August 17, 1995
The U.S Department of Transportation (DOT) was created in 1966 by consolidating several independent agencies devoted to specific transportation sectors, chiefly the Federal Highway Administration and Federal Aviation Administration, into a new Cabinet-level department. Also included in the new department were several transportation-related divisions from other departments, such as the Coast Guard (which had been at the Department of Commerce), together with newly established federal responsibilities for mass transit under the Urban Mass Transit Act of 1964. In 1970, DOT added interstate passenger rail service to its duties when it took over money-losing passenger routes from private railroads and reorganized them as money-losing Amtrak. Several years later, for a brief period, the department was home to Conrail, a collection of bankrupt rail freight lines in the Northeast, which soon became one of the few federal privatization successes.
For this fiscal year, federal spending on transportation is budgeted at just over $39 billion. Nearly half -- $19 billion -- will be spent on highways, while roughly 25 percent -- $10 billion -- will be spent on aviation, primarily air traffic control operations and airport grants. Much of the department's spending is derived from the Highway Trust Fund, which is replenished by the federal fuel tax that every consumer pays when he fills up his tank, and the Aviation Trust Fund, financed largely by a passenger ticket tax and several lesser aviation user taxes.
Largely unchanged in structure and purpose since its creation in 1966, DOT has been the object of a number of recent reform proposals, including a recommendation by the Clinton Administration's National Performance Review that it be overhauled. Several of these proposed reforms, such as "corporatization" of the air traffic control system and consolidation of many surface transportation programs into infrastructure block grants that would be provided to the states, were part of the FY 1996 federal budget. At the same time, the Administration proposed to reduce slightly the amount of money the federal government spends on transportation over the next several years.
These relatively modest reforms met with considerable opposition even among House Republicans, who wanted to maintain much of the nearly $40 billion the federal government spends on transportation each year. Fortunately, Senate Republicans have been more committed to fundamental reform, and this was represented in the House/Senate conference agreement on the FY 1996 budget resolution. Though somewhat vague on critical points, the conference report did commit Congress to downsizing and streamlining DOT, and even recommended privatization of the air traffic control system -- in contrast to the House Republicans' initial proposal to keep it as a government bureaucracy. The report, noting that the nation's infrastructure needs are not being met by the current centralized command structure, also urged greater privatization and federalism.
Specifically, the conference report proposes to phase out Amtrak, which will be cut by $205 million from last year, and mass transit operating subsidies, which will be cut by $300 million. Other areas of transportation, however, receive substantial increases. Spending on highways would rise a staggering $880 million over last year, while $660 million will be provided to start 30 new transit systems, most of which will be in light rail, the least cost-effective of the options available to Americans. This reflects a $19 million increase over last year's new start spending, and is significantly more than President Clinton recommended in proposing only 12 new transit starts in his 1996 budget.
This reluctance to impose fiscal discipline is troubling. Even worse is the record the House is compiling in attempting to reform the restrictive labor practices past Congresses have forced on Amtrak and local transit systems, as well as Davis-Bacon Act provisions affecting highways. In July, efforts to reform costly labor practices and mandates on mass transit and Amtrak were defeated overwhelmingly as many House Republicans joined with Democrats to vote down every reform proposal put forward as part of the transportation appropriations bill.
Although too modest in scope, the Clinton Administration's proposals could help reinvigorate the process of fundamental transportation reform that began with President Carter and carried over into the early Reagan Administration, and the House/Senate conference report at least includes general endorsements of reform, decentralization, and privatization. The Administration's proposals implicitly recognize that DOT's duties are largely commercial in nature and might better be left to the states or to the private sector. In the past, the federal government often helped facilitate the more rapid commercialization of a new technology (aviation) or a new concept (limited-access interstate highways). Generally, however, the Department has simply preserved, at considerable taxpayer expense, such inefficient transportation concepts as urban mass transit monopolies or poorly managed interstate passenger rail service. Despite its early successes in highways and aviation, federal involvement in these areas has become costly, bureaucratic, and inflexible, operating in a fashion that preserves the privileges of businesses, civil servants, congressional committees, and unions that benefit financially from the status quo.
It is time for Congress to recognize that continued federal involvement in transportation is an inefficient use of society's scarce resources. To decrease the costs and decentralize the management of America's transportation system, the Department of Transportation should be closed down, and most of today's federal transportation responsibilities should be returned to individual states, local communities, or the private sector. Such actions would have the effect of continuing the successful transportation policies of the late Carter Administration and early Reagan Administration, when airlines, interstate rail freight, trucking, and the moving industry were deregulated to the considerable benefit of America's consumers, workers, and businesses.
Specifically, Congress needs to institute major reforms in several areas of transportation policy:
Congress should return to the states much of the responsibility, with the necessary resources, to operate and fund those transportation functions that are the province of government. Most transportation concerns are local in nature, and continuing to force politically influenced, centralized solutions on local problems will be no more successful in the future than it has been in the past.
Today, the federal government determines how much will be spent on transportation infrastructure, raises the money, and then decides how it will be distributed and divided among the many different forms of transport -- such as highways, mass transit, aviation, and rail passenger services -- in accordance with a central plan developed by the DOT, Congress, and the states and influenced by the many private industries that depend on federal grants and contracts. Costly strings are attached to these funds in the form of dozens of mandates, directives, and special set-asides to satisfy certain constituencies.
Congress can reverse this process in 1997 when the legislation authorizing the DOT's largest program -- the Highway Trust Fund -- and the taxes that support it expires. Funded with an 11.5 cent share of the 18.4 cent per gallon federal gas tax, the trust fund each year takes in and disburses approximately $20 billion on highways, bridges, and mass transit initiatives. The program should be allowed to expire as scheduled so the states can assume this relinquished taxing authority to fund their own transportation programs. As an interim step, all the money collected by the federal government through the fuel tax should be returned to the states as a transportation block grant in exact proportion to the amount collected in each state. The accumulated balance in the trust fund, now approaching $18 billion, should be returned to the states in proportion to the amount paid in once the federal budget reaches balance, as scheduled, in the year 2002.
This block grant would be unrestricted except for a requirement that it be used for transportation, with each state free to distribute the funds among a variety of transportation purposes that best suit its needs. For states needing rail passenger service, a portion of the funds could be used to maintain some or all of the lines that formerly were part of Amtrak. For heavily urbanized states, funds could support mass transit beyond revenues generated by fares. And for most states, most of the money would continue to support highway and bridge programs. After 1997, when the federal fuel tax author-ity expires, states could assume responsibility for the tax2 or could develop other funding mechanisms, including taxes, user fees, greater private investor participation, and tolls, to maintain and sustain their own transportation program.
