Meeting_Body
FINANCE, BUDGET, AND AUDIT COMMITTEE
JANUARY 16, 2025
Subject
SUBJECT: FISCAL YEAR 2026 BUDGET DEVELOPMENT PROCESS
Action
ACTION: RECEIVE AND FILE
Heading
RECOMMENDATION
Title
RECEIVE AND FILE The Fiscal Year 2026 (FY26) Budget Development Process.
Issue
ISSUE
This report provides the updated Near-Term Outlook and lays the groundwork for the annual development of the Equitable Zero-Based Budget (EZBB) process. An outline of the planned EZBB process and schedule follow to address the delivery of Metro’s objectives in the next fiscal year, culminating in a planned May 2025 Board Adoption.
In preparation for the FY26 Budget development process, the Office of Management and Budget (OMB) initiated early engagement by providing an oral report to the Finance, Budget, and Audit Committee on November 21, 2024, centered on the recap and assessment of:
• FY24 Year End Preliminary Budget Results
• Metro Transit Cost Growth Drivers
• Transit Infrastructure Development (TID)
• Other Programs
• Revenues Assessment
• Next Steps in Budget Development Process
Background
BACKGROUND
California Public Utilities Code Section 130105 requires Metro to adopt an annual budget to manage the revenues and expenses of the Agency’s projects and programs. The budget is the legal authorization to obligate and spend funds and to implement Board policy. It includes all operating, capital, planning and programming, subsidy funds, debt service requirements, and general fund activities for the fiscal year. The legal level of control is at the fund level. Total annual expenditures cannot exceed the final appropriation by the Board at the fund level except for capital expenditures, which are authorized on a life of project basis. This month, staff will begin to provide a series of status updates on the FY26 Budget development process to the Metro Board’s Finance, Budget, and Audit Committee.
Discussion
DISCUSSION
Near-Term Outlook Update and Challenges Ahead
Metro consistently underscores the critical role of sound financial planning in effectively executing transit investments and operational strategies. The EZBB cycle begins with the Near-Term Outlook, which sets forth a five-year financial forecast grounded in a comprehensive evaluation of the economic landscape, revenue projections, ongoing programs, market cost escalations, Board-approved priorities, and the planning of major capital investments.
The Agency’s Near-Term Outlook has improved from twelve months ago from $1.5 billion deficit to $0.1 billion in FY27 (Figure 1) due to:
1) Board approved policy changes to the newly established Transit Community Public Safety Department (TCPSD)
2) Zero-Emissions Bus (ZEB) and infrastructure revised forecast as well as incremental grant revenues from SB125 ZETCP
3) Constrained and prioritized budgeting efforts through the EZBB process
4) Delayed spending on capital projects based on year-end actuals
However, the Agency is committed to continuing its mitigation efforts as a cumulative financial gap of $2.3 billion is anticipated by FY30 (Figure 1). The gap is comprised of $1.3 billion for Metro Transit Operations & Maintenance (O&M) and $1.0 billion in Metro Transit Capital Improvement Program (CIP) due to continued cost growth, increasing at a faster rate than projected sales tax and operating revenues.
Figure 1:
Revenue Update
One of the first steps in updating the near-term outlook is revising revenue estimates and projections based on the most recent information available. Figure 2 below compares the prior year and the updated near-term outlooks.
Figure 2:
Sales Tax Projections
Sales taxes make up over two-thirds of Metro’s resources. The updated forecast projects a 2.3% decrease from the prior year in overall sales tax revenues, primarily due to the economic slowdown from FY23 Q3. Slowing auto sales, lower fuel prices and continued spending shifts to non-taxable categories like services and housing costs depressed taxable purchases. The Federal Reserve’s interest rate hikes led to higher borrowing costs for consumers. Other influencing factors, such as declining countywide population, political uncertainties and higher unemployment rates all contributed to a slowing local economy and thus lower than expected year-end actual receipts in FY24 and FY25 Q1. A more detailed discussion of these trends will be included in the February Board Report.
Forecasting agencies are anticipating the economic slowdown to continue into the first half of FY25 but gradually improve over time with the Fed’s steady interest rate cuts and easing inflation. The average five-year sales tax revenue growth is projected to normalize at 2.9%.
Figure 3 illustrates Metro’s adopted, actual and projected sales tax revenue per ordinance from FY24 to FY30.
Figure 3:
System-Generated Revenues
• Fare revenues are increasing by 10.8% in this year’s near-term due to anticipated ridership growth from the opening of D Line (Purple) Extensions 1, 2 and 3, A Line to Pomona Extension, G Line improvements, and implementation of fare capping and fare policies.
