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BOSTON (AP) — A panel created to oversee the financially-strapped Boston-area transit system warned Tuesday of painful choices, including possible fare increases, as it looks to address a gaping budget shortfall and a backlog of unmet maintenance needs.

In its first report to the Legislature, the Massachusetts Bay Transportation Authority’s Fiscal Management and Control Board said eliminating a projected $242 million operating deficit in the next fiscal year was an urgent priority, along with freeing up capital funds to modernize aging infrastructure.

“Many of the (board’s) decisions will be difficult and unpopular,” the report said. “But continued inaction on the MBTA is simply not an option. The riding public, MBTA employees, taxpayers, and the region’s economy demand a well-functioning, efficient MBTA.”

The report was released a day after the board approved a policy that would allow for fare increases of up to 10 percent every two years. Fares could jump as soon as July, but the precise amount of the increase could depend on how state law is interpreted.

Some lawmakers, including Democratic Senate President Stan Rosenberg, argue that a 2013 law was intended to cap fare increases at no more than 5 percent every two years. State transportation officials disagree and contend the law permits fare increases of up to 10 percent.

The higher increases would likely run into opposition from commuters who believed the 2013 law was meant to cap them at 5 percent every other year. The T Riders Union, in an open letter to the control board last week, said “backtracking” on the fare cap would be a “profound insult” to commuters.

In its report, the board noted that the current budget outline assumes only a 5 percent increase next year and that raising fares more than 5 percent is but one of a bevy of new revenue and cost-cutting options under consideration.

The report also included a sobering update on the amount of spending that would be required to bring all of the T’s equipment into sound working order. The current State of Good Repair backlog has been estimated at $7.3 billion, but the board said that when accounting for inflation, the cumulative cost of erasing the backlog over the next 25 years could reach a staggering $24.8 billion.

The board said it would not ask the Legislature next year for more than the $187 million in state subsidies the MBTA received in the current year, but instead of using the funding to balance the operating budget, it promised to put it toward reducing the maintenance backlog.

Republican Gov. Charlie Baker, who persuaded lawmakers to create the control board after storms that paralyzed the system last winter, said he was not convinced the T had made the case for additional state funding.

“I don’t buy and I don’t believe anyone else should the notion that somehow the whole problem here is that we don’t have enough money,” Baker told The Associated Press. “It’s very clear that the T needs to get its act together in so many different ways first.”

Joseph Aiello, the control board chairman, also called for an audit after T officials disclosed that nearly a quarter of its employees will make more than $100,000 this year, including overtime and retroactive pay raises.