The End of Mandates
Also terminated should be the large and costly collection of federal mandates, regulations, and prohibitions that have inflated state transportation costs and deterred the development of creative, low-cost transportation solutions. Mandates associated with federal highway funds force states to incur additional costs that may equal as much as 80 percent of the federal funds received. For the federal transit programs, the costs of fulfilling federal mandates can be two to three times the value of the federal subsidy. Ending these mandates would increase substantially the buying power of a transportation block grant, and eliminating the many federal restrictions discouraging states from forming partnerships with private investors to develop or rehabilitate highways and bridges would allow states open access to substantial pools of private development capital.
Urban Mass Transit
The most important action Congress can take to reform surface transportation is to terminate the Federal Transit Administration, the most wasteful and counterproductive of all DOT programs. Federal spending on local transit initiatives runs in excess of $4 billion per year, part of which is financed from the 1.5 cent share of the federal fuel tax. Urban and community transit programs are almost entirely local in nature, have few (if any) national ramifications, and derive only about five percent of their operating funds from the federal government. But because of federal mandates, including costly provisions that directly benefit organized labor, the hidden cost to the community may be two to three times higher than the value of the subsidy itself. Thus, all existing federal transit legislation also should be amended to remove all federally imposed mandates and restrictive labor practices. Once the program is terminated and the laws amended, states would be free to fund mass transit programs through the proposed transportation block grant.
As part of a comprehensive reform of DOT surface transportation programs, all federal funding to Amtrak should end and Amtrak's management should be encouraged to work with interested and affected states to develop creative ways to maintain cost-efficient service. States could use a portion of the new transportation block grant to maintain some local or regional rail service in cooperation with other states and Amtrak, or its successor entity. To this end, the Rail Passenger Service Act of 1970 should be amended to eliminate excessive labor protections and Amtrak's federally enforced monopoly status. In addition, an eight-state compact to maintain and fund operations in the Northeast Corridor should be pre-approved by Congress and the formal transfer of assets (rolling stock, road bed, stations) to the new consortium included in the legislation terminating Amtrak. Popular long-haul routes should be privatized separately to take better advantage of their tourism potential.
DOT aviation programs, operated by the Federal Aviation Administration (FAA) and financed largely from the airport trust fund, should be privatized (in the case of air traffic control) or fully devolved to the states (airports). Aviation safety responsibilities should remain with the federal government in a new transportation safety agency. Specifically, and similar to proposals of the Senate Budget Committee, the National Performance Review, and the Clinton Administration, the FAA should be split into three parts. The air traffic control system should be reorganized as an independent government corporation, funded by direct user fees, and ultimately privatized; the airport improvement program, and the taxes and fees that fund it, should be turned over to the states and localities. Meanwhile, the safety, licensing, inspection and training functions of the FAA should be carried out either by an independent federal aviation safety agency or by a new government agency that also deals with safety issues related to highways, boats, rail, and other forms of transportation.
As part of this change, the airport trust fund, with a balance now in excess of $12 billion, should be dissolved and the federal passenger ticket tax ended. A portion of the balance could be used to fund some of the potentially high transition costs involved in privatizing the air traffic control system and to honor existing commitments under the airport improvement program. Once the federal budget is balanced, the remaining funds could be returned to existing airport authorities in proportion to ticket taxes previously collected.
Existing federal laws, mandates, and prohibitions governing airports should be amended or eliminated to allow greater freedom for airport managers and more private sector participation in airport ownership, construction, development, and management. With these mandates ended, airports would be free to establish their own charges, fees, or taxes on aircraft or passengers in order to fund ongoing operations and improvements.
The Coast Guard
The Coast Guard's chief responsibilities now focus largely on law enforcement. Congress therefore should transfer the Coast Guard and its coastal security and interdiction functions to the Department of Justice, so that its activities can be coordinated more effectively with those of other federal law enforcement agencies. Other, less pressing duties could be shifted to the private sector, the states, or other agencies. Basic rescue responsibilities, for example, could be turned over to existing private competitors and volunteer organizations, with government retaining responsibility only in the event of extreme emergencies and severe weather conditions beyond the scope and resources of the private sector. Boat safety responsibilities should devolve to the states, where most other transport safety issues already are lodged. The Environmental Protection Agency (EPA) should take over the Coast Guard's anti-pollution responsibilities, and states or regional authorities should assume responsibility for maintaining navigational aids, policing waterways, and icebreaking.
The Maritime Administration should be terminated except for its international regulatory roles, which should be transferred to the Department of State or the U.S. Trade Representative. Safety functions and responsibilities should be retained in an independent federal agency. The Maritime Administration and Congress's long, counterproductive interference with the ocean shipping industry have succeeded only in destroying America's once proud maritime heritage. The price, in addition to considerable taxpayer expense, has been the loss of thousands of jobs.
Federal Highway Program
Today's federal highway programs began with Franklin D. Roosevelt's 1944 Federal Highway Aid Act which earmarked $1.6 billion for highways over three years, and Dwight D. Eisenhower's Federal Highway Aid Act of 1956. The former created the federal responsibility; the latter shaped the program that exists today. Specifically, the 1956 Act called for completion of a 41,000-mile interstate highway system by 1972 and created the Highway Trust Fund, financed by a federal excise tax on gasoline, as a long-term source of federal funds for road construction.
Congress originally intended the highway program to be a federally assisted state program.3 But over time, as more and more federal mandates and money have been added, it has become a state-assisted federal program. A $30 billion program with a fifteen-year projected time for completion has incurred costs of more than $300 billion and is now thirty years behind schedule.
Although the broad objectives of federal involvement have been met, the federal highway program, operating out of Washington as a centrally managed monopoly incorporating the ideas and transportation concepts of the 1950s, is no longer what America needs. It also is no longer consistent with the original intent of a federally funded state program. With the national highway system largely completed, and with existing and emerging surface transportation issues predominantly local or regional in nature, a centralized, one-size-fits-all program makes little fiscal, management, or creative sense.
Unresponsive and Bureaucratic
The principal weakness in the current federal system is its centralized allocation of financial resources according to mechanical formulas based more on political influence than on transportation needs. Money collected at the state level from individual drivers whenever they fill their gas tanks is funneled to Washington, where a little less than two-thirds is deposited in the Highway Trust Fund for reallocation back to the states for a variety of federally determined purposes in federally determined proportions.
