Update 4/28: NJ Transit announced today that it will not increase fares in fiscal year 2010. More coverage soon.

Imagine taking out a mortgage or a car loan, and then spending much of the proceeds to pay your grocery bills instead. It’s not a sign that you’re in the best financial health.

But that’s what NJ Transit has been doing for years. NJ Transit’s operating budget is funded by three main sources: fares ($755 million in the current, fiscal year 2009 budget), state aid ($358M), and transfers from its capital budget ($356M). And Gov. Corzine’s proposed  budget will cut state aid to the transit agency by 17% ($62 million).

Unlike the operating budget, the capital budget is primarily debt-funded.  The capital budget’s largest source of funding is the state’s Transportation Trust Fund, which is funded almost entirely through bond proceeds. The large capital-operating transfer means that much of NJ Transit’s operating budget is essentially on a credit card.

These transfers were common practice even before 2000, but worsened as NJ Transit expanded its system with projects like the Hudson-Bergen Light Rail and Secaucus Transfer Station, and the state failed to sufficiently increase NJ Transit operating aid to cover the cost of running the new transit services (see MTR # 402 and others).  In FY2004, the size of the capital-operating transfer had grown to $383 million.

In response to these and other transportation funding issues, a state commission created by then-Gov. McGreevey recommended that the agency receive more for capital projects and at least hold the transfer to $300 million/year until new sources of revenue could be found. But none were; NJ Transit remains the largest transit agency in the country without a dedicated source of operating revenue.  Since 2000, NJ Transit operating costs have risen by $800 million but state operating aid has increased by only $200 million. Ridership has increased by 21.5% over the same time period.

Image: Data via NJ Transit.