Presidents 2012-2013 Proposed Operating Financial Plan 

INTRODUCTION 

While service adjustments were necessary to balance the 2010 budget, there are no further service reductions planned in the 2011 budget. Through a bonding agreement with the State of Illinois and the Regional Transportation Authority, the CTA is able to hold fares steady in 2011 as well. 

While the effects of the economic recession have been felt across all transit agencies, the CTA minimized the impact on riders by first cutting administrative and internal costs, as well as enhancing efficiency. We have implemented strict controls to contain our labor costs including aggressively managing overtime, closely monitoring hiring, and requiring unpaid days for nonunion employees. And through the efficient and disciplined management of contracts, we continue to realize savings on materials and fuel. 

In addition to internal cost controls, the 2011 operating budget will again use eligible federal capital funds to help achieve a balanced budget. Under normal times, the use of scarce capital funds for operating is not desirable given that the CTA has an unfunded capital need of nearly $7 billion. But these are not normal times, and we are doing all that we can to provide the critical services that our customers rely on now more than ever. 

Through belt tightening, disciplined management and the transfer of eligible capital resources, the CTA will preserve service and hold fares steady in 2011. But as you can see in the financial plan that follows, these actions alone will not be enough to balance the budget as we look ahead to 2012 and 2013. Unless the economy improves significantly, the next several years will be challenging. Tough choices still lie ahead. 

The plan for 2012 and 2013 reflects managements ongoing control of expenses, but cooperation from the CTAs union partners will be essential to reduce costs as well. This is because labor costs account for approximately two-thirds of the CTAs total operating expenses and nearly 90 percent of the CTA workforce is unionized. 

Additionally, the CTA will need the commitment and support of both the federal and state governments to provide critical funding to help move us beyond the immediate economic crisis. Due to the recession, public transit agencies across the country are facing unprecedented budgetary challenges. Yet, it remains vital that these agencies connect people to jobs and their communities, thus helping to support an economic recovery. 

The proposed budget is based on representations by the Governors Office that the State of Illinois will pay all 2010 PTF and reduced fare subsidy owed to the RTA and CTA by the end of 2010. 

OPERATING EXPENSES 

The Presidents proposed operating expenses are $1.369 billion and $1.394 billion respectively for 2012 and 2013. 

Labor expenses, which account for approximately two-thirds of the CTAs total operating expenses, are composed of wages, health care, pension, workers compensation, and payroll taxes for social security (FICA). For the third consecutive year, non-union employees will forego wage increases in 2011, and will again be required to take up to 12 unpaid furlough days and six unpaid holidays. 

The current union contracts expire December 31, 2011. Therefore, labor rates for the bulk of the labor force are predictable throughout 2011. Per the labor agreement with the Amalgamated Transit Union (ATU), covered employees will receive a 3.5 percent increase on January 1, 2011. 

Wage rates for members of the CTA Craft Coalition will be equal to the applicable prevailing wage rates for the region as determined each year by the US Department of Labor. Prevailing wage rates will go into effect on July 1, 2011 for all Coalition members except members of Teamsters Local 700 and Machinists District 8. Prevailing wage rates will go into effect for Teamsters and Machinists on January 1, 2011. 

While labor costs are relatively predictable for 2011, they are uncertain for 2012 and 2013. This plan assumes a modest overall increase of 1.5 percent. Containing and controlling labor costs must be part of any sustainable budget plan for the CTA. The CTA will pursue cost reductions and productivity gains through collective bargaining. Pension costs, another portion of labor costs, are determined by actuarial valuation each year. 

While the CTA has lowered healthcare costs through such means as joint purchasing alliances with the City of Chicago and other sister agencies, these costs continue to increase. As previously stated, this plan assumes that overall labor costs will rise by 1.5 percent per year. The cost to provide healthcare is a meaningful component of the CTAs overall labor costs which will, therefore, need to be controlled as well. To aid in controlling these costs, the CTA will seek to restructure benefits and pursue additional cost sharing through labor negotiations. 

Materials are purchased and used to maintain the CTA bus and rail fleet, rail tracks, facilities, stations and fare revenue equipment. As the CTAs infrastructure, facilities and equipment age, operation and maintenance costs increase. While the CTA has benefitted from the recent investments made in its bus fleet, unless the CTA reaches a state of good repair across its entire system, it will continue to face increased operating and maintenance expenses. Inflationary pressure increases material costs as well. To help offset this impact, the CTA continues to implement supply chain improvements that help to mitigate rising material costs. All contract bids are reviewed thoroughly before being awarded to ensure that the CTA is getting the best price possible, and that we are purchasing only the required quantities. Due to these efforts, the CTA projects materials costs to rise modestly to $ 74.2 million in 2012 and $75.7 million in 2013. 