Of the 18.4 cents per gallon now paid at the pump in federal excise taxes, only 10 cents goes to highways. Of the remainder, 1.5 cents goes to mass transit, 0.1 cents to cleaning up leaking storage tanks, and 6.8 cents to the government generally. On October 1, 1995, the highway dedication will rise by 20 percent to 12 cents per gallon and the transit dedication will rise by one-third to 2 cents per gallon. These increases will be financed by reducing the 6.8 cent highway tax support for general government (no overall tax increase will occur).4 Similar diversions of tax funding from deficit reduction to highways and mass transit will occur at the same time with respect to other motor fuel taxes.
How much money each state receives from the fund is determined according to an elaborate mechanical formula which has left a trail of winners and losers. Since its inception in 1956, states such as Alaska and Hawaii, along with the District of Columbia, have received in grants substantially more than they have paid into the fund, while states such as South Carolina, Texas, and Wisconsin have received just over half the amount they have paid in fuel taxes.5
Once the aggregate allocation is determined, the money returned to the states is earmarked for specific types of projects as determined jointly by members and staff of key congressional committees and staff and officials of the U.S. Department of Transportation. In the 1995 budget, developed in cooperation with President Clinton and the 103rd Congress, $20.1 billion in federal highway aid was allocated in specific amounts to such programs as the national highway system, the surface transportation program, the bridge program, interstate completion, interstate maintenance, interstate substitutions, congestion mitigation and air quality improvement, intelligent vehicle highway systems, emergency relief, federal lands, administration and research (more than $700 million), demonstration projects, high priority corridors, highway-related safety grants, motor carrier safety grants, and miscellaneous appropriations of a quarter of a billion dollars for 80 specific highway projects mandated by Members of Congress for their states or districts.6
In addition to the predetermined allocations among the states and between specific types of highway projects, Washington determines how much and what types of urban mass transit assistance each state receives, how much passenger rail service is available to it and at what cost, and how much money will be provided for airport construction, improvement, and modernization.
Miles of Red Tape
In order to receive these predetermined funding allocations, states and local communities must agree to adhere to a growing list of mandates that substantially raise the cost of meeting transportation needs, thereby actually diminishing the amount of transport services that each federal dollar can buy. Chief among these counterproductive mandates are:
These substantial costs are forced on automobile owners despite the absence of conclusive epidemiological evidence that these emissions adversely affect human health. And while the health and environmental benefits of these and other regulations are uncertain and questionable, the financial benefits of the oxygenated fuels mandate to the ethanol industry are both substantial and obvious. In addition to these restrictions, new highway construction projects must be preceded by costly and time-consuming environmental impact statements.
The Need to End Federal Limits and Prohibitions on Tolls and
Private Investor Participation
Among the most damaging federal requirements are the limits on the extent to which states can charge tolls and work in partnership with private-sector investors. Highways funded in whole or in part by the Highway Trust Fund may neither charge any tolls (except for a small number of Washington-approved demonstration projects) nor be developed or renovated with private investor participation. Thus, an opportunity to add significantly to the funds available for highway construction -- at no cost to the taxpayer -- is foregone, and America's ability to meet its transportation needs is held hostage to federal funding limits and allocations established by Congress and DOT staff. For example, an estimated 230,000 highway bridges need significant repair at a projected cost of $60 billion or more.10 In this year's budget, the Clinton Administration requested just $2.6 billion in FY 1996 for bridges under the Federal Aid to Highways program, or just less than 5 percent of the estimated need.11
In addition to the unnecessary limits on resources that it creates, the prohibition on tolls precludes opportunities to contribute, however modestly, to the alleviation of congestion and the better utilization of existing transportation resources through market pricing mechanisms. For example, the major surface transportation issue in communities throughout the country is congestion, generally associated with commuting and rush hour travel. With existing highways offered to consumers (drivers) as a "free good," or at least as a pre-paid service, drivers have no financial incentive to alter their schedules or their mode of transportation so they might use this valuable asset more efficiently to minimize congestion. To induce drivers to alter their travel plans to diminish congestion during peak travel periods associated either with holidays or workday rush hours, tolls could be levied (or increased where they already exist) on specific bridges or highways, as appropriate. This would encourage some individuals to defer travel, to utilize an alternative mode of transportation such as public transit or car pools, or take a different route.
Such congestion pricing tolls have been implemented in several cities in Europe and Asia (for instance, Bergen, Oslo, and Singapore), and public transit systems in Washington, D.C., and several other U.S. cities charge a premium for rush hour travel on buses and subways to encourage riders to shift travel to off-peak times. Although by no means a panacea, there is no reason why this concept could not be applied selectively to auto travel in the United States in those places and along those routes where existing traffic patterns make it possible and where driving patterns may be sensitive to price incentives. Unfortunately, federal prohibitions and habit deter its use, so efforts are limited to public exhortations urging citizens to ride buses or join car pools.
Until recently, placing tolls on congested urban roads and bridges was not always economically practical because the collection costs and ensuing delays would likely have worsened the situation. However, new technologies allow electronic assessment of tolls from moving cars and trucks, using inexpensive transponders or receivers mounted on the vehicles. In the United States such automated systems have been implemented on the Crescent City Connection 12-lane bridge in New Orleans, the 17-mile North Dallas Tollway,12 and the Oklahoma toll road system.
Allowing for tolls creates opportunities for the private sector to develop and operate highways or to participate as partners with government in highway construction and operation. While private toll roads are common in Western Europe, and several are under construction (or planned) in several places in the U.S., their use has been limited severely by prohibitions and constraints at both the state and federal levels. Many states simply prohibit privately owned highways, while others tightly regulate them and require an elaborate and costly approval process. At the federal level, while there are no outright prohibitions on private highways, there have been tight controls on the extent to which private and public moneys can be commingled in infrastructure investments developed on a for-profit basis, and these controls have largely discouraged any private interest.13
At the same time, ambiguities regarding ownership of existing federally supported public roads, as well as federal anti-toll provisions, deter the creation of for-profit public/private partnerships that could rehabilitate, modernize, or widen -- at little or no taxpayer expense -- an existing public road that once received federal funding for some or all of its construction. Until very recently, there was no formal legal mechanism to allow for the sale or disposal of such highways, or to assess properly a reimbursement payment to offset the past federal investment. As a consequence, previously built highways in need of rehabilitation, modernization, and widening must wait their turn and compete politically with other highway projects for federal grant money. In recent years, executive orders promulgated by both the Bush and the Clinton Administrations have resolved some, but not all, of these problems.