• Advertising revenues are increasing in this year’s near-term with the implementation of the Metro Transportation Communications Network (TCN) digital billboard advertising program, adding an additional $30 million annually starting in FY26.
• Toll revenues are increasing in this year’s near-term with the increase in ExpressLanes toll rates and the I-105 ExpressLanes to begin service in FY29.
Grant Resources
Grant resources are increasing 8.0% from the prior forecast at an average growth of 18.9% with the addition of SB125 Formula-based Transit and Intercity Rail Capital Program (TIRCP) and Zero Emission Transit Capital Program (ZETCP) grants, estimated at $1.3 billion total during the near-term.
Grants included in the near-term comprise only those known and highly likely to be received. Given the economic and political uncertainties involved in the change of administrations and associated changes in national policies and priorities, additional state and federal funding is difficult to predict at this time.
Metro staff will continue to pursue federal, state and local grant opportunities and present to the Board as additional information becomes available. Staff will also work closely with the region’s elected political delegations at both the state and federal level, as well as with APTA and the broader transit community, to educate the incoming administration about the needs for and benefits of public transit and advocate for continued and enhanced transportation funding from our external funding partners.
Major Cost Growth Drivers
As Metro advances its preparations in developing the FY26 Budget, staff has assessed the recent developments and expense outlook. This report outlines the key developments since the Special Board Workshop in March 2024, where Metro staff provided the Board with an in-depth analysis of the projected financial outlook for the Metro Transit program, facilitating a thorough assessment of the cost growth drivers and their implications for Metro’s operational program delivery.
The Agency’s Near-Term Outlook through FY30 includes continued cost growth in Metro Transit O&M and CIP in the following areas (Figure 4):
• Public Safety
• Cleanliness and Station Experience Expansion
• System Expansion
• Labor Costs
• Workers Compensation (WC), Personal Liability and Property Damage (PLPD) and Insurance Market Premiums
• Zero-Emissions Bus (ZEB) and Infrastructure
• Major Capital Project Risks
The cost growth drivers are presented in Figure 4, which highlights the anticipated growth rate of every cost driver in comparison to the prior year’s projections. While every operational cost growth driver is anticipated to grow at a faster rate than sales tax revenues at 2.9%, there are a few areas where the growth has slowed:
• Public Safety due to Board Approval in establishing the Transit Community Public Safety Department (TCPSD)
• Insurance/WC/PLPD premiums by reinstating the Operations Safety Steering Committee (OSSC), which meets quarterly to review risk exposure trends and evaluate mitigation measures
• Zero-Emissions Bus (ZEB) & infrastructure costs due to forecast revision
Figure 4:
The remaining cost growth drivers remain relatively flat or continue to grow due to the Agency’s continued investments:
• Labor Costs remain relatively flat even after incorporating the increases in the latest collective bargaining agreements starting in the current fiscal year and for the next five years
• Parts, Fuel & Outside Services growth driven by high inflation, propulsion power, utilities, other parts & supplies and professional services
• Cleaning Costs are driven by Metro’s strategic investment in the expansion of its Station Experience initiatives and implementing technological innovations (i.e., Intelligent Cleaning Equipment (ICE) auto-scrubbers, Elevator Open Door Program, etc.)
• System Expansion remains relatively flat, with annual openings through FY30 which will strengthen connectivity and enhance integration across our transit network
Attachment A further outlines the updated assumptions in the latest Near-Term forecast surrounding the cost growth drivers.
Additional Risks and Challenges
As Metro works to mitigate the cost growth drivers, there are additional risks and challenges that have not been quantified in the current forecast which may impact the Agency in the Near-Term. Some of the external risks include:
• Geopolitical uncertainty
• Potential increases in tariffs and their impact on Metro’s purchase price
• Change in tax exemption status
• The availability and impact of traditional Federal programs and grants
• Ongoing inflationary pressures
Additionally, there are also internal factors that add financial pressure to the Agency:
• Operating Metro’s system in the future with the expanding rail system will be more costly than operating the same level of service today. The average cost of running one hour of rail is 2.2 times more than operating one hour of bus service.
• The ongoing financial risks that stem from capital cost increases due to scope and project schedule changes may take away funding eligible for bus and rail operations if no alternative funding source is identified.
• Preparation for the 2028 Olympic and Paralympic Games in absence of additional funding presents significant challenges.
FY26 Equitable Zero-Based Budget (EZBB) Process and Schedule
Metro is continuing to utilize the year-round EZBB process for its FY26 Budget development, starting with the five-year financial outlook followed by Capital Budgeting to anticipate project needs, while focusing on cost management and sustainability. Metro will continue its efforts to mitigate and defer the Near-Term deficit, managing through the economic slowdown that is expected to linger into FY26 while focusing on Agency priorities that require continuous investment.
