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The latest stay-at-home orders are expected to impact transit ridership and revenue. Photo via Facebook
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Transit district fiscal pressures run deeper than COVID-19

REGION — The regional transit district continues to face structural fiscal pressures — namely, steadily declining ridership and a mounting pension liability — which COVID-19 exacerbated but didn’t fundamentally cause, an annual financial report indicates.

Stay-at-home orders caused “significant declines in ridership in all modes of transportation,” according to the report, reducing fare revenues about one-fifth over last fiscal year.

NCTD, governed by a board of North County elected municipal officials, operates rail, bus and shuttle services. About three-quarters of its operating revenues come from federal, state and local subsidies, the remainder from passenger fares and other generated income.

“With these new stay-at-home orders, we do expect that there will be a renewed impact on ridership,” Executive Director Matt Tucker told the board at its Dec. 17 meeting.

The COASTER, NCTD’s north-south rail commuter, is the hardest hit, with ridership 88% under-budget. BREEZE and SPRINTER, the district’s bus and east-west rail commuter services, are down 28% and 31%.

Tucker said the difference owes to the fact that COASTER riders more probably can telework, whereas Breeze and Sprinter riders “are going to be classified as essential workers and less likely to be able to work from home.”

“We’re looking toward the recovery of the economy and the reopening to see what things we’re going to need to do to bring ridership back,” he said.

Chart NCTD finances
The North County Transit District has faced declining ridership revenues for years, COVID-19 notwithstanding. Graphic by Dan Brendel

“NCTD is well prepared to mitigate the financial impact from the economic downturn caused by the COVID-19 pandemic through the fiscal year 2021,” according to the report. Federal CARES Act dollars “will supplement the loss of fare revenue and sales tax-sourced grant revenues.”

Though certain trends, long predating COVID, might suggest a bleaker picture.

The district’s net position, or its bottom line, has decreased steadily over the past decade, from $635 million in 2011 to $479 million in 2020. Passenger boardings fell 28% over 10 years. Fare revenue as a percentage of operating cost has nearly halved, from 24% systemwide in 2011 down to 13% in 2020.

“Increased vehicle access, particularly among low-income households who represent the most frequent and reliable transit users, is the primary cause of ridership declines,” an NCTD spokeswoman said, citing a 2018 SANDAG study. “NCTD, like many transit agencies, has been working to reverse these trends by focusing on improving services by increasing frequencies and providing services that meet the changing need of our transit market. For example, NCTD is rolling out micro-transit and more than doubling the frequencies of COASTER trains during the next three years.”

“Micro-transit” means “small-scale, on-demand” services, such as vans instead of buses, according to the American Public Transportation Association.

The funded proportion of NCTD’s CalPERS pension liability has steadily declined, from 78% in 2015 to 72% in 2019. The downward trend is largely caused by CalPERS’ governing board reducing its assumed rate of return on pension fund assets. CalPERS assets, to which NCTD contributes every year, need to appreciate at a sufficient rate to outrun inflation and support future payments to retirees. Decreasing expected future earnings means increasing current contributions to make up the difference.

CalPERS has ratcheted down its expected rate of return from 7.65% in 2015 to 7.15% in 2019.

“Very small changes in the [expected rate of return] have an effect on our pension liability,” NCTD CFO Eun Park-Lynch said.

If the CalPERS board were to reduce the expected rate of return used to calculate liability down just one percentage point, NCTD’s unfunded obligations would increase nearly 40%, from $41 million to $58 million. Currently, NCTD plans to pay down its unfunded gap through 2043, with annual contributions steadily increasing for several years, from $2.6 in 2020 to $4.1 million in 2026.

Solana Beach Councilwoman Jewel Edson called pension liabilities “scary for all of us,” for NCTD and municipal governments alike.

“I know we’re not trying to get to %100 [i.e., zero unfunded pension liability], that would be almost impossible,” Encinitas Councilman and NCTD board chair Tony Kranz said. “But in the meantime, the southbound trajectory is a little concerning.”

“Changes to the [expected rate of return] can threaten some organizations with bankruptcy,” he said.

“Despite our challenges with ridership, NCTD is optimistic about the future and believes our services are key to the national goals of reducing harmful emissions and fostering economic opportunity for all,” an NCTD spokeswoman said. “NCTD continues to project a balanced budget for the next five fiscal years and we are working to identify supplemental sources of revenue, to include the advancement of development projects, to generate long-term sources of revenue.”