects are proceeding with conceptual engineering separately but concurrently. The conceptual engineering will result in designs that are approximately 10% complete.  The Environmental Impact Statement/Environmental Impact Report (EIS/EIR) for the Santa Clara/Alum Rock corridor is currently being prepared and the environmental clearance process will be completed in the spring of 2005.  The conceptual design and environmental work for the Monterey Highway corridor is less complex than the other two projects and is anticipated to be completed during 2005. However, no immediate preliminary engineering activities are scheduled for either the Santa Clara/Alum Rock or Monterey Highway corridors at this time.

The Environmental Impact Statement/Environmental Impact Report (EIS/EIR) for the Capitol Expressway Light Rail Project is being prepared and the environmental clearance process will be completed in late 2004.   This project is now positioned to proceed and VTA’s next steps are to solicit proposals from and engage engineering consultants to begin the Preliminary Engineering phase.

The amendment to the capital budget proposes funding of $11 million to complete the Preliminary Engineering phase for the Capitol Expressway project segment to Eastridge. The activities of preliminary engineering are the same as listed for the Silicon Valley Transit Project. The funding source is the 2003 Bond Program using debt secured by and payable from the 2000 Measure A Program.

Downtown Platform Retrofit  

VTA budgeted $38.4 million in FY 02 for the retrofit of station platforms along the entire Guadalupe Corridor to accommodate the new low-floor light rail vehicles.  Due to financial constraints, we reduced the project budget and scope by deferring the retrofitting of the South-line and Downtown segments, at a savings of $21.5 million.

VTA now proposes to proceed with the retrofit of the Downtown segment. The project will remove the mechanical lifts and raise the existing station platform height to the new VTA standard, providing level boarding at all doors of VTA’s new low floor vehicles. We believe that this project should be completed before the opening of the Vasona Light Rail line, which is scheduled to provide service from Campbell to downtown San Jose by January 2006. From an operational perspective, VTA will introduce another train set into the transit mall every seven to eight minutes, in between the existing Guadalupe Light Rail trains. In order to operate efficiently, trains must maintain scheduled run times to avoid bunching of Guadalupe and Vasona trains in the transit mall. Retrofitting the mall platforms to allow level boarding before Vasona service starts will reduce the dwell time at station platforms. The enhanced schedule reliability associated with level boarding will increase VTA’s operational efficiencies.

This action would increase the project budget by $16.0 million, comprised of a grant funding assumption of $11.9 million (As we anticipate that the grant will not be available for at least two years, we proceeded to treat this amount as locally funded with a long-term receivable for budgeting purposes.) and required local match of $4.0 million. VTA plans to pursue future Federal Fixed Guideway funding earmarks and utilize the savings of the current phase of the project towards the local match for the grant funds. Since we have already received a Letter Of No Prejudice (LONP) from the Federal government, we propose to fund this project by using variable rate debt secured by and payable from our 1976 ½ cent sales tax in order to advance the necessary funds. VTA can retire the debt using federal grant funds received later.

There is more than a moderate risk that grants will not be available for this project in the future due to a relatively low ranking in the MTC regional scoring system. In the event we are unable to obtain grants, we would hold open the option to convert the outstanding variable rate debt to fixed rate debt. Assuming an interest rate of 5%, annual debt service payments would be approximately $1.0 million of 30 years. Estimates indicate that there may be potential operational efficiencies of up to $850,000 as a result of the completion of the Downtown platform retrofit, but the real benefits of the retrofit are enhancing schedule reliability, passenger convenience, and bringing the stations into compliance with ADA.

Increase in Project Budgets due to a Change in Cost Allocation Methodology

As mentioned in the Expenses Section earlier, we need to adjust the budget of some current projects as a result of a new cost allocation methodology. The total augmentation needed is $9.3 million for 40 projects.

ALTERNATIVES:

The Board of Directors may modify the budget amendment proposals.

FISCAL IMPACT:

We propose a revised biennial operating budget with an operating surplus of $60.4 million in   FY 2003-04 and a deficit of $4.3 million in FY 2004-05. We recommend increasing the funding for three major capital projects totaling $197.0 million. Two of them are 100% funded by the 2000 Measure A Program. There are also adjustments in other capital projects. The net increase in capital project spending is $21.5 million.

Primarily as a result of savings generated by efficiency improvements, an increase of $10.6 million in Preventive Maintenance Grant, exceeding the three year budgetary goal in financing transactions by $4.71 million, and on-going efforts to reduce local share committed for previously approved capital projects, the forecasted amounts of our Uncommitted Budgetary Reserves have increased to $81.8 million as of June 30, 2004, and $72.5 million as of June 30, 2005. The 2005 ending balance represents an increase of $63.4 million from our adopted budget. Because of better than anticipated results in these other areas, described above, tax law will limit the extent of debt that can be issued to fund operations. Therefore, we anticipate that: (1) The amount of the 2003 Bond Program will be less than the amount reflected in the Revised Operating Budget; and, (2) The ending Uncommitted Budgetary Reserves will be lower by an equal amount.

CONTACT BOARD SECRETARY'S OFFICE FOR EXHIBIT 1

Click here to return to the Board Agenda Index