Private-sector participation would allow some highway rehabilitation projects (particularly for well-traveled highways with restricted access) to receive immediate attention and financing at no cost to the taxpayer. A partnership could be formed between the state or local community and private investors, who would provide the funds to widen and resurface the aging highway to current standards and needs and be compensated for the effort, risk, and investment by receiving a portion of the tolls collected on the highway. The community's transportation needs would be addressed sooner and for less money (thanks in part to no federal red tape, which adds at least 20 percent to 30 percent to highway costs). Meanwhile, those who benefit the most -- the drivers who use the new road -- would pay for it in direct proportion to usage and benefits received.
Private highway projects currently are under construction in Virginia and California, and others are planned for Minnesota and Washington State. Private toll roads have long been in operation in France, Germany, and Italy and are underway in Argentina, Chile, China, Great Britain, Hong Kong, and Mexico.14
Although toll roads, including hundreds built and operated by private companies, played an important role in the early development of America's transportation infrastructure, the growing federalization of the highway system over the past forty years has discouraged and formally prohibited both private sector participation and the use of tolls on public roads. The rationale for this prohibition is thin and merits brief discussion.
Haven't We already Paid For It?
The chief argument used against tolls and highway privatization is that drivers already have paid for the highway through the federal fuel tax and Highway Trust Fund, which roughly relates taxes paid to highway usage. Under these circumstances, it is argued, any additional levies or user fees would be unfair and redundant. But this exaggerates the extent to which fuel taxes paid by individuals actually fund the highways, as well as the correspondence between costs incurred and benefits received. Further, it vastly overstates the ability of the user fee, as currently configured, to finance the U.S. highway and bridge system to the desired level of quality and capability.
A principal complaint about the existing user fee system is that less than 55 percent of the tax goes to highways, suggesting that any reference to the gas tax as a user fee is misleading. Further distorting the relationship between fees paid and benefits received is the fact that a disproportionate share of federal highway money goes to just 22 percent of U.S. road miles, which includes the interstate highway system and, to a lesser extent, its arterials and collectors. It does not include local roads, however, so auto owners whose driving is primarily local pay the federal fuel tax without receiving much in the way of direct benefits.
In a similar vein, drivers who pay to use existing toll roads, such as the New Jersey and the Pennsylvania Turnpikes or Interstate 95 between Baltimore, Maryland, and Wilmington, Delaware, also pay the gas tax, yet are not eligible for a rebate due to double taxation. Indeed, the price of fuel sold on these toll roads includes the federal fuel tax. Also distorting the relationship between fees and benefits is the fact that while different types of vehicles impose significantly different costs on highways, these differences are not reflected properly in the fees they pay. Heavy trucks, for example, cause substantially more wear and tear than is covered by the various fees and taxes they pay.15
Thus, it is not true that bridge and highway tolls are unfair because they would distort the relationship between fees and usage. The addition of more road and bridge tolls dedicated exclusively to highway improvement actually would enhance the correspondence between what drivers pay and what they in turn receive.
What Congress Should Do
Federal motor fuel taxes should be allowed to expire as scheduled.16 This would constitute complete and final devolution of the program to the states, which would finance their highway, transit, and leaking underground storage tank needs as they see fit (probably by increasing state motor fuels taxes or substituting a state fuel tax for the terminated federal fuel tax).
Abolish the Federal Highway Administration (FHWA) (49 USC app. 1651 note).
This would require repeal of Title 23 of the U.S. Code, with the exception of Sections 204, 205, 210, 212, 215, 216, and 218, and would comport with the original intent of the law that the federal highway program be a state program. Full devolution to the states is appropriate, since local governments are units of state government. Research programs would be financed by the states and by private-sector interests in the highway industry.
Devolving the program would involve several actions:
This office could be created either as an independent agency or within a successor entity that absorbed remaining responsibilities of terminated or consolidated agencies. It would bring together state officials to deal with issues of coordination among the states (such as designation of interstate and USC highway numbers). Minimal funding would be required.
Included in DOT are numerous transportation responsibilities with international ramifications, such as landing rights for air carriers, limits on fares, negotiated shipping rates, and safety issues. These matters could be handled better by the Department of State in coordination with other diplomatic issues.
Highway Safety Programs
The National Highway Traffic Safety Administration is responsible for regulatory and other programs involving highway and vehicle safety. In addition, the Office of Motor Carriers deals with safety issues associated with interstate bus and truck transportation, and the Office of Research and Special Programs includes or oversees several other related efforts including Hazardous Materials Safety, Pipeline Safety, the Transportation Safety Institute, and university research programs.
All of these programs should be reviewed for effectiveness or redundancy and to determine whether they are more properly the province of the states. Once reviewed and restructured, the remaining federal safety responsibilities should be transferred to a newly created independent federal entity - an Interstate Transportation Safety Office (or Administration) -- which includes all the other transportation safety responsibilities now within DOT, such as those of the Federal Aviation Administration and the Maritime Administration.
As part of this review, Congress should consider creating national maximum vehicle safety standards to discourage states from imposing more restrictive regulations that impede interstate commerce and add unnecessarily to costs. A possible precedent for such federal maximum standards is the standards promulgated and enforced by the Department of Housing and Urban Development for the manufactured housing industry. Again, however, highway safety programs are more legitimately the province of the states.
What Congress Should Do
The Federal Transit Administration
Created by the Urban Mass Transit Act of 1964 and administered by DOT's Federal Transit Administration, the federal transit program is a costly failure: Mass transit's market position today is the same as 31 years ago when Congress passed the Act. The program has consistently led to unwise transportation decisions by state and local authorities, encouraged local transit monopolies, and precluded the adoption of cost-effective operating methods and innovative solutions.
Although funding from the Mass Transit Account of the Highway Trust Fund and other federal revenues provide only a small fraction of the financial resources available to urban mass transit systems, the many regulations and mandates attached to federal funding have had a profoundly adverse influence on local transit policy. Despite the billions of dollars of state, local, and federal money invested in costly transit systems over the past 30 years, annual transit trips per capita have declined by one-third, and barely two percent of person trips today are by transit. In addition, transit's work trip (commuter) market share declined from 1980 to 1990 in 36 of the nation's 39 metropolitan areas with populations of more than one million.20
Transit's vastly diminished status reflects more than a century of government meddling and government-sanctioned and protected monopolies, whether public or private. Private transit companies and systems emerged in the late 19th century and grew rapidly in response to the growth of the urban population during the industrial revolution. Although private in origin, these rail-based companies quickly became monopolies by obtaining exclusive franchises from local and state governments. As early as the second decade of this century, governments in city after city outlawed jitneys (independently owned and operated buses), eliminating any competitive threat that might confront the private transit monopolists.