The FY26 Budget will align with Metro's mission to enhance transit services, maintain infrastructure, and plan for regional projects, adhering to regulations and board-approved policies. Metro will continue collaborating with the Board of Directors with the goal of developing a balanced budget supported by monthly program reviews to reassess needs.
A schedule of upcoming topics will be presented, concluding with the Board’s final adoption in May.
Early and Expanded Public Outreach and Engagement
Metro remains dedicated to fostering transparency with riders, the public, and stakeholders. To uphold this commitment, the budget outreach process continues to engage the public through both traditional and new methods. This includes social media campaigns, stakeholder meetings, and outreach directly on the system with informational flyers. Updates on the budget outreach will be shared in the upcoming monthly reports.
FY26 My Metro Budget Activity
The My Metro Budget Activity, a national award-winning initiative, promotes education and transparency around Metro’s budget. Recognized by the International City/County Management Association (ICMA) with the Voice of the People (VOP) Award for Excellence in Budget & Finance (Figure 5), the program highlights effective community feedback and data-driven decision-making.
Following previous years, a social media campaign is focused on engaging Spanish-speaking, female, and community college student riders, while Equity Focus Communities (EFCs) remain central to the engagement efforts. Metro station staff and internal groups such as LIFE, Metro Micro, and the On the Move Riders Club are distributing information cards to engage underrepresented groups and riders.
The Fiscal Year 2026 (FY26) activity, launched in October 2024, can be accessed at mybudget.metro.net <https://mybudget.metro.net/>.
Figure 5:
New Tactics & Features
Metro continues to improve the budget activity based on feedback received and advancements in technology and incorporates the following new features and tactics:
- The activity includes over 90 unique categories for public comment
- Four new scenario questions
- Translations in nine languages to increase accessibility
- Leveraging Artificial Intelligence (AI) to better analyze the written comments
o Categorization of comments for departments
o Summarization by topic
o Sentiment analysis
The feedback collected will be shared with Metro departments starting in January and will play a vital role in shaping the FY26 budget.
Future Initiatives and Staying Updated
A Budget Telephone Town Hall is scheduled for Tuesday, February 4, 2025. This live, interactive forum is ideal for residents who cannot attend in-person meetings or participate online. Metro will request written comments in advance, with attendees also having the opportunity to ask questions and provide live feedback.
As the FY26 budget develops, further updates on outreach initiatives will be provided. Stay informed at the Budget Portal: <https://budget.metro.net>.
Equity_Platform
EQUITY PLATFORM
As we move forward with the development of the FY26 Budget, our commitment to equity will continue to guide our approach and decisions. While addressing public safety, cleanliness, system expansion, labor equity, and environmental sustainability, we strive to create a transit system that is not only efficient and safe but also inclusive and equitable for all Los Angeles residents and riders.
Additionally, Metro’s EZBB processes will undergo enhancements following the recent awarding of a contract for an Agencywide Budget Equity Assessment. The assessment will refine Metro’s budget tools and process to better incorporate both procedural and distributional equity considerations, extending beyond the analysis of impact or proximity to Equity Focus Communities (EFCs). Metro will continue to conduct the EFC Budget Assessment for FY24 Actuals and FY26 Proposed Budget and analyze the FY26 budget against budget equity principles as aligned with Metro’s Equity Platform framework. However, the Agency will not be applying the Metro Budget Equity Assessment Tool (MBEAT) to the FY26 capital and operating budgets until the consultant’s assessment is completed.
Implementation_of_Strategic_Plan_Goals
IMPLEMENTATION OF STRATEGIC PLAN GOALS
The recommendation supports the following Metro Strategic Plan Goal:
Goal # 5: Provide responsive, accountable, and trustworthy governance within the Metro Organization.
Next_Steps
NEXT STEPS
Metro staff will provide regular Budget briefings to Board members and their staff starting this month. Staff will also provide receive-and-file reports monthly, as previously detailed.
Attachments
ATTACHMENTS
Attachment A: FY25 - 30 Near-Term Cost Growth Drivers
Prepared_by
Prepared by:
Tina Panek, Sr. Director, Finance (213) 922-4530
Irene Fine, Sr. Executive Officer Finance, (213) 922-4420
Michelle Navarro, Sr. Executive Officer Finance, (213) 922-3056
Reviewed_By
Reviewed by: Nalini Ahuja, Chief Financial Officer, (213) 922-3088
