Meeting_Body
FINANCE, BUDGET, AND AUDIT COMMITTEE
JANUARY 15, 2026
Subject
SUBJECT: FISCAL YEAR 2027 BUDGET DEVELOPMENT PROCESS
Action
ACTION: RECEIVE AND FILE
Heading
RECOMMENDATION
Title
RECEIVE AND FILE the Fiscal Year 2027 (FY27) Budget Development Process.
Issue
ISSUE
This report establishes the foundation for the development of the FY27 Equitable Zero-Based Budget (EZBB) by providing the updated Near-Term Financial Outlook and outlining the budget development schedule, with final adoption planned for May 2026.
On June 18, 2025, staff identified key internal and external financial pressures, outlined a strategic workplan, and adopted Guidelines for Addressing the Fiscal Cliff.
Since then, Metro staff has advanced the cross-departmental strategic workplan through:
• Deep Dive on Revenue Generating Opportunities: presented to the Board on September 18, 2025
• Deep Dive on General Fund: presented to the Board on September 18, 2025
• Near-Term Financial Outlook Update
As the FY27 Budget is developed amid fiscal uncertainty, Metro remains committed to disciplined, results-driven financial management aligned with the Board adopted guidelines, prioritizing the preservation of essential transit services and investments that improve the rider experience.
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.
In alignment with these governance standards, this report is the beginning of a series of status updates on the FY27 Budget development process to the Finance, Budget, and Audit Committee. These updates will provide ongoing transparency into financial assumptions, strategic priorities, and emerging fiscal considerations as Metro progresses toward final budget adoption.
Discussion
DISCUSSION
Near-Term Outlook Update and Challenges Ahead
Metro continues to emphasize disciplined financial planning in executing its transit investments and sustaining operational excellence. The EZBB cycle commences with the Near-Term Outlook, which presents a five-year financial forecast grounded in a comprehensive assessment of macroeconomic conditions, revenue trends, cost inflation, Board-approved priorities, and major capital investment planning.
The Agency’s Near-Term Outlook is in line with FY27. However, starting in FY28, the deficit widens from $0.9 billion to as much as $2.0 billion. Looking ahead, Metro projects a cumulative financial gap in the range of $3.6 to $5.2 billion by FY30 (Figure 1). The gap is comprised of $4.3 billion for Metro Transit Operations & Maintenance (O&M) and $0.9 billion for Metro Transit Capital Improvement Program (CIP).
Figure 1:
Note: These figures do not include cost assumptions for the 2028 Games.
This decline reflects mounting financial pressures primarily driven by the following factors:
• Downward revisions of sales tax revenues based on less favorable trends and indicators. Sales tax revenue is projected to decline by 7% relative to the prior forecast of 2.3%, establishing a lower base for the current planning horizon
• Projected grant reductions of up to 12%, reflecting adjustments in federal and state funding assumptions
• Continued cost growth, including labor, fuel and energy costs, and capital investments
While this projection highlights ongoing fiscal pressures, it also reinforces the importance of proactive financial stewardship and strategic planning. Metro views this outlook as an opportunity to strengthen its long-term fiscal framework through targeted mitigation and continuous improvement initiatives. Metro is actively advancing a comprehensive response that emphasizes:
• Enhanced cost management through data-driven budgeting and operational efficiencies;
• Strategic prioritization of capital investments to ensure alignment with the Board’s policy goals and the region’s mobility needs;
• Continuous efforts in evaluating revenue generating opportunities
Through these concerted efforts, Metro remains confident in its ability to reduce the financial gap, sustain service delivery, and continue investing in a more connected, sustainable, and equitable transit system for the region.
Revenue Update
One of the first steps in updating the near-term outlook is revising the revenue estimates and projections based on the most recent information available.
Sales Tax Projections
Sales taxes make up over two-thirds of Metro’s resources. To provide a realistic near-term forecast, actual FY25 sales tax receipts are used as the base for projections, the FY26 Budget is reassessed based on the available economic data and reforecast as necessary.
The FY25 actual receipts were 6.6% or $304 million below budget, resulting in a lower base for the current near-term outlook. As a result, this year’s five year forecast projects a 7.0% or $2.4 billion reduction in overall sales tax revenues compared to the prior forecast, primarily due to the lower starting level and lower projected growth rates of 2.3% vs. 2.9% average.
Economic developments such as slower job growth, increasing consumer debt and loan delinquencies, and continued spending shifts to non-taxable categories such as services, health care and housing costs are major drivers eroding consumer confidence and taxable goods sales. Forecasting agencies including UCLA Anderson Forecast, Beacon Economics and Muni Services expect the region’s sluggish economic growth to continue into FY27 but gradually improve in the following years.