Unfortunately for these transit companies, their government protection from competition was not without its cost. Over the ensuing decades, these private systems were subject to price controls on their fares, mandatory service on designated routes, and mandated frequency of service. At the same time, they became easy prey for organized labor, which could shut down an entire city because all competing systems and companies had been eliminated. Private transit systems had little choice but to accede to exorbitant union wage demands and work rule requirements. These work rules are still in force, but in the public transit sector where federal mandates help maintain organized labor's privileged position in local systems.21
Local governments could suppress organized business competition to their protected transit franchisees, but they could not suppress the striving of individual commuters for something better. These individuals began to exercise their free will and seek a more convenient and cost-effective solution by driving their cars to work and to market. Subject to heavy government regulation and high labor costs, and thus unable to compete, the private transit monopolists began to face serious financial problems as their customers went elsewhere. With harsh labor contracts precluding cost savings through labor efficiencies, transit companies turned to deferred maintenance, capital acquisition, and reductions in other services. The ensuing deterioration in service further discouraged customers, and revenues continued to decline until the systems went bankrupt. One by one, they were taken over by local governments or multi-jurisdictional transit authorities. Taxpayer-supported public monopolies replaced the private ones that had failed.
The Federal Takeover
The next step was to get the federal government involved. This occurred in 1964 with the enactment of the Urban Mass Transit Act, which provided for capital grants to fund up to 75 percent of local projects. Section 13(c) of the Act also effectively codified organized labor's privileged position within the transit system by requiring, as a condition of federal aid, that a transit authority sign a U.S. Department of Labor-approved contract with transit unions. Among other things, these mandated agreements generally include provisions requiring a six-year severance payment for transit employees dismissed because of efficiency measures.
This Act was just one of several pieces of federal legislation during the 1960s that shifted heretofore local responsibilities such as housing, transit, and welfare to the federal government, all with disastrous results. Ten years later, in 1974, the Urban Mass Transit Act was amended to extend federal support to operating subsidies as part of a national energy conservation effort. Today, the federal government spends about $4 billion each year to help subsidize a service that millions of consumers overwhelmingly reject in growing numbers: Just over five percent of employees now get to work using public transit.
Impact of Cutting Off Federal Subsidies
Because federal support accounts for only about five percent of transit operating costs, and because existing transit system borrowing capabilities would be sufficient to add more and replace existing capital assets, the termination of all federal subsidies would have little initial negative impact on transit's ability to serve its dwindling customer base. Indeed, encouraging greater self-reliance and removing all of the costly and counterproductive mandates attached to federal grants and subsidies would leave enterprising transit authorities financially better off, because the estimated cost of these mandates is more than two to three times the value of the subsidy.22 For FY 1996, the House/Senate conference report on the budget proposes a substantial reduction in federal financial support of transit but stops short of recommending the elimination of the Federal Transit Administration, as proposed originally by the House.
With the provisions of Section 13(c) eliminated and no longer able to disrupt productive labor-management relations, transit authorities could adopt widely available cost savings opportunities through such practices as competitive contracting and better management of existing workforce. Because of the lack of incentives for properly managing existing personnel, and because of the many restrictive work rules common to its federally approved labor contracts, America's public transit industry has been the only major industry to experience a decline in labor productivity during the 1980s. Over that period, transit's productivity fell a staggering 40 percent compared with an increase in all other transportation sectors, including even Amtrak.23
The combination of rising wages and falling productivity has had a profoundly adverse effect on transit's cost structure. Unit costs (costs per mile or hour) are often double, or more expensive than market costs for the same services, even when provided by private contractors using union labor. As a result, U.S. transit cost escalation has been greater than that of health care and greater than that of transit systems in other developed nations.24
As long as the federal government is there to bail them out, transit authorities have no incentive to become more efficient or to adopt management techniques common to other businesses, and local communities and governments, which oversee these transit systems, have no incentive to interfere or to exercise their responsibility on behalf of their constituents and transit's customers. Without the federal cushion and indirect oversight, local governments could restructure their transit systems in ways that serve the customer, not managers and employees and Washington bureaucrats that devise and enforce the regulations and mandates.
With the federal government no longer providing capital grants that mandate certain types of equipment, transit authorities also would be free to acquire less expensive but more suitable equipment. Moreover, with transit authorities now fully responsible for servicing the debt incurred to acquire the equipment, these capital assets would be better maintained than has been the practice.25
The Need for Competition
Chief among the necessary reforms is opening the local transit market to competition by eliminating the legal monopoly now held by all transit authorities. Today, anyone offering services in competition with existing public transit is in violation of various criminal and civil statutes. As the limited contracting out done by transit services demonstrates, private-sector providers, often using unionized workers, are able to provide the same service for less money, make a profit, pay taxes, and service the debt on their equipment -- four simple tasks that no public transit service in the country could hope to accomplish.
While the potential cost savings are considerable, the real benefit to consumers from competition is the creativity that it will unleash in devising innovative solutions to traditional problems. In the hands of government monopolies, U.S. transit systems now rely on a combination of solutions and services that have not evolved much beyond those that were developed between 1880 and 1920, except that they cost much more and offer less convenient service. Not surprisingly, modern Americans have little interest in a type of service that was becoming obsolete when their grandparents were coming of age.
Typical of Congress's fascination with 19th century technologies are the costly light rail systems it has funded in communities across the United States, notwithstanding a pervasive lack of commuter interest. The "new start" rail capital program has financed some of the most costly and ineffective pork-barrel projects in the nation, despite the absence of any evidence from anywhere in the world that urban rail lines reduce traffic congestion. These systems involve sometimes staggering costs. According to one recent report, the congressionally approved Tasman Corridor, a $500 million, 12.4-mile light rail line in California linking Milpitas and Mountain View, will cost $33 for each new rider.26
A DOT study by Harvard economists indicates that bus-ways can be built and operated for one-fifth the cost of new rail systems.27 But rail systems have become a federally financed way to enhance civic pride and accommodate the preferences of hobbyists and rail buffs. Virtually all academic researchers not dependent upon income from the transit industry or the Federal Transit Administration agree that building publicly financed rail transit is indefensible.
Even if the cost could be justified, no element of today's local transit programs calls for federal involvement. Transit programs are, by definition, local in scope, and where two or three states are involved in the same system, interstate compacts can be formed to provide region-wide management and help raise the funds needed to maintain the service. Removing the federal government from local transit matters would leave state and local governments free to devise their own solutions, reduce costs by getting rid of federal red tape, and adopt creative solutions from a competitive private sector that stands to profit by serving its customers.
Supporters of the status quo argue that there is no money to be made in transit and that the financial failures of government-regulated monopolies in the 1950s and 1960s prove this. What they really prove, of course, is the counterproductive effects of government-sanctioned anti-competitive practices and regulation. Today, scores of profit-making, private transit firms bid eagerly on every government contract offered, and at prices below the level charged by public transit. The only thing that prevents a flood of private buses, vans, and taxis from offering low-cost, for-profit transit services in cities and suburbs is the threat of legal action from government.
