Meeting_Body
FINANCE, BUDGET, AND AUDIT COMMITTEE
MARCH 15, 2023
Subject
SUBJECT: FISCAL YEAR 2024 BUDGET DEVELOPMENT STATUS UPDATE
Action
ACTION: RECEIVE AND FILE
Heading
RECOMMENDATION
Title
RECEIVE AND FILE the Fiscal Year 2024 (FY24) Budget Development Status Update.
Issue
ISSUE
This is the third of a series of monthly updates to the Board on the FY24 Budget development process, culminating in a planned May 2023 Board Adoption. This report lays the framework for the annual budget development, with the primary objective for the annual budget to advance Metro’s transit and transportation goals, with an equity lens, in a fiscally sound and financially responsible manner.
This report focuses on Metro’s diverse portfolio of major infrastructure capital projects, including Transit Infrastructure Development (TID), Highway Multimodal Development, and Regional Rail. Additionally, this report provides an overview of Metro’s voter approved Regional Allocation and Pass Throughs (Subsidy) funding programs.
This report also discusses the mitigation options to be considered for managing through the near-term financial challenges for the major infrastructure capital projects and shares the latest update regarding Metro’s comprehensive budget outreach efforts.
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.
Discussion
DISCUSSION
Major Infrastructure Capital, Near-Term Financial Challenges
Metro recognizes the importance of sound financial planning to successfully implement transit capital investments and operating plans. The overall operating deficit also referred to as the ‘fiscal cliff,’ and the challenges of major infrastructure capital projects, are two distinct concerns impacting Metro. In this report, we will be discussing the challenges regarding major infrastructure capital projects. The operating deficit will be presented in next month's report.
Metro recognizes the additional financial risks stemming from Transportation Infrastructure Development (TID) as we continue to build out the ordinance approved major construction projects. While the cashflow required in the next three-year near term is not at risk, Metro needs to be mindful of the total project costs and potential funding gaps faced by each project over the next ten years and beyond so as to not be obligated to a project delivery ahead of the funding plan. Currently, Measure R and M total receipts are below their ordinance projections. Although Metro continues to compete for capital investment grants, not all of Metro’s projects are awarded funding. Grants awarded to Metro often include significant operational and local match funding requirements placed in the legal framework for the funding agreement. Additional debt issuance is projected from FY24 to FY26 to cover shortfalls in certain programs; however, new debt issuance will only be used as a last resort as it is subject to Board established maximum bonding capacity policy and potentially means reduced future funding availability for other transit needs.
Other common capital project management issues include higher bid prices and cost increases due to a tighter labor market and rising demand for goods with previous supply chain constraints. Capital projects are also impacted by fiscal challenges that may increase total project cost at completion. Project cost overruns with no new or dedicated funding will continue to take away funding currently available for transit. These combined challenges in capital infrastructure, along with the stressors in the operating budget deficit, have contributed to the Agency's overall financial outlook.
Major Infrastructure Capital, EZBB Cost Control
Metro is enacting cost controls through the Equitable Zero-Based Budgeting (EZBB) process by establishing the Early Intervention Team and other program management efforts.
At Board’s direction, the CEO formed the Early Intervention Team (EIT), which is set up to draw on the collective experiences of cross department collaboration to review and assess cost and schedule drivers, potential corresponding mitigation strategies currently in practice at Metro, as well as new mitigation strategies needed across the full life cycle of projects, from planning through construction and finally into operations and maintenance. Regular updates are being provided to the board on the status and progress of these efforts.
Metro is actively evaluating the appropriate consultant to staff ratio that can build up in-house knowledge. Metro is also strategically embedding seasoned project management and controls staff onto new major projects as other projects are exiting the construction phase and moving on to the operational phase. There is also ongoing project soft cost monitoring and reporting.
Major Infrastructure Capital, Near-Term Mitigation Strategies for Consideration
Below are some other mitigation strategies to help address the challenges described above.
Transit Infrastructure Development:
• Project Timeline: Deliberate board review at each major project milestone; assess the cost/benefit of changing project schedules as necessary while remaining within sequence per ordinance.
• Project Scope: Avoid adding additional components beyond the original project scope to remain within budget.
• Operational Impact: Plan and incorporate the cost implications of system integration due to an expanding system.