Grant Resources
Overall grant resources are decreasing up to 12.2% ($1.5B) over a five-year period relative to the prior forecast based on the latest grants projections. Federal grant funds savings for Operations is being accelerated in usage due to depletion of one-time stimulus funding by FY27. In addition, reauthorization negotiations at the Federal level have just begun and are difficult to predict.
At the state level, growing budget deficit projections have led to a freeze on the ZETCP program that could impact cash flow or total funding for the program depending on future state budgets. Formula funding from the state fluctuates based on diesel fuel prices and sales but is relatively steady year-over-year.
Grants included in the near-term comprise only those known and highly likely to be received. Given the economic and political uncertainties involved 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. While a forecast decline of grant funding will place added pressure on local funding resources, staff will also work closely with the region’s elected political delegations at both the state and federal levels -along with APTA and the broader transit community-to educate 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 moves forward with developing the FY27 Budget, recent trends and changes have been evaluated and projected in the current expense outlook. This report outlines the key developments since the Board Report on Addressing the Fiscal Cliff in June 2025, where staff provided the Board with Metro’s workplan, guiding principles, and timeline of managing the projected deficit in the upcoming years.
The following cost drivers constitute the majority of metro transit costs, and their anticipated growth rate continue to outpace projected sales tax revenue growth of 2.3%:
• Zero-Emissions Bus (ZEB) & infrastructure costs due to achieving a zero-emission fleet by 2035
• Cleaning Costs are driven by Station Innovation Experience initiatives and cleaning frequency, with continued investments in expanding rail system
• System Expansion due to at least one major rail opening per year through FY28
• Labor Cost growth is expected to continue with the latest collective bargaining agreements starting in the current fiscal year and for the next five years
• Insurance/WC/PLPD premiums due to higher loss payment projections and set up of Department of Public Safety (DPS)
• Public Safety Resources: scaling internal Department of Public Safety (DPS) capabilities while maintaining overlapping contractor obligations through the transition period
• Parts, Fuel & Outside Services growth driven by inflation, utilities, other parts & supplies and professional services
Additional Risks and Challenges
As Metro continues to implement strategies to mitigate cost growth drivers, it is important to acknowledge that several unquantified risks remain in the current financial forecast. These risks-both external and internal-pose potential implications for Metro’s near-term fiscal stability and long-term strategic objectives.
External Risks
Metro operates within a complex and evolving global environment. Several external factors may adversely affect cost structures, funding availability, and financial planning:
• Geopolitical Instability: Global tensions and supply chain disruptions may lead to increased procurement costs and material shortages.
• Potential Tariff Escalations: Tariff adjustments and import cost fluctuations could elevate Metro’s purchase prices for key materials and equipment.
• Changes in Tax-Exempt Status: Any revision to Metro’s current tax exemption privileges could directly increase operating and capital costs.
• Federal Funding Uncertainty: The availability and timing of Federal transit grants and infrastructure program allocations remain uncertain.
• Persistent Inflationary Pressures: Sustained inflation continues to weaken purchasing power, elevate contract costs, and strain budget forecasts.
Internal Risks
In addition to external dynamics, Metro faces internal financial pressures stemming from operational, capital, and strategic program commitments:
• Operational Cost Growth: The expansion of system operations is projected to outpace available operation-eligible funding, with an estimated 40% funding gap emerging by FY27 and increasing through FY31.
• Rail Operations Funding Constraints: Limited eligible funding for rail operations is anticipated to intensify after FY27, following depletion of existing rail balances.
• Games Readiness: Preparation and operations for the 2028 Olympic and Paralympic Games without secured supplemental funding presents substantial fiscal and operational risks.
• Restricted Funding for Underground Construction: Funding eligibility limitations for underground projects constrain Metro’s flexibility in capital deployment.
• Capital Cost Risks: Continued cost increases from project scope changes and delays may divert funds from bus and rail operations. Unfunded projects for system expansion integration also compete for operating funding.
FY27 Equitable Zero-Based Budget (EZBB) Process and Schedule
Metro continues to employ its EZBB process as a year-round strategic framework guiding the development of the FY27 Budget. The process begins with a comprehensive five-year financial outlook, followed by Capital Budgeting to anticipate project and funding needs, ensuring a disciplined approach to cost management and long-term fiscal sustainability.
As Metro navigates an economic slowdown projected to persist into FY27, Metro remains focused on mitigating and deferring near-term deficits through proactive financial management. Efforts will center on preserving core service delivery, advancing key capital priorities, and aligning resource allocation with Metro’s strategic and operational objectives.
The FY27 Budget will reflect Metro’s enduring commitment to its mission-enhancing transit services, maintaining critical infrastructure, and advancing regional mobility initiatives-while adhering to Board-approved policies, fiscal regulations, and sound financial governance principles.