What Congress Should Do
The Federal Railroad Administration
The Federal Railroad Administration (FRA) oversees rail safety, rail subsidies, and rail research. It also administers the Northeast Corridor rail rehabilitation project and owns and administers the Transportation Test Center, staffed by the Association of American Railroads. Only one of these functions -- interstate rail safety -- is an appropriate federal activity. Research should be funded by the railroad industry.
What Congress Should Do
The National Railroad Passenger Corporation (Amtrak)
The National Railroad Passenger Corporation (Amtrak) was created in 1970 to take over the nation's ailing private passenger rail service. Conceived as a two-year federally assisted experiment, Amtrak has managed to survive for 25 years at a cumulative cost to the taxpayer of over $17 billion plus interest. With a fleet of approximately 2,200 cars and engines operating on over 25,000 miles of track, Amtrak carries approximately 22 million passengers a year.
President Clinton's budget proposed a subsidy of $750 million for FY 1996 and assumed that Amtrak will adopt substantial reforms to make itself more commercially viable and reduce its reliance on federal operating subsidies. Although the original House Republican proposal was even more generous, the House/Senate budget conference cut more than $200 million from Amtrak. However, efforts to reform operations, particularly onerous labor requirements, failed as many House Republicans voted with the Democrats to preserve the extraordinary privileges in organized labor's Amtrak contract. This failed reform effort illustrates why it is time to terminate the federal subsidy at the end of this fiscal year, giving Amtrak time to develop a strategic plan to achieve financial independence from the taxpayer.
Amtrak's Marginal Impact on America's Transport Needs
Carrying less than one-half of one percent of America's inter-city passengers, Amtrak has become a costly burden on the taxpayer. Proposed for termination in several budgets during the Reagan Administration, it has been kept alive by Congress, which has provided billions in annual subsidies in return for promises that the corporation would become commercially viable. It never has, and those who believe it will in the future are allowing hope to triumph over experience and good sense. Despite 25 years of reform efforts and promises, the best the government has been able to do is to reduce the annual subsidy from over a billion dollars during the Carter Administration to about half that during the Reagan Presidency. Under Clinton the subsidy has been creeping back up to Jimmy Carter levels of generosity.
After years of mismanagement, overly generous labor agreements, and intense competition from airlines and long-haul buses, Amtrak's financial situation has deteriorated, and its prospects for improvement are even more illusory than in the past. In December 1994, as a result of competitive pressures on revenues, higher than expected operating costs, and a serious accident, Amtrak's budget went even deeper into the red, forcing the company to announce a series of major route and service cuts to stay within its existing budget and federal subsidy. Faced with persistent competition from private buses and airlines, Amtrak will continue to struggle with a worsening deficit, in addition to which deferred maintenance, an aging fleet (23 years per car today, compared with 17.5 years in 1989), and rapid depreciation of the Northeast Corridor's roadbed will likely cause operating and essential capital costs to escalate rapidly, requiring even larger taxpayer subsidies.
Amtrak represents a failed attempt to convert inter-city rail service from a subsidized system to a self-sustaining, profitable system. Amtrak achieves a significant market share only in the Northeast Corridor (Washington-New York-Boston) -- and only with heavy subsidies per rider. In virtually all other markets, eliminating service would have no discernible impact on transportation facilities (highways and airports), because Amtrak's market share is infinitesimal.
To compensate for the loss of federal financial support, Amtrak's strategic survival plan should include privatization of commercially viable routes; partnerships with other transportation, travel, and recreational entities; or regional public-private partnerships through more aggressive use of the 403(b) provisions of the Rail Passenger Service Act, which allow for greater cost sharing with states and local communities served by Amtrak. In the event that the mid-Atlantic and northeast states served by Amtrak's Northeast Corridor operation find the service of value to their citizens and businesses, they could use some portion of their proposed transportation block grant or state-controlled fuel tax to keep regional Amtrak service in operation. To facilitate this, the DOT should be prepared to conduct an orderly transfer of necessary assets and responsibilities -- chiefly the rolling stock and roadbed -- to the affected states.
Existing law and practice allow for this, and there is precedent for state takeover of routes abandoned for budgetary purposes. Under the Section 403(b) provisions of the Act, and in response to Amtrak's elimination of several costly and wasteful lines, California will take over daily Amtrak service between San Francisco and Sacramento.
There is no public purpose to be served by further taxpayer support of Amtrak. Nor is there any practical reason to phase out federal support only gradually, as many in Congress suggest. A careful reading of 25 years of presidential budget proposals and congressional appropriations bills for transportation, shows annual promises by Amtrak to get its house in order. But Amtrak has never delivered on its promises, and never will. This Congress should distinguish itself from its predecessors by being the first not to be fooled by Amtrak's bureaucracy or its powerful unions.
1 The authors wish to
thank Robert W. Poole, Jr., and Gabriel Roth, whose extensive
writings on transportation issues and frequent discussions with the
authors have had an important influence on this study. Of course,
the authors are responsible for the analysis and overall policy
recommendations that follow.
2 California already has enacted legislation that would automatically transfer any reductions in the federal fuel tax to an offsetting increase in the state fuel tax.
3 "The authorization of the appropriation of federal funds or their availability for expenditure under this chapter shall in no way infringe on the sovereign rights of the states to determine which projects shall be federally financed. The provisions of this chapter provide for a federally assisted state program." 23 USC 145.
4 It would be appropriate to cancel this increase if the highway and transit program is devolved to the states. It should be noted that regulatory relief in the form of Davis-Bacon repeal would be likely to save the states an amount greater than the income from the scheduled revenue increase.
5 Gabriel Roth, "Perestroika for U.S. Highways: A Bold New Policy for Managing Roads for a Free Society," Reason Foundation Policy Insight, No. 125, November 1990, pp. 13-14, tables 4 and 5.
6 Appendix, Budget of the United States Government, Fiscal Year 1996 (Washington, D.C.: U.S. Government Printing Office, 1995), p. 712; cited hereafter as 1996 Budget Appendix.
7 For analysis of this burdensome regulation, see U.S. General Accounting Office, "The Davis-Bacon Act Should be Repealed," HRD-79-18, April 27, 1979; Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options, A Report to the Senate and House Committees on the Budget, February 1995, pp. 216-217; and Mark Wilson, "Four Reasons Why Congress Should Repeal Davis-Bacon," Heritage Foundation Backgrounder Update No. 252, June 7, 1995.
