Meeting_Body
FINANCE, BUDGET, AND AUDIT COMMITTEE
FEBRUARY 20, 2025
Subject
SUBJECT: FISCAL YEAR 2026 BUDGET DEVELOPMENT PROCESS: NEAR-TERM OUTLOOK AND ANTICIPATED CHALLENGES
Action
ACTION: RECEIVE AND FILE
Heading
RECOMMENDATION
Title
RECEIVE AND FILE The Fiscal Year 2026 (FY26) Budget Development Process: Near-Term Outlook and Anticipated Challenges.
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 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) Zero-Emissions Bus (ZEB) and infrastructure revised forecast as well as incremental grant revenues from SB125 ZETCP
2) Constrained and prioritized budgeting efforts through the EZBB process
3) Delayed spending on capital projects based on year-end actuals
4) Board approved policy changes to newly established Transit Community Public Safety Department (TCPSD) is expected to result in gradual reductions in contract costs.
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:
Major Cost Growth Drivers
As Metro advances its preparations for 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 2):
• 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 2, 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 projected 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) which is expected to reduce contract costs over time.
• 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 2:
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 the 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 budget updates 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 3), 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 3:
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
- Metro is utilizing the new Community Based Organization (CBO) Database from the Office of Equity & Race for an informational campaign to increase participation of Youth Groups.
- 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 was held on 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.
Vehicle_Miles_Traveled _Outcome
VEHICLE MILES TRAVELED (VMT) OUTCOME
VMT and VMT per capita in Los Angeles County are lower than national averages, the lowest in the SCAG region, and on the lower end of VMT per capita statewide, with these declining VMT trends due in part to Metro’s significant investment in rail and bus transit.* Metro’s Board-adopted VMT reduction targets align with California’s statewide climate goals, including achieving carbon neutrality by 2045. To ensure continued progress, all Board items are assessed for their potential impact on VMT.
While this item does not directly encourage taking transit, sharing a ride, or using active transportation, it is a vital part of Metro operations, as it reflects the agency’s commitment to fiscal discipline while making the investments needed to ensure a safe, clean, comfortable, reliable, and easy ride for all patrons. Because the Board has adopted an agency-wide VMT Reduction Target, and this item supports the overall function of the agency, this item is consistent with the goals of reducing VMT.
*Based on population estimates from the United States Census and VMT estimates from Caltrans’ Highway Performance Monitoring System (HPMS) data between 2001-2019.
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. We 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