• Business Interruption Fund (BIF): Advocate for BIF funds to be eligible to match and/or be eligible for reimbursement of state and federal funds.
Highway Multimodal Development:
• Strategic Partnership with Caltrans: Work with Caltrans to explore efficiencies to deliver the highway projects based upon core competencies.
Regional Rail:
• Metrolink Operating Plan: Align service level goals to ridership demand with a financially sustainable operating framework to mitigate the structural deficit in eligible funding sources Metro utilizes to finance Metrolink operations.
Major Infrastructure Capital Investment FY24 Preliminary Budget
LA County’s capital expansion plan is one of the nation’s most ambitious and transformative transportation construction and enhancements programs. The report below covers the following programs:
1. Transit Infrastructure Development (TID): The FY24 Budget provides funding for planning and constructing new transit projects for LA County per the voter approved Measure R and Measure M sales tax ordinances. In FY23, this program reflected 26.5% of the total FY23 budget.
2. Highway Multimodal Development: The FY24 Budget provides funding from voter approved Measure R and Measure M sales tax ordinances to advance design and construction activities for Highway projects in LA County, notably the I-105 ExpressLanes, I-5 North Capacity Enhancements Project, and community-driven efforts to re-imagine the I-710 North, I-710 South, and I-605 Hot Spots Projects. In FY23, this program reflected 6.6% of the total FY23 Budget.
3. Regional Rail: The FY24 Budget supports double tracking and grade separation projects transitioning from Final Design to pre-construction activities, advancing the transformative Link Union Station project, and ongoing subsidy support for Metrolink’s operating and SGR/capital components. In FY23, this program reflected 3.3% of the total FY23 Budget.
In FY23, major infrastructure capital projects totaled 36.4% of the Metro budget. The FY24 Preliminary Budget represents the annual incremental cashflow requirement to advance these capital projects.
Transit Infrastructure Development (TID)
The TID Program consists of transit line expansions and improvements specified in the Measure R (MR) and Measure M (MM) Ordinances. These project development activities are divided into planning and construction phases, and the annual budget request reflects the annual increments of the project development phase. Starting with a feasibility study followed by alternative analyses, the planning phase typically culminates in environmental clearance. The multiyear Life Of Project (LOP) budget is adopted for each project through a separate board action.
The annual budget monitors the cashflow requirement for the activities in each project phase while considering the existing level of board authorization(s), respective project delivery schedule and identifies eligible and available funding sources from Federal/State/Local grants, sales taxes, and financing.
Fig 1:
For FY24, Figure 1 above displays the preliminary budget for the TID program at $2.19 billion, a decrease of $113.4 million or 4.9% from the FY23 budget. The decrease in the Transit Construction budget reflects the opening of the Regional Connector in FY23 while newer projects, including the East San Fernando Valley Light Rail Transit project project has yet to proceed into the major construction phase. While the budget for transit construction decreased, the budget for planning studies increased by $105.6 million, or 61.3%, which reflects increased funding for planning projects in the environmental and design phase, including the Sepulveda Corridor, West Santa Ana Branch and Eastside Transit Corridor Phase 2 projects. These projects will also advance to requiring funds for construction in future fiscal years, and thus this year’s requested budget reflects current project phasing and not a broader pattern.
A more detailed project discussion can be found in Attachment A.
Highway Multimodal Development
The FY24 Preliminary Budget of $606.3 million represents a $27 million or 4.7% increase over the FY23 Adopted Budget. The FY24 preliminary budget reflects a transitional period for Metro’s Highway program as the Agency begins to shift away from legacy highway expansion projects and towards investments in ExpressLanes and HOV construction, improvements to bus infrastructure, including bus-only lanes, and safety enhancements. Further, a shift in eligibility criteria for Metro freeway and street programs enables municipalities and partner agencies to incorporate multimodal components in the surface street and subregional road improvement projects.
In FY24, the Highway Multimodal Development budget advances design activities and pre-construction activities for the I-105 ExpressLanes project, the implementation of additional bus-only lanes and bus infrastructure throughout LA County, re-imagining the I-710 South and I-605 Hot Spots projects, and ongoing construction for the I-5 South and I-5 North freeways, as well as the SR-57/SR-60 confluence project.
Fig 2:
See Attachment B for individual Highway project detail.