8 While highway deaths and accidents have fallen over the period in which the federal speed limit has been in effect, this largely reflects nothing more than a continuation of long-term trends toward greater transportation safety and the power of post hoc, ergo propter hoc reasoning. Over this same period, deaths and accidents in rail and air transport also declined dramatically, but no federal speed limits were imposed in these areas. Indeed, airplanes are faster today than they were in the recent past, and over this same period the federal government invested millions of dollars in finding ways to make trains run faster.
9 See Thomas McClintock, "Unfunded Federal Mandates: The States' Go-Pound Sand-Option," The Claremont Institute, 1995, forthcoming, for a list and analysis of these federal mandates on California.
10 Roth, "Perestroika for U.S. Highways," p. 38.
11 1996 Budget Appendix, p. 712.
12 Roth, "Perestroika for U.S. Highways," pp. 20-21.
13 The provisions of OMB's Circular A-102 have been one of the chief obstacles to private/public partnerships. See Terree P. Wasley, "A Private Sector Foundation for Roads and Bridges," in Edward L. Hudgins and Ronald D. Utt, eds., How Privatization Can Solve America's Infrastructure Crisis (Washington, D.C.: The Heritage Foundation, 1992). In recent years, Executive Orders 12803 and 12893 have clarified and eased these limits somewhat.
14 John O'Leary, ed., Privatization 1995 (Los Angeles:The Reason Foundation, 1995), pp. 32-37.
15 Roth, "Perestroika for U.S. Highways," p. 19.
16 A potential option would involve reducing federal motor fuels taxes by a lesser amount to take credit for reduced state and local government costs attributable to federal mandate cancellation. This could provide additional funding for federal budget deficit reduction.
17 For an example of such statutory construction, see 49 USC 120.
18 The returned federal funds would be subject to the same processes as state-generated revenues. In other words, the federal government would not designate any official or agency as having jurisdiction over the returned funding. The state legislatures and governors would perform their normal state constitutional and statutory responsibilities.
19 This should be part of a comprehensive and coordinated program of trust fund reimbursements (for example, from the Social Security Trust Fund and Aviation Trust Fund).
20 It was stable in one and rose in two (Phoenix and Houston, where very modest gains translated into market share increases because transit ridership is minimal).
21 This includes severance pay of up to six years for layoffs related to efficiency efforts, prohibitions on part-time workers despite the peak-load nature of the business, and requirements that substitute drivers be paid whether they work or not, as opposed to the practice in the unionized teaching sector, where substitutes are paid only if they teach.
22 Wendell Cox and Samuel A. Brunelli, "Up to the Challenge: Why State and Local Governments Can Flourish Under the Balanced Budget Amendment," American Legislative Exchange Council Issue Analysis, Vol. 21, No. 1 (February 1995).
23 Wendell Cox, "Reclaiming Transit" in Hudgins and Utt, How Privatization Can Solve America's Infrastructure Crisis, p. 44.
24 Ibid., p. 21.
25 FTA's standard for bus life is 12 years. Canadian transit agencies routinely operate virtually the same buses for 20 years or more. Further, federal regulations and mandates related to the environment and people with disabilities have increased the cost of buses significantly. There is considerable potential for reducing bus capital costs. Moreover, bus capital costs are small relative to transit operating costs, and competitive contracting savings represent a significant potential source of replacement funding.
26 Christina Del Valle, "Meet Bud Shuster, Prince of Pork," Business Week, May 15, 1995, pp. 86-87.
27 John F. Kain et al., "Increasing the Productivity of the Nation's Urban Transportation Infrastructure: Measures to Increase Transit Use and Carpooling," prepared for the Federal Transit Administration (DOT-T-92-17) by the Department of Urban Planning and Design, Harvard University, January 1992.
28 About three-fourths of this number operate the system, while the remaining personnel maintain the equipment.
29 1996 Budget Appendix, p. 711.
30 See, for example, Privatization: Toward More Effective Government, Report of the President's Commission on Privatization, David F. Linowes, Chairman (Washington, D.C.: U.S. Government Printing Office, March 1988), pp. 65-84.
31 Frank E. Kruesi, "The Proposal for a Government Corporation for Air Traffic Control in the United States," in Federal Privatization: Washington's Agenda Today, National Council for Public-Private Partnerships, March 1995, pp. 57-64.
32 U.S. Department of Transportation,"Air Traffic Control: Analysis of Illustrative Corporate Financial Scenarios," May 3, 1994, p. 10.
33 See, for example, Robert W. Poole, Jr.,"Air Traffic Control: The Private Sector Option," Heritage Foundation Backgrounder No. 216, October 5, 1982; "Restructuring the Air Traffic Control System," in Hudgins and Utt, eds., How Privatization Can Solve America's Infrastructure Crisis, and "How to Spin Off Air Traffic Control," Reason Foundation, August 1993. A 1994 report by the Congressional Research Service credits Heritage's 1982 paper as the first published proposal advocating privatization of the ATC.
34 Poole, "How To Spin Off Air Traffic Control," p. 14.
35 Ibid., pp. 14 and 15, Table 1 and 2. The data for these tables were derived from Congressional Budget Office, "Paying for Highways, Airways and Waterways: How Can Users Be Charged?" May 1992.
36 Richard Golaszewski, "The Unit Costs of FAA Air Traffic Control Services," Transportation Research Record, Vol. 28 (1987), pp. 13-20.
37 Ibid., Table 2.
38 Poole, "How to Spin Off Air Traffic Control," pp. 26-27.
39 Robert W. Poole, Jr., "Privatizing Airports," Reason Foundation Policy Study No. 119, January 1990.
40 For more details on these constraints see William G. Laffer III, "How to Improve Air Travel in America," in Hudgins and Utt, eds., How Privatization Can Solve America's Infrastructure Crisis.
41 Office of the Secretary of Transportation, "The Effects of Airport Defederalization: Final Report," DOT-P-36-87, February 1987.
42 U.S. General Accounting Office, "Coast Guard: Issues Related to Fiscal Year 1996 Budget Report," GAO/T-RCED-95-130, March 13, 1995, p. 6.
43 For more information, see Scott A. Hodge, ed., Rolling Back Government: A Budget Plan to Rebuild America (Washington, D.C.: The Heritage Foundation, 1995.
44 U.S. General Accounting Office, "Cargo Preference Requirements: Objectives Not Significantly Advanced When Used in U.S. Food Aid Programs," GAO/GGD-94-215, September 1994.
The High Speed Rail Program
In addition to subsidizing Amtrak, the DOT subsidizes a costly high speed rail program designed to encourage the development of high speed rail corridors.
