Meeting_Body
FINANCE, BUDGET, AND AUDIT COMMITTEE
FEBRUARY 20, 2025
Subject
SUBJECT: FISCAL YEAR 2026 BUDGET DEVELOPMENT PROCESS: RESOURCES & PARAMETERS
Action
ACTION: RECEIVE AND FILE
Heading
RECOMMENDATION
Title
RECEIVE AND FILE the Fiscal Year 2026 (FY26) Budget Development Process: Resources & Parameters.
Issue
ISSUE
This report sets up the economic context for the upcoming fiscal year with the forecast of sales tax revenues and other resources, cost inflation and other financial risks. A comprehensive and transparent public outreach program runs concurrently during the budget development process to maximize public input and ensure that Metro’s stakeholders have an active role.
Metro will focus on aligning the budget with a common set of strategic imperatives and priorities, working collaboratively across their respective departments to maximize funding availability by program.
Background
BACKGROUND
The first phase of the FY26 Equitable Zero-Based Budget (EZBB) process began with an oral report in November 2024, followed by the Near-Term Outlook Update and analysis of cost growth drivers this month, as discussed in Board Report #2025-0026.
Resource projections set the foundation for the financial framework guiding our fiscal planning. This report outlines the budget development parameters, incorporating key assumptions related to the sales tax forecast, operating revenues, grants, bond proceeds, and prior-year carryover. These assumptions will guide the determination of available resources for eligible projects and programs in FY26.
Discussion
DISCUSSION
Metro is committed to maximizing the use of revenues for all programs, based on each of the ordinances that govern the eligibility and use of funds. However, the most critical step is to develop accurate projections of sales tax revenues.
Sales Tax Revenues
Sales taxes are the primary revenue sources for Metro, representing close to two-thirds of the total annual resources. Metro’s local sales tax ordinances (Proposition A, Proposition C, Measure R, and Measure M) have voter approved directives on how each sub-fund should be spent, which determines the funding available for programs. Metro utilizes multiple modeling approaches and sources to estimate sales tax revenues.
Economic Sector Model
During the pandemic, Metro staff developed an economic sector model to isolate and evaluate local sales tax impacts of changes in specific sectors of the economy. A list of the sector breakdowns is given in Attachment A. Post-pandemic, this model has continued to prove valuable in refining the agency’s annual budget projections. The FY26 sales tax revenue projection assumptions considered the following external factors:
• The region’s economic activity declined slightly in FY24 due to the Federal Reserve’s high-interest rate policy, increasing housing costs, office vacancies, and a slowdown in logistics.
• Consumer spending slowed as a result, with year-over-year sales tax revenues down slightly in FY24 and the first quarter of FY25.
• Online sales and restaurants have been the strongest performing groups over the past year, while car sales and service stations have been the weakest.
• Reconstruction, repair, and replacement activities due to the recent wildfires will shift spending into categories such as building materials, furnishings, and autos at the expense of other categories. The net impact on sales tax revenues is still to be determined.
• Spending on services, insurance, and housing continues to grow faster than taxable retail sales.
• Increases in consumer debt and delinquencies continue to impede growth in the near term.
• Gasoline and diesel fuel prices have a larger impact on taxable sales than the transition to electric vehicles (EVs). They have been trending down on a year-over-year basis but are particularly volatile and influenced by a wide variety of factors.
• FY26 cost inflation, as measured by the Consumer Price Index (CPI), is expected to slow down but remain above the Fed’s 2% target even as mitigating efforts of the Federal Reserve ease.
Multiple Regression Model
Metro staff also developed a statistical multiple regression analysis model to validate the business sector model results. This regression model determines the correlations between sales tax revenues and other independent variables such as unemployment rate, CPI, and personal income in Los Angeles County, and derives a formula using historical data to make future projections.
Trend Analysis
Trend analysis is also used to evaluate long and short-term historical receipts and develop projections. These trends are compared to professional forecasting agencies, including UCLA Anderson, Muni Services and Beacon Economics, to ensure projections are within range.
Forecasting Results
These models and trend analysis indicate a moderate growth in sales tax in the upcoming fiscal year, projected at 2.1%.
FY25 Sales Tax Update
Metro monitors actual monthly sales tax receipts from the California Department of Tax and Fee Administration (CDTFA) and the first quarter actual receipts for FY25 are below budget. The FY25 year-end receipts are projected to be $1,048.0 million per ordinance, rather than $1,156.0 million, 9.3% below budget.
Preliminary FY26 Sales Tax Assumption
Based on the forecasting results, sales tax is projected to be $1,070.0 million per ordinance, an increase of 2.1% over the FY25 Reforecast of $1,048.0 million. This moderate increase is based on the forecast modeling that indicates a gradual economic recovery in the next year. Figure 1 displays Metro’s historical sales tax revenue actuals and latest projections for FY25 and FY26.
Figure 1:
Figure 2 compares Metro’s historical and current budget estimates to actual receipts and leading regional forecasts. FY26 sales tax revenue projections from UCLA, Beacon Economics and Muni Services are between $1,020.9 million to $1,109.7 million per ordinance, and Metro’s preliminary assumption of $1,070.0 million falls within range.