Metro Regional Rail
Metro oversees the planning, programming, and implementation of commuter rail projects in LA County that are or will be operated by other agencies such as Southern California Regional Rail Authority (Metrolink), Amtrak, California High Speed Rail Authority, and freight carriers. Metro also manages and coordinates capital improvement projects along approximately 150 miles of Metro owned, and Metrolink operated railroad right-of-way.
Fig 3:
The LINK US project at Los Angeles Union Station (LAUS) will expand LAUS's overall capacity and operational efficiency for rail operations. The FY24 budget is driven by the anticipated procurement of the Construction Manager / General Contractor (CMGC) contract and the finalization of real estate acquisitions. Other major activities include the ongoing construction of the Rosecrans/Marquardt Grade Separation Project (the State of California’s top priority grade crossing project), completing the construction of the interim configuration for the Doran St. Grade Separation Project, completing the final design and initiating pre-construction activities for the Brighton to Roxford double tracking project in the east San Fernando Valley and the completion of the final design for the Lone Hill to White double tracking project in the San Gabriel Valley.
The Regional Rail group will also advance preliminary engineering for a high-speed rail service from Palmdale via the High Desert Corridor to the future Apple Valley station of Brightline’s privately funded high-speed rail line to Las Vegas.
Metrolink Commuter Rail
At the time of this report, Metrolink is developing its FY24 operating and capital budget. An update will be included in a later monthly report to the Board.
Regional Allocations and Pass Throughs
The budget's Regional Allocations and Pass Throughs portion represents resources distributed to regional partners to carry out local transportation needs. This component is directly tied to locally imposed and collected sales taxes as well as Metro oversight and distribution of State and federal pass-through grant funding. This program includes:
• Pass-through funding awarded to local jurisdictions and municipal and local transit operators through Local Agency Programs (ex., Local Return) and Regional Transit Funding (ex., Regional Transit Formula and Access Services).
• Pass-through funding for Major Projects being implemented by local agencies, including the Inglewood Transit Connector, Alameda Corridor East Grade Separation Phase II, Metrolink Antelope Valley Line Projects, and Sankofa Park
• Grants allocated to local agencies through Other Local Programs such as the Congestion Reduction Demonstration (CRD) Toll Revenue grant program, Open Streets grant program, Active Transportation Program (ATP), Federal Pass-Throughs, and the Transit Oriented Development (TOD) Planning grant initiative.
The Regional Allocations and Pass Throughs program expenditures are projected to increase by an estimated $155.2 million over the adopted FY23 Budget and will total approximately $2.06 billion in FY24. About 85% of this budget element is comprised of Local Agency Programs and Regional Transit Funding. As a result of the better than anticipated performance of the local economy during FY22 and FY23, direct subsidies provided by local and State sales tax-based programs passed through to LA County transit operators and local jurisdictions, are expected to increase. The table below summarizes the FY24 Preliminary Regional Allocations and Pass Throughs Budget.
Fig 4:
Local Agency Programs
The two funding programs that make up Local Agency Programs include Local Return and Transit Development Act (TDA) Article 3 and Article 8 funding. This subprogram will increase by $139.9 million, an increase of 17% over the FY23 budgeted amount. Most of this increase is due to the Local Return program, estimated to receive $126.1 million more than the FY23 budgeted amounts in sales tax revenue to LA County jurisdictions.
Regional Transit Funding, Including Access Services
Similar to Local Agency Programs, Regional Transit Funding programs are projected to increase during FY24 by $95.8 million, a 14% increase. This subprogram is comprised of the annual transit formula funding allocated to the LA County municipal and local transit operators as well as Access Services. The increase is partially due to higher than anticipated sales tax revenues in FY22 that will be carried over into FY24. Formula programs for the municipal and local transit operators included in this subprogram include Proposition A Discretionary funding, Measure M 20%, Measure R 20%, SB1 State of Good Repair, TDA Article 4, and other fund programs. Staff also continues to work in partnership with the Bus Operators Subcommittee (BOS) and the Local Transit Systems Subcommittee (LTSS) to understand the residual impacts of COVID-19 and to determine the appropriate allocation methodology for the FY24 Formula Allocation Procedure (FAP).
In addition, preliminary funding of $163.9 million is proposed for Access Service operations in Los Angeles County, including the direct Metro subsidy to support Access riders on Metrolink within the County, an increase of $7.8 million over the adopted FY23 Budget. The final budget amount is subject to Access Services’ final budget request.
