The Bay Area Rapid Transit (BART) system is one of California’s largest public transit operators. Last year, it maintained a $722.6 million operating budget and facilitated a record 117.8 million rail rides throughout the northern San Francisco Bay Area.[i] In early July 2013, BART’s employees initiated a four-day labor strike that ceased only when the system and employees agreed to extend their labor negotiations. Hours before the union could announce that it would resume its strike at 12:01 AM on August 5, 2013, Governor Brown ordered an effective seven-day hold on any decision by appointing a three-member board to investigate the potential strike’s impact on Bay Area transportation services.[ii]
Employees’ salary, pension benefits, and retiree healthcare benefits are at the negotiations’ core. Over the last decade, BART’s costs for its employees’ retirement benefits have comprised a rising proportion of the district’s budget. BART argues that it is willing to increase employees’ salaries, but that their retirement benefit packages have reached unsustainable levels. The system’s overall annual retirement costs nearly quadrupled from 2000 to present day, growing from $13.1 million to $58.0 million. Retirement benefits grew from 3% of BART’s operating budget in 2000 to 8% of its operating budget last year.[iii] Should this trend continue, retirement benefits will consume increasing portions of the system’s operating budget, necessitating a reduction in operating service quality, a rider rate increase, or a combination of the two.
BART Compensation vs Other Systems
In 2000, salaries, wages, and benefits were $257.8 million and accounted for 61.0% of BART’s operating expenses.[iv] By 2011, BART’s compensation levels were higher at $416.5 million, but accounted for a lower 57.9% of its operating expenses.[v] While BART’s compensation spending did decline relative to its operating budget, its compensation level relative to the system’s operating budget is higher than the transit sector median statewide and its decline was not nearly as steep those among California’s overall public transit sector. Among transit systems that reported their personnel spending statewide, the median ratio of compensation to operating expenses declined steeply from 44.4% to 20.9% from 2000-11 (Figure 1). Likewise, the average declined from 37.1% to 32.6% during the same period.
Figure 1: BART vs Other Transportation Systems, Compensation Spending as Portion of Operating Budget
Figure 2: Annual Benefit Spending vs Annual Operating Expenses (Normalized)
Retiree Health Costs More Prominent
As is the case among other public sector entities, during the last decade, non-pension benefit (or “other post-employment benefits”, OPEB) costs began consuming substantially larger portions of BART’s overall retirement spending. In 2000, non-pension benefits accounted for only 10.7% the system’s total retirement benefit spending.[vi] Since then, however, that portion has increased steeply to 42.6%.[vii]
Retiree health care accounts for the vast majority (94%) of BART’s non-pension benefit spending, and it accounts for the most significant growth among the system’s retirement benefits. Costs associated with retiree health care rise as general health costs rise, the number of retirees increases, and/or retirees’ life spans increase. In the last decade, as health costs have skyrocketed nationally, Baby Boomers have begun to retire en masse, and medical technology has extended life spans, all of these factors have driven up retiree health costs nationwide.[viii]
Figure 3: Retiree Health Benefit Pay-as-you-Go Costs
Just a decade ago, employers like BART typically paid any retiree health benefits due in a given year directly from their operating budgets on a “pay-as-you-go” basis. These annual out-of-pocket costs were low enough that they proved relatively insignificant in the context of total budgets. That is no longer the case. BART’s annual pay-as-you-go retiree health costs rose from $1.0 million in 2000 to $14.5 million in 2012, amounting to a 26% average annual increase and a 1294% increase overall. During the same period, pay-as-you-go retiree health cost outpaced the growth in the operating budget, which grew from $418.1 million to $722.6 million, or 4.7% annually on average and 73% overall.[ix]
Prefunding Retiree Health Care
By the mid-2000's, as BART’s annual retiree health cost growth outpaced its operating budget’s growth, this “pay-as-you-go” approach began to prove unsustainable, promising to apply even more strain to future budgets as costs continued to rise. As of 2012, BART’s future retiree health cost obligation was an estimated $376.1 million, meaning that the present value of current employees’ and retirees’ retiree health care is $376.1 million over the course of their lives. To fund this future obligation, BART is transitioning away from its pay-as-you-go model to a “prefunding” model, in which it sets aside money today in a Trust Fund dedicated to securing future retirees’ health benefit obligations.
BART established the Trust in 2004 and began making contributions on an ad-hoc basis. For instance, in fiscal year 2005, BART contributed to the Trust $36.2 million in proceeds from operations and the sale of investment shares.[x] In 2008, BART began making systematically larger contributions to the Trust even as it continued to make its pay-as-you-go costs, effectively requiring it nearly double its annual retiree health costs during its initial prefunding years. Consequently, this “ramp-up” to full prefunding is more costly in the short-term with the understanding that in the long-term, prefunding and paying benefits from the Trust is cheaper than paying the costs out of pocket on a pay-as-you-go basis.
When BART’s ramp-up prefunding costs are taken into account, the system’s total annual OPEB spending rose from $1.0 million in 2000 to $24.7 million in 2012, a 2271% increase. In 2006, the Trust had $40.9 million in assets and a $331.2 million obligation, meaning that it was 12.4% funding.[xi] As of June 30, 2011, the Trust had $120.1 million in assets, meaning that the $376.1 million obligation was 31.9% funded.[xii]
Pension Costs Still Growing
Though annual retiree health care growth has outpaced annual pension cost growth over the last decade, BART’s pension costs are still rising and they remain higher than its retiree health costs. BART’s annual pension costs more than doubled since 2000, rising 172% overall from $12.3 million to $33.3 million in 2012.[xiii] That amounts to a 14% average annual increase in the system’s pension costs, outpacing the operating budget’s 4.7% average annual growth during the period.
