After several years of sales tax revenue growth, the city of Austin’s transit agency is preparing to face tough times ahead.

In the past five years, Capital Metro’s sales tax revenue, which amounts to 79 percent of its total revenue, has grown between 5 and 10 percent year over year. However, in 2017 that growth has slowed and even dropped in June, according to the agency.

“We’re in a good position right now, but we are so dependent on sales tax that if it takes a major dip like it did back in 2008-09, there will be some real tough decisions to make,” President and CEO Linda Watson said.

By fiscal year 2020-21, the agency’s  capital budget is expected to drop to $26 million from $151.5 million in FY 2017-18. By 2018, the agency expects that any capital funding not earmarked in its capital plan for future projects will be depleted, said Reinet Marneweck, the agency’s chief financial officer.

“I don’t want to leave the impression that we’re penniless,” Capital Metro board Chairman Wade Cooper said. “We have the opportunity to continue to do [projects], but we have to be very thoughtful and careful.”

Slowing growth

Of the area’s 8.25-cent sales tax, the majority, 6.25 cents, goes to the state, but Capital Metro receives one penny. Only jurisdictions in Capital Metro’s service area contribute to sales tax. Austin is the largest contributor, but other cities in the service area include Leander.

The previous years’ revenue growth gave the agency an ability to grow its statutory operating reserve—two months of operating expenses, as required by the state—and its capital reserves to fund infrastructure projects.

That time of prosperity, Marneweck said, also allowed Capital Metro to catch up on projects it deferred during the recession, namely replacing outdated buses and bringing infrastructure into a good state of repair.

“When I came in there were 280 buses that needed to be replaced, and it was mostly a financial issue,” Watson said. “But now we have a regular replacement schedule, and we’ve done a good job of getting caught up [on maintenance] and have a good process set in place to be able to stay on that schedule.”

For FY 2017-18, Capital Metro initially forecast sales tax growth at 3.5 percent, but Marneweck said the slowed growth so far in 2017 led the agency to reduce the increase to 2.5 percent. That amounted to a $5 million hit to the agency’s FY 2017-18 budget, which the board approved Sept. 29.

“As our sales tax growth declines, revenue is declining, and our costs will still be increasing because we have contracts with our service providers that have escalation clauses in [them] and we have inflation,” Marneweck said. “That will leave less cash for us to do improvements and one-off capital projects.”

A new focus

Should the slowed growth trend continue, Marneweck said the agency would have to defer more capital projects and find ways to cut costs.

“Most likely we would look at our capital projects to see which of those projects we can delay until we have more prosperous times,” she said.

Currently the agency’s sales tax and fare revenues cover its operating expenses, Cooper said, but the small margin leaves the agency with little to put toward or save for capital projects, including what might be proposed in the regional Project Connect high-capacity transit plan under development.

Some Connections 2025 projects—those agency's 10-year service plan—are also not yet funded, but Watson said many of those projects will not be implemented for several years, including new MetroRapid bus routes 820 and 804 in Central Austin, and Capital Metro still has time to search for funding options.

Watson, who is retiring at the end of 2017, said the agency’s new leader will also face the challenge of financing and implementing Project Connect.

“It’s crucial for us as a region to really get this Project Connect right and to really have a plan that we as a region buy into,” Cooper said.

Recession proof?

In 2008 the effect of the recession on Capital Metro’s finances amounted to about $25 million, Marneweck said. Even though the agency has recovered, she said its leaders are keeping an eye future market declines.

Recessions typically occur every seven to 10 years, Marneweck said. Should the market see another decline, she said Capital Metro would be very well-positioned now that the agency has met the requirements laid out by the Texas Sunset Commission, which reviews state agencies for inefficiencies. The commission mandated the agency restructure its labor system and build up its reserves.

In 2008, Marneweck said the agency had no reserves and was preparing to launch MetroRail in 2010.

“What we have in the statutory operating reserve would be adequate to cover a recession of a similar size [to 2008] and cover budget shortfalls,” she said.

Because of the uncertainly of the market and sales tax revenue, Cooper said the agency will need to enlist partners throughout the region to help expand transit. But Capital Metro also will need to keep an eye on maintenance so it does not find itself in a position of deferring critical capital projects, he said.

“Keeping an eye on the five- and 10-year plans will be key and not getting so caught up in the shiny new toy that you ignore the less fun fact that you’ve got to replace buses and repair trains,” Cooper said. “We need to factor those things into our ongoing planning.”