CHICAGO — The Regional Transportation Authority of Illinois board last week approved a $2.3 billion operating budget for 2011 that taps capital funds to cover operating costs as the agency waits for its share of local sales tax revenue to recover from the recession.

"The ongoing economic recession has continued to adversely impact our transit funding for the last three years, but despite the ongoing crisis, a fiscally responsible budget has been approved," said the agency's new executive director, Joseph Costello.

The board at its meeting last week also formally named Costello executive director of the authority, which provides financial oversight of Chicago-area transit agencies. Costello, the RTA's chief financial officer for the last 15 years, was tapped in October to serve as acting director after Stephen Schlickman retired to return to the private sector. Costello will be paid an annual salary of $217,000.

"This is a critical time in our transit system's history," board chairman John S. Gates Jr. said in a statement. "What was critical in our decision to appoint Joe as the executive director was his successful track record in managing the agency's finances and funding, as well as the leadership skills he has demonstrated over the few last months as acting executive director."

The $2.3 billion budget allocates $1.33 billion to the Chicago Transit Authority, $634.2 million to Metra commuter rail, $183.3 million to Pace suburban bus service, $120.7 million for paratransit, and $33.7 million for RTA administrative costs.

The authority's service boards struggled to balance their 2011 budgets given lackluster sales-tax collections and delays in state aid payments. The challenges are expected to persist, Costello said.

The agency was able to avoid service cuts or fare increases primarily by transferring $258 million in federal capital funds to cover qualified operating expenses that includes preventative maintenance.

The RTA has in recent years siphoned off capital funds for operations, but the 2011 transfer represents the largest amount yet and is not sustainable, according to Costello. "The service boards realized it's not the time to cut service or raise fares but we want to get out of the business of using capital funds," he said.

Fare hikes and service cuts could be on the horizon depending on sales-tax collections and the timing of state aid payments. Illinois is nearly caught up on all of the $451 million allocated to the RTA for 2010, with a final $77 million expected before its closes its books on 2010. But the state already owes the authority $128 million under its fiscal 2011 budget, which took effect July 1.

The RTA has no general obligation borrowing plans for capital because it exhausted nearly all of its state-approved bonding authority in 2006. Illinois' $31 billion capital program earmarks $2.7 billion for transit. The RTA received $442 million this year, but has no assurance on the timing of the other $2.3 billion of funds given the cash-strapped state's fiscal woes.

The RTA intends to implement a commercial paper program for the first time next year. It will tap the program to restructure $260 million of working cash notes that come due next year. The authority has a total of $400 million of notes outstanding. JPMorgan will manage the program.

Costello, who is a certified public accountant, views a commercial paper program as providing more flexibility for the agency to manage cash-flow needs than the private line of credit and working-cash note structure previously used.

"We borrow only what we need when we need it," he said.

The RTA's $2.3 billion of debt is rated AA-minus with a negative outlook by Fitch Ratings, AA and stable by Standard & Poor's and Aa3 and stable by Moody's Investors Service. All three downgraded the authority this year due to its fiscal challenges.

The RTA's ability to address ongoing capital needs while maintaining prudent leverage ratios will be closely watched by analysts who view that challenge as a potential downgrade factor. The agency's current five-year capital program, from 2010 to 2014, totals $4.7 billion. About $1.4 billion is estimated for projects in 2010, with nearly all of that amount being devoted to repairs of existing equipment.

"The authority's aging equipment forces operating expenses that would normally be used for improving or expanding service to be diverted to habitual system repair," Fitch wrote. "Timely action and proactive cost controls will be necessary to maintain adequate levels of service, safety, and state of good repair."

The RTA recently unveiled its first formal capital-needs assessment report, warning that $24 billion worth of infrastructure work is required over the next decade. About $13 billion is needed for overdue work on equipment and facilities.

After guiding the agency through its current economic challenges, Costello says a push among the public and lawmakers for a dedicated source of revenue for capital funding is a priority.

"The primary long-term need is for capital investment," he said. "We've got to get people to appreciate the benefits of public transportation in the region. Nationally and statewide if people are supportive, the funding will be forthcoming."

Costello said officials first must conduct a "visible effort to show that transit authorities are operating as effectively as they can" and then they must "share a compelling vision for transit service" that is promoted cooperatively by all stakeholders, including transit agencies and advocacy groups.

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