The proposed budget for 2011 projects fuel costs to be $54.5 million. This is based on an estimated consumption of 17.75 million gallons at an average cost of $3.07 per gallon. The proposed financial plan projects fuel costs to equal $56.1 million in 2012 and $57.8 million in 2013. For a variety of reasons, fuel prices can be volatile. The CTA mitigates this risk through the strategic use of hedging instruments to ensure a reasonable degree of budget certainty. In recent years, hedging has saved the CTA a considerable amount of money. In 2010 alone, through a series of strategic hedges early in the year, the CTA fixed 89 percent of its estimated consumption at $2.95 per gallon versus a budget of $3.82 per gallon, resulting in significant savings. This financial plan assumes a continuation of these hedging strategies. 

In 2012 and 2013, the CTA projects electric power costs to be $30.7 million and $31.3 million, respectively. As with diesel fuel, the CTA uses hedging techniques to mitigate the impact of severe price fluctuations. In 2010, actual costs are projected to be less than the budget as a result. Prices are expected to remain relatively flat throughout 2011. This financial plan projects a modest two percent annual increase in 2012 and 2013. 

Funding for the provision of injuries and damages in 2012 is $30.6 million and is expected to increase approximately two percent in 2013 to $31.2 million. The amount needed to fund this reserve is a function of actual experience, the projected future balance in the reserve and the liabilities projected for the following year. 

The CTA estimates security services expenses will increase approximately two percent in 2012 and an additional two percent in 2013, bringing the cost of security to $34.8 million in 2012 and $35.5 million in 2013. 

Other expenses include utilities, advertising, equipment, software maintenance, accounting, engineering, legal, banking fees and commissions, interest on the outstanding pension obligation bond and other consulting services. Other Expenses are projected to be $205.1 million in 2012 and $211.3 million in 2013. 

OPERATING REVENUE 

System-Generated Revenues 

Fare revenue is expected to increase to $622.1 million in 2012 and remain constant in 2013. The increase in 2012 reflects the elimination of the $83 million in State funding provided in 2010 and 2011 as part of the CTAs agreement with the State to hold fares constant for two years. The replacement of this funding is expected to come from a combination of a fare increase and increased ridership. 

This plan assumes that the reduced-fare subsidy will be $28 million in both 2012 and 2013, constant with that which is expected in 2011. 

The CTA continues to focus its efforts on producing revenue from areas other than the farebox, such as advertising, charters and concessions. Currently, the CTA derives revenue from advertisements on buses, trains and stations, as well as from concessions. These additional opportunities include offering certain naming and branding rights, as well as other forms of advertising and concessions. Unfortunately, the economic recession has impacted the CTAs efforts to increase revenue in this category, as corporations have been forced to reduce their spending on these activities. Accordingly, this plan reflects that revenues in these areas will increase as the economy begins to recover. Revenues are expected to increase to $21.6 million in 2012 and $25 million in 2013. 

As in 2010, investment income is expected to be lower than historical levels due to reduced cash on hand and historically low interest rates. Accordingly, investment income is expected to be $867,000 in 2012 and $884,000 in 2013. 

Statutory required contribution revenues are forecast to continue to be $5 million per year. The Regional Transportation Authority Act requires that the City of Chicago contribute $3 million annually and that Cook County contribute $2 million annually to CTA operations. 

Other revenues are projected to be $45.6 million in 2012 and $45.8 million in 2013. These revenues are derived from parking fees, rental properties, third-party contractor 
reimbursements, fees from filming, a non-capital annual grant from the RTA and other miscellaneous revenues. 

Public Funding 

Public funding through the RTA statutory formula is estimated to be $547.7 million in 2012 and $544 million in 2013. The CTA expects to receive $529.3 million in 2011. 

The recovery ratio measures the percentage of expenses that a service board must pay against revenue that it generates. System-generated revenues, operating expenses and certain statutory exclusions are used in the calculation. The RTA Act requires the region to fund 50 percent of its expenses through revenues generated by the RTA and its three Service Boards. 

***A graph is inserted here to show the recovery ratio of public transit operations in large metropolitan regions. The data is collected from the National Transit Database of 2008. The recovery ratios of 23 public transit systems are presented. There are only three transit systems whose recovery ratios are above 40% (Los Angeles, Milwaukee and Philadelphia). Four transit systems have the recovery ratios between 30% to 40% (Boston, Minneapolis, New York and Washington D.C.). Most of the rest transit systems shown in this chart have recovery ratios around 20%, with a few whose recovery ratios are around 10% (Dallas, Detroit, Honolulu, Miami, and Phoenix). A line is also presented to show the 50% mandated recovery ratio for RTA services. Only the public transit systems in Philadelphia and Milwaukee meet this target. ***

As the graph indicates, this is considerably higher than the recovery ratio required in other transit agencies across the country. 

The RTA assigns each Service Board recovery ratio targets when it issues the funding marks required by the Act. While the RTA has set a required recovery ratio target of 50 percent for the CTA, the estimated recovery ratios in 2012 and 2013 are 62 percent and 61.8 percent, respectively, considerably higher than the requirement. As public funding declines, it is necessary for the CTA to raise system-generated revenues, thus increasing our recovery ratio. 