Figure 2:
Other Resources
State Transit Assistance (STA)/Senate Bill 1 (SB1) Revenues
STA and SB1 are sales tax revenues dependent on actual consumption and the price of diesel and gasoline. The FY26 preliminary assumption of $281.8 million will be revised in late February 2025 to reflect the State Controller’s Office (SCO) FY25 allocations.
Passenger Fares
Recent trends reveal an increase in boardings and fare revenues, driven by enhanced safety measures and improved station experience. While ridership growth is expected, revenue growth is impacted by the various free and reduced fare policy and programs:
- Fare Capping: Limits daily and weekly payments, allowing additional rides at no extra cost once the cap is reached.
- GoPass: A K-14 program providing unlimited free rides for students.
- Low Income Fare is Easy (LIFE) Program: Offers free 20-trip passes monthly and free 90-day passes for new enrollees.
Metro’s preliminary FY26 fare revenue projections are based on five months of collected data, average fare per boarding and anticipated ridership growth. Assuming a 10% ridership increase over estimated year-end actuals, preliminary passenger fare revenue and related fees for FY26 is projected at $176.2 million.
Staff is currently refining and finalizing ridership forecasts. Building on Operations' projections, staff will refine fare revenue estimates.
Advertising
The overall FY26 advertising revenue is $41.5 million. Advertising revenue from bus and rail is expected at $27.5 million which is based on the adjusted minimum annual guarantee (MAG) payments from the advertising contract modifications approved by the board in March 2023.
Corporate sponsorship revenue is expected at $3 million, including new sponsorships for the Metro Airport Connector Station, J Line Bus Rapid Transit (BRT), the Dodger and SoFi shuttles, and other services as businesses secure media space and assets in preparation for the World Cup and Super Bowl. The Board approved two policy amendments in November 2024 that allow for Public Service Announcements (PSAs) from Non-Profit organizations, right size short-term and long-term commercial sponsorship durations, and streamline and expedite sponsorship business process.
The new Transportation Communication Network (TCN) project establishes a network of digital transportation communication displays that will create a connected communication system by using outdoor advertising infrastructure on Metro’s property throughout the City of Los Angeles. The project is estimated to generate $11 million in FY26.
Toll and Other
Toll revenues are projected to be $107.6 million in FY26, which include ExpressLanes usage and fees from the existing I-10 and I-110. Other revenues include bike program, Union Station, park and ride, lease, film, Service Authority Freeway Emergencies (SAFE), auto registration fees, transit court fees, Measure W, Low Carbon Fuel Standard (LCFS) and Renewable Index Numbers (RINs) credit sales, investment income, and other miscellaneous revenues are anticipated at a total of $56.5 million in FY26.
Grant Resources
The FY26 projection for grant revenues is still being developed and will be finalized at a later point in the budget development process. Local, state and federal grant resources are used to support Metro’s transit planning, operating, State of Good Repair and construction activities.
Federal grants include Federal Transit Administration (FTA) formula grants, Capital Investment Grants for new transit project construction, and a variety of other discretionary grant programs - including but not limited to - Bus and Bus Facilities and Low or No Emission grants programs. The nature of federal formula programs and discretionary grants is likely to change as Congress prepares to craft a new surface transportation authorization bill to replace the Bipartisan Infrastructure Law (P.L. 117-58) that will expire in Fall 2026.
State grants include Transportation Development Act (TDA), State Transit Assistance (STA), State of Good Repair and other discretionary grants funded through Senate Bill 1 (SB1). Senate Bill 125 (SB125) amended the 2023 Budget Act to provide new funding through the Transit and Intercity Rail (TIRCP) program and a new Zero-emission Bus (ZEB) program. SB125 funds will be included in the proposed FY26 Budget.
The grant outlook for FY26 is cloudy, particularly at the federal level. The recent flurry of Executive Orders issued by the new administration indicates a shift in priorities. How this will impact transportation funding specifically has yet to be determined. However, Metro staff continue to aggressively pursue discretionary grant opportunities at both the state and federal levels. Metro’s significant local funding will continue to be used as matching funds to leverage our local commitment to continue providing safe and efficient transit service and maintain momentum on the Measure R and M programs.
Bond Proceeds and Prior Year Carryover
Debt issuance is authorized by applicable federal and state legislation and the local sales tax ordinances. The Board-adopted Debt Policy establishes parameters for the issuance and management of debt that follow best practices and set affordability limits. New debt issuance will be used as a last resort to mitigate the shortfalls in State of Good Repair, transit construction and highway activities.
In FY25, $1,502.9 million of debt proceeds and prior year carryover are available for transit expansion, highway, State of Good Repair and Transit Improvement/Modernization projects. The debt and carryover amounts for FY26 will be determined when we finalize the FY26 expense budget and are subject to CEO approval.
Resource Assumption Summary
Referring to Figure 3 below, sales tax and TDA revenues are projected to increase conservatively at 2.1%. Line 6 represents a total increase of 2.1% in overall resources excluding grant resources, bond proceeds and prior year carryover.