Metro will continue to collaborate closely with the Board of Directors to ensure alignment on funding priorities and financial strategies. This partnership will be reinforced through monthly program reviews, enabling Metro staff to continuously reassess needs, optimize spending, and uphold budgetary balance.
The table below outlines the monthly schedule of budget development milestones and discussion topics, culminating in the Board’s final adoption of the FY27 Budget in May.
FY27 Budget Outreach and Engagement
Metro maintains a commitment to fiscal transparency, utilizing a multi-platform approach including web tools, social media, stakeholder meetings, and on-system rider interactions. The initial phase of Budget outreach and engagement activities has recently commenced. The outreach is strategically focused on engaging riders through diversity, such as targeting perspectives from youth under 18, female riders, the Spanish-speaking community, and riders living in Equity Focus Communities.
The multi-award-winning My Metro Budget Activity (<https://mybudget.metro.net/online>) was relaunched in November to deepen public understanding of Metro’s budget. The new My Metro Priorities tool for riders under 18 (<https://mybudget.metro.net/prioritize>) debuted at the Youth Council Summit in September 2025. Feedback from both tools will inform the FY27 budget beginning in January. Progress and updates on all engagement activities will be reported in forthcoming monthly Budget Board Reports.
Equity_Platform
EQUITY PLATFORM
As Metro advances the development of the FY27 Budget, the Agency’s steadfast commitment to equity continues to guide its financial strategies, investment decisions, and policy implementation. Guided by Metro’s Equity Platform Framework, the FY27 Budget process prioritizes equitable outcomes for everyone while addressing key organizational priorities such as public safety, system cleanliness, system expansion, labor equity, and environmental sustainability. The overarching goal is to deliver a transit system that is efficient, safe, inclusive, and equitable for all Los Angeles County residents and riders.
Metro’s EZBB process has been further refined to integrate budget equity tools that strengthen data-driven decision-making. Through the Agencywide Budget Equity Assessment (ABEA) Project, Metro has improved both the procedural and distributional equity aspects of its budgeting framework, expanding analysis beyond geographic proximity or direct impacts to Equity Focus Communities (EFCs).
Historically, Metro utilized two distinct quantitative tools: the Metro Budget Equity Assessment Tool (MBEAT) and the EFC Assessment. While MBEAT provided a more detailed analysis, it was administratively burdensome and did not result in regular data reporting. In contrast, the EFC Assessment offered a more streamlined approach with annual reporting to the Board. Starting with the FY28 Budget, Metro will integrate the strengths of both tools into a single Equity Budget Assessment (EBA). Staff are currently working with departments to refine the data collection and analysis mechanisms, ensuring this unified approach enables continued quantitative tracking, year-over-year analysis, performance monitoring, and transparent reporting. Metro will continue to conduct EFC Budget Assessments for FY25 and FY26 Actuals and report on the outcomes as we transition to the new EBA.
Vehicle_Miles_Traveled_Outcome
VEHICLE MILES TRAVELED 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.
As part of these ongoing efforts, this item is expected to contribute to further reductions in VMT. This item supports Metro’s systemwide strategy to reduce VMT through investment activities that will improve/benefit and further encourage transit ridership, ridesharing, and active transportation. Although projects and programs in this budget have mixed outcomes, taken as a whole, most of the investments described in this report will likely decrease VMT in LA County. Within the suite of projects funded in this budget, Metro seeks to reduce single-occupancy vehicle trips, provide a safe transportation system, and increase accessibility to destinations via transit, cycling, walking, and carpooling. Some of the projects funded include items that will ease congestion for cars and trucks, or expand vehicle capacity, resulting in the possibility of increased VMT. However, the investments Metro is making into programs such as rail, bus, active transportation and shared mobility will result in an overall decrease in VMT. Metro’s Board-adopted VMT reduction targets were designed to build on the success of existing investments, and this item aligns with those objectives.
*Based on population estimates from the United States Census and VMT estimates from the highway performance monitoring system 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 begin providing regular Budget briefings to Board Members and their staff starting this month. In addition, Metro will submit monthly receive-and-file reports, consistent with the established reporting schedule, and will hold a Budget Workshop for Board members.
Prepared_by
Prepared by:
Jeffrey Lopez, Senior Manager, Budget (213) 418-3183
Tina Panek, Deputy Executive Officer, Finance (213) 922-4530
Tim Mengle, Executive Officer, Finance (213) 922-7665
Irene Fine, Deputy Chief Financial Officer (Interim), (213) 922-4420
Reviewed_By
Reviewed by: Michelle Navarro, Chief Financial Officer (Interim), (213) 922-3056