Final distribution amounts will be brought forward for specific Board approval detailing subsidy funding amounts for each municipal and local operator, including Access Services and local jurisdictions.
Major Projects
This subprogram is comprised of the Alameda Corridor East Grade Separation Phase II, the Antelope Valley Line Projects, Inglewood Transit Connector, and Sankofa Park. It is estimated that these multi-year projects will need less funding (-32%) during FY24 compared to FY23 due to project progress in prior fiscal years.
Other Local Programs & Regional Federal Grant Programs
Due to the pass-through nature, annual variability of local and federal grant programming, and uses by local jurisdictions, 7% or $6.7 million less funding is being requested for FY24 activities in the following subprograms: ATP-related grants, Call for Projects, CRD Toll Revenue Grant Program, Federal Earmarks, and TOD Planning Grants. A modest increase of 1.4% is projected for Regional Federal Grants.
Fare Assistance - Low Income Fare is Easy (LIFE) Program
The LIFE program is anticipated to continue to grow during the coming year, and the budget request has increased accordingly to $31.9 million to support the Board approved expansion and improvements to the program. This represents a 5% increase over the adopted FY23 budgeted amount for the program.
Early & Expanded Public Engagement Update
Public outreach and engagement continue to be a priority for Metro. Metro’s FY24 public engagement and outreach began in 2022. Metro held a Telephone Town Hall on October 18, 2022, and on January 17, 2023, with a third one scheduled in March 2023. Metro launched a My Metro Budget feedback and interactive educational tool, which greatly expanded the outreach efforts, with over 20,000 views. Metro has implemented many changes in how it approaches engaging with the public and stakeholders on important budget topics and will continue to improve.
Public participation is a process, not a single event, and happens year-round. Metro strives to capitalize on public feedback to reflect the interest and values of the received input. The following methods in attachment A are a few ways Metro obtains public input to help develop the annual budget. There are many other efforts made throughout Metro to engage with stakeholders and the public that help shape the budget. The topics of safety, service, and cleanliness are consistent areas of public concern.
See attachment C for an overview of the public engagement efforts to date.
Equity_Platform
EQUITY PLATFORM
The FY24 EZBB development begins with the evaluation process that provides flexibility to focus resources on Metro’s core missions, key initiatives, and priorities. Budget Equity is a top priority in the FY24 Budget development as Metro carries out its initiatives and impacts all communities throughout Los Angeles County. Furthermore, the FY24 Budget will align with principles highlighting how public transit can be equitable, sustainable, economically productive, safe, and Americans with Disabilities Act accessible.
As part of the FY24 EZBB evaluation process, the ongoing Metro Budget Equity Assessment Tool (MBEAT) is in its fourth fiscal year of evaluating equity in Metro’s Annual Budget. Staff also incorporated a more detailed geographic equity measure into budget development by conducting Equity Focus Communities (EFC) Budget Assessments for both the FY23 Approved Budget and the FY24 Budget, the latter of which will be finalized later this year. Implementation of MBEAT and the EFC Budget Assessment will assess equity impacts that will identify access to opportunities and reduce potential barriers or harms.
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
Next month’s FY24 Budget process update will address Metro Transit Operations & Maintenance, Metro Transit State of Good Repair, Congestion Management, and Planning and Administration.
Metro will host the third in the series of FY24 Budget Development Telephone Town Halls on March 28, 2023. This is an opportunity for riders and the public to hear and weigh in on the FY24 Proposed Budget. Metro leadership will attend the event and listen, learn, and respond to public comments on Metro’s FY24 initiatives.
Attachments
ATTACHMENTS
Attachment A - Transit Infrastructure Development project details
Attachment B - Highway Multimodal Development project details
Attachment C - Public Engagement Update
Prepared_by
Prepared by: Marie Kim, Deputy Executive Officer, Finance, (213) 418-3472
Cosette Stark, Deputy Executive Officer, Local Programming,
(213) 922-2822
Robert Gutierrez, Senior Director, Finance, (213) 922-4496
Jason Gravitch, Manager, Transportation Planning, (213) 418-3378
Reviewed_By
Reviewed by: Nalini Ahuja, Chief Financial Officer, (213) 922-3088