The recovery ratios in other regions throughout the country are far lower than the required recovery ratio for the CTA. This is, of course, a function of the level of public tax support for transit in these other regions. The Chicago region is one of a few in the country with a legislatively mandated recovery ratio of at least 50 percent. The CTA, Metra and Pace together have a higher recovery ratio than almost every other metropolitan region in the United States, even when accounting for different methodologies used in calculating the ratios. 

The recovery ratio has significant implications on the delivery of the CTAs services. The CTAs expenses routinely grow as the cost of labor (wages, pension, healthcare, etc.) increases. External factors cause our expenses to increase as well, including the cost of fuel. At the same time, our revenues are affected by the economy as we have seen over the past few years. Public funding, tied to both sales tax and real estate sales, has steeply declined and has not kept pace with the growth of our expenses. To meet the recovery ratio requirement, the CTA is left with few options but to reduce expenses through service cuts or to raise system-generated 
revenues by increasing fares. Both of these choices hurt our customers and they are counter productive to our larger goal to increase ridership and reduce congestion. 

Accounting Notes: The CTAs ongoing operations are accounted for on a proprietary fund basis. Operations are financed and operated similar to a private business, where the intent is that the costs of providing services to the public should be recovered through user charges. The full accrual accounting method is used, recording revenues when earned and expenses when incurred. 


Presidents 2012-2013 Proposed Operating Financial Plan Schedule 
(All Numbers In Thousands) 

Labor: 2010 Forecast - $834,974; Proposed Budget 2011 - $931,179; Plan 2012 - $937,242; Plan 2013 - $951,320
Material:  2010 Forecast - $82,276; Proposed Budget 2011 - $72,762; Plan 2012 - $74,217; Plan 2013 - $75,702
Fuel: 2010 Forecast - $58,121; Proposed Budget 2011 - $54,487; Plan 2012 - $56,122; Plan 2013 - $57,805
Power: 2010 Forecast - $36,226; Proposed Budget 2011 - $30,070; Plan 2012 - $30,671; Plan 2013 - $31,285
Purchase of Security Services:  2010 Forecast - $33,185; Proposed Budget 2011 - $34,109; Plan 2012 - $30,600; Plan 2013 - $31,212
Other Expenses: 2010 Forecast - $172,367; Proposed Budget 2011 - $200,149; Plan 2012 - $205,103; Plan 2013 - $211,304
Total Operating Expenses: 2010 Forecast - $1,260,149; Proposed Budget 2011 - $1,337,756; Plan 2012 - $1,368,746; Plan 2013 - $1,394,115

System Generated Revenue 
Fares and Passes: 2010 Forecast - $518,660; Proposed Budget 2011 - $523,660; Plan 2012 - $622,133; Plan 2013 - $622,133
Reduced Fare Subsidy:  2010 Forecast - $28,000; Proposed Budget 2011 - $28,000; Plan 2012 - $28,000; Plan 2013 - $28,000
Advertising, Charter & Concessions: 2010 Forecast - $18,900; Proposed Budget 2011 - $18,924; Plan 2012 - $21,552; Plan 2013 - $24,894
Investment Income: 2010 Forecast - $850; Proposed Budget 2011 - $850; Plan 2012 - $867; Plan 2013 - $884
Statutory Required Contributions: 2010 Forecast - $5,000; Proposed Budget 2011 - $5,000; Plan 2012 - $5,000; Plan 2013 - $5,000
All Other Revenue: 2010 Forecast - $18,400, Proposed Budget 2011 - $35,817; Plan 2012 - $35,713; Plan 2013 - $36,070
Total System Generated Revenue: 2010 Forecast - $589,810; Proposed Budget 2011 - $612,251; Plan 2012 - $713,265; Plan 2013 - $717,071

Public Funding Required for Operations: 2010 Forecast - $670,339, Proposed Budget 2011 - $725,505; Plan 2012 - $655,481; Plan 2013 - $677,044

Transfer from Capital- Preventive Maintenance: 2010 Forecast - $90,000; Proposed Budget 2011 - $113,200; Plan 2012 - $57,800; Plan 2013 - $70,000
Fare Agreement with State: 2010 Forecast - $83,000; Proposed Budget 2011 - $83,000
To Be Determined Revenue: Plan 2012 - $50,000; Plan 2013 - $63,000
Public Funding Available through RTA:  2010 Forecast - $497,339; Proposed Budget 2011 - $529,305; Plan 2012 - $547,681; Plan 2013 - $544,044

Total Funding: 2010 Forecast - $670,339; Proposed Budget 2011 - $725,505; Plan 2012 - $655,481; Plan 2013 - $677,044

Recovery Ratio: Forecast 2010 - 55.20%; Proposed Budget 2011 - 54.60%; Plan 2012 - 62.00%; Plan 2013 - 61.80% 
Required Recovery Ratio 50.00%
Fund Balance: Forecast 2010 - zero; Proposed Budget 2011 - zero; Plan 2012 - zero; Plan 2013 - zero

Recovery ratio is calculated by dividing System Generated Revenues over Operating Expense. The calculation includes in-kind revenues and expenses for security provided by the City of Chicago, excludes security expense, POB debt service and includes some grant revenues. 