Figure 3:
Consumer Inflation and Other Financial Risks
Cost Inflation Indicator - Consumer Price Index (CPI)
On the expense side, Metro program cost and cash flow requirements are impacted by cost inflation, labor contracts agreements and program guidelines. The most common indicator of cost inflation is the CPI as published by the Bureau of Labor Statistics. Accurate sales tax revenues and CPI projections are important to provide a sound revenue and expenditure budget plan.
Historical trends, the Federal Reserve’s monetary policy, and leading regional forecasts are considered when estimating cost inflation. The Fed issued multiple interest rate cuts since September 2024. Experts widely expect inflation to continue cooling with further interest rate reductions in FY25 and FY26. The FY26 CPI growth is projected to be moderate and in between UCLA and Beacon Economics’ projections at 3.0% (Figure 4). Metro staff will continue to monitor CPI trends and updates from the economic forecasts as we go through the budget process.
Figure 4:
Other Financial Risks
One challenge that Metro faces is the uncertain growth in sales tax revenues. Los Angeles County is trailing other Southern California counties such as Riverside and Orange Counties in terms of sales tax growth. Out-migration due to high cost of living and recent wildfires could lead to countywide population decline and labor force reduction. The higher labor costs resulted from the scarce labor supply may drive prices up and challenge the inflation mitigation that the Fed has been implementing. The persistently high housing costs, along with increasing insurance rates, grocery prices and other essential living expenses, continue to erode consumers’ purchasing power by reducing their disposable income.
Uncertainty over grant funding is another concern that Metro faces. The grant process is likely to get tighter and more competitive as the federal and state governments explore ways to mitigate shortfalls. The federal budget incurred a deficit of $711 billion in the first quarter of fiscal year 2025, an increase of 39.4% compared to the same period last year. Despite the balanced 2025-26 Governor’s proposed budget, the administration’s multi-year budget forecast anticipates $13 to $19 billion annual operating deficits annually over the subsequent three fiscal years.
These challenges, combined with increasing operating expenses, elevated building material costs for Metro’s capital projects, and policy uncertainties around tariffs, taxes, and immigration, have specific financial implications to the available funding for FY26.
Outreach & Engagement Activities Update
Metro employs a variety of tactics to keep Los Angeles County residents and stakeholders engaged in the budget development process. Methods include the “My Metro Budget” activity, Telephone Town Hall, Budget Portal, e-blasts, paid and organic social media campaigns, and the distribution of information cards with quick response (QR) codes. These methods, which prioritize capturing diverse voices and fostering robust participation, are detailed below and in Attachment B.
Public Comments
Stakeholder and public feedback remain crucial to shaping the budget. This year, Metro is using Artificial Intelligence (AI) to analyze thousands of written comments, ensuring that all relevant feedback reaches the appropriate departments. A Power BI dashboard provides department leaders with access to this analysis, directly informing budget decisions.
Determination of Safety Impact
DETERMINATION OF SAFETY IMPACT
This recommendation will not have an impact on safety standards at Metro.
Equity_Platform
EQUITY PLATFORM
Metro's commitment to equitable services and investments is reflected in its budgeting practices. Metro will continue to conduct the EFC Budget Assessment for FY26 Proposed Budget and analyze the FY26 budget against budget equity principles as aligned with Metro’s Equity Platform framework.
Acknowledging that people living in EFCs constitute a large portion of ridership, Metro values their input as a critical component of its budget outreach and development efforts. Ensuring their voices are heard is essential, and Metro continues to actively seek and incorporate their diverse perspectives. Language translation in nine languages has been incorporated to better serve the members of these communities. Physical marketing cards with QR codes are being distributed across the system to help engage people traveling from and to EFCs. OMB is collecting location data to visualize where outreach activity participants are located and adjust marketing strategies to capture regions that are less represented.
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 our commitment to fiscal discipline while making the investments needed to ensure we can provide a safe, clean, comfortable, reliable, and easy ride for all patrons. Because the Metro 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
Recommendation supports the following Metro Strategic Plan Goal:
Goal # 5: Provide responsive, accountable, and trustworthy governance within the Metro Organization.
Next_Steps
NEXT STEPS
Next month’s update on the FY26 Budget process will focus on Infrastructure Planning and Construction, encompassing Transit Infrastructure, Multimodal Highway Investments, Regional Rail, and Regional Allocations and Pass-Throughs.
Attachments
ATTACHMENTS
Attachment A - Economic Sector Model
Attachment B - FY26 Proposed Budget - Public Engagement and Outreach Forums
Prepared_by
Prepared by: Jessica Lai, Senior Director, Finance, (213) 922-3644
Linda Wang, Senior Director, Finance, (213) 922-2464
Timothy Mengle, Executive Officer, Finance, (213) 922-7665
Michelle Navarro, Sr. Executive Officer, Finance, (213) 922-3056
Reviewed_By
Reviewed by: Nalini Ahuja, Chief Financial Officer, (213) 922-3088