During the period, miscellaneous employee pension costs rose from $10.9 million to $26.4 million. Safety employee pension costs more than quadrupled from $1.7 million to $7.0 million.
Under its current collective bargaining agreement, BART engages in a practice known as “pension pickup,” in which the employer pays employees’ share of their contributions to the pension fund in addition to its own.[xiv] While not unique to BART, the pension pickup has grown increasingly expensive for employers as annual pension costs have risen. BART and its employees are negotiating about whether to continue the practice going forward, with BART arguing that it should end the practice.[xv]
Unfunded Pension Obligation Assumptions
Officially, BART’s unfunded pension obligation is $187 million, meaning that it is 90% funded. In 2000, the pension fund actually had a $306 million surplus, meaning that it was 142% funded. The current estimated unfunded pension obligation – the difference between the funds’ assets and the amount the pension fund requires to pay the amount of benefits its current employees and retirees have already earned – is based on the assumption that the pension fund’s investments will return 7.5% each year for the next 30 years. The fund estimates that it can discount the amount it sets aside at the rate it expects to return on its investments (7.5%), thereby enabling it to fully meet its future obligations.
The size of unfunded public pension liabilities depends on the rate of return public pension funds expect to earn on their assets. BART expects to earn 7.5% annually and therefore reports an unfunded liability of $187 million. Conversely, investor Warren Buffett expects to earn 6.6% for his pension funds. Using that rate of return, BART's unfunded liability would be $439 million. Moody’s credit rating agency recommends that public pension systems use a 5.5% rate, under which BART's unfunded liability would be $797 million. A higher 8.25% discount rate eliminates the unfunded liability entirely, but would require the fund’s investments to return 8.25% annually or require higher contributions from employers and/or employees.[xvi]
Figure 4: Rediscounted Pension Unfunded Liability
Over the last decade, BART faced pressure to provide effective transportation services throughout the Bay Area as mounting retirement benefit costs consumed larger portions of its operating budget. As that operating budget grew steadily at an average 4.7% percent annually, the system's annual pension costs grew at a faster 14% on average annually. And its annual pay-as-you-go retiree health benefit costs grew at a rapid 26% on average annually. Prefunding offers BART the opportunity to secure retiree health benefits for future employees and ultimately slow the growth of its retiree health costs, but requires higher benefit spending in the immediate years. On top of benefit cost growth, BART’s previous and current compensation levels remain higher than California’s public transit sector overall, and the system continues to cover its employees’ share of their contributions to the pension fund. Furthermore, depending on the accuracy of the system’s pension funding assumptions, its current payment levels may ultimately prove insufficient for meeting the system’s actual funding requirements. Should these trends continue, retirement benefits will consuming larger portions of BART's operating budget, necessitating a reduction in the quality of services, higher rider rates, or a combination of the two. Those are critical trends for a system seeking to rein in costs.
[i] “Annual Financial Report for the Years Ended June 30, 2012 and 2011.” BART. <http://www.bart.gov/docs/financials/FY%202012%20Audited%20Financial%20Report.pdf>. Page 13.
“Total Annual Exits FY 1973-FY 2013.” BART. <http://www.bart.gov/docs/BART_Ridership_FY73_FY13.xls>
[ii] “Governor Brown Takes Action to Avert BART Strike.” Governor’s Press Office. August 4, 2013.
[iv] “Transit Service Operators and Non-Transit Claimants, Fiscal Year 1999-00.” California State Controller. <http://www.sco.ca.gov/Files-ARD-Local/LocRep/transit_reports_99-00_9900transit.pdf>. Page 2.
[v] “Transit Service Operators and Non-Transit Claimants, Fiscal Year 2010-11.” California State Controller. <http://www.sco.ca.gov/Files-ARD-Local/LocRep/1011Transit.pdf>. Page 2.
[vi] “Annual Financial Report for the Years Ended June 30, 2000 and 1999.” BART. Page 22.
[vii] “Annual Financial Report for the Years Ended June 30, 2012 and 2011.” BART. Page 17.
[viii] Tatum, Adam. “Paving a Way Out: Options for Managing California’s Rising Retirement Healthcare Costs.” California Common Sense. <http://www.cacs.org/images/dynamic/articleAttachments/29.pdf>. Page 1.
[ix] “Annual Financial Report for the Years Ended June 30, 2012 and 2011.” BART. Page 13
“Annual Financial Report for the Years Ended June 30, 2000 and 1999.” BART. Page 3.
[x] “Annual Financial Report for the Years Ended June 30, 2006 and 2005.” BART. Pages 47-48
[xi] “Annual Financial Report for the Years Ended June 30, 2007 and 2006.” BART. Pages 49
[xii] “Annual Financial Report for the Years Ended June 30, 2012 and 2011.” BART. Page 56.
[xiii] “Annual Financial Report for the Years Ended June 30, 2012 and 2011.” BART. Page 51.
“Annual Financial Report for the Years Ended June 30, 2000 and 1999.” BART. Page 51.
[xiv] “Annual Financial Report for the Years Ended June 30, 2012 and 2011.” BART. Page 54.
[xv] “BART seeks to rein in soaring benefit costs.” BART. <http://www.bart.gov/news/articles/2013/news20130801.aspx>.
[xvi] Calculated using an assumed 15-year duration for all plans, which is considered a mid-range estimate. Plan durations typically range from 13 years to 17 years.