This program serves no useful purpose because the inter-city transportation market already is served by self-sustaining (profitable) air and surface operators. High speed rail is not commercial in the United States for a variety of reasons, among them the country's relatively low population densities, relatively high access to automobiles, and competitive (deregulated) air transportation market, which is capable of price discounting that renders high speed rail uncompetitive. As a result, a number of privately financed high speed rail proposals have failed, and the federal government is not likely to improve on this record.
What Congress Should Do
THE FEDERAL AVIATION ADMINISTRATION
The Federal Aviation Administration (FAA), with an annual budget of $8.4 billion and 49,000 employees, manages the nation's civilian air traffic control system, promotes air transport safety, and assists in the financing of airport improvements. Approximately three-quarters of its personnel are involved directly with the air traffic control system,28 composed largely of the operations of airport control towers, which guide aircraft through landings and takeoffs, and twenty en route centers, which manage the flow of air traffic between airports in the system. The FAA has broad responsibility for regulating air transportation and managing the nation's airways, in addition to such safety-related duties as aircraft certification, airport security, maintenance inspection, and pilot licensing.
The FAA's programs are funded through a combination of general revenues and the Aviation Trust Fund, itself financed by a series of user fees and dedicated taxes related to system usage. In 1995 these user fees and special taxes totaled over $6 billion. They were derived chiefly from the passenger ticket tax ($4,829 million), the waybill tax ($325 million), the fuel tax ($195 million), and interest on the trust fund ($809 million). At the be-ginning of 1995, the trust fund account had accumulated to $12.3 billion.29
The FAA™s Air Traffic Control Responsibilities
Although the FAA's air traffic control (ATC) system has helped provide the American traveler with one of the safest forms of transportation, shifting the system to the private sector would give it the flexibility and resources needed to speed modernization, enhance operating efficiency, and better manage and retain its many employees. The ATC system's efforts to improve and modernize operations have suffered from the bureaucratic idiosyncrasies of the federal procurement process, the civil service code, and congressional and executive branch meddling. One former FAA Commissioner noted that congressional committees had mandated the installation of thirty pieces of equipment neither authorized by Congress nor requested by the FAA. At the same time, rigid government pay scales have limited the FAA's ability to attract experienced professionals to high-cost, high-stress urban air traffic control facilities.30
Faster Modernization. The ATC's multi-year, multi-billion-dollar modernization program is a costly failure. As a result, the system remains one of the world's largest users of vacuum tubes, some of which are available only through formerly East Bloc countries.31 Freed from oppressive government procurement procedures, a privatized corporation could speed the modernization of the air traffic control system by drawing on private capital. This would reduce costs by raising worker productivity; improving passenger safety through better and more accurate controls; diminishing weather-related cancellations, delays, and safety risks; and allowing more intensive use of existing airports, thereby cutting future infrastructure costs.
At the same time, automation of the many ATC functions that would be triggered by privatization would quickly turn an existing liability into an asset. Dependent upon the obsolete, high-maintenance, and labor-intensive technologies of the past, today's air traffic control system confronts a serious shortage of skilled personnel as an aging workforce becomes eligible for retirement. With the adoption of advanced technologies that allow a few to do the work of many, and that also require less maintenance, the prospect of significant retirements over the near term would allow for the orderly and costless down-sizing of FAA's substantial workforce.
Budgetary Savings. Although the ATC system relies heavily on user fees, general revenues still supplement its budget. An internal DOT study in 1994 concluded that converting the FAA's ATC component into a self-sufficient, independent government corporation could lead to savings of $18 billion, or approximately $2 billion per year, from 1996 to 2005.32 As a quasi-government entity, this corporatized system would continue to rely on the passenger ticket tax as the chief source of ATC funding, but the general revenues that now fund a portion of FAA/ATC operations would be cut off. To compensate for this loss, the system would be permitted to borrow in capital markets on its own account to fund long-term investments and modernization. The FAA's safety and regulatory functions would remain within the federal government as part of a much smaller FAA, whose role would be largely one of system oversight, a legitimate federal function that would improve in quality as the government concentrated its energies and resources on a limited number of activities.
While the Clinton Administration's plan for the ATC system is bold and innovative by past federal reform standards, opportunities for even greater reform exist in today's political climate. These should be pursued, as they are now in other industrialized countries. At present, the air traffic control systems in Canada, Germany, New Zealand, South Africa, Switzerland, and the United Kingdom are corporatizing, privatizing, or actively considering one of these options.
To privatize the ATC system, Congress should use as its model the proposal developed by Robert Poole of the Reason Foundation in a series of reports and publications dating back to 1982.33
Privatizing the ATC System
The first step would be to reorganize the FAA by creating, as an independent government corporation, a U.S. Airways Corporation (USAC) and transfering to it all current ATC-related FAA staff (about 40,000), all FAA facilities and equipment used to operate the ATC system, and all ATC responsibilities now held by the FAA. During the reorganization period, and until the new corporation was established and operating successfully, all of its shares would be held by the U.S. Treasury on behalf of the federal government. Also as part of the reorganization, consideration should be given to creating several new air traffic control companies to ensure post-government competition. Half the towers could go into one, and half to another (the same would be true for the en route centers). Once privatized, they would be free to compete for business.
After the transition, the shares would be sold to the public, with special allowances for concessionary purchases by existing employees and managers. Within the portion of shares available to the public, a sub-portion could be set aside for purchase by firms and industries heavily dependent upon the USAC's services, such as the major airlines or associations representing general aviation, international aviation, passengers, overnight package delivery, and general cargo.
Once established, the USAC would operate on a self-supporting basis and would be authorized to borrow for major capital expenditures, modernization, and other improvements. In contrast to the Clinton Administration's proposal to continue funding a restructured ATC through the existing passenger ticket tax, the private USAC would be funded by a direct user fee levied on the aircraft according to their utilization of the services provided by the system. As Poole has observed, the "daunting challenge facing ATC spin-off proposals is developing a user fee structure that is politically feasible yet fully funds the corporation" 34 and which also avoids the cross-subsidies inherent in the current system.
These cross-subsidies are considerable. For example, whereas passenger ticket taxes collected through the airlines account for 88 percent of the current system's revenues, airlines utilize 49 percent of its en route services and just 20 percent of the tower services. In contrast, general aviation provides just three percent of the revenues but accounts for 21 percent of en route costs and 60 percent of tower costs.35 At the same time, government flights, chiefly military, utilize some ATC system services, but pay no direct, indirect, or other fees, although the military air traffic controllers provide some services to civilian aircraft, also at no charge.
In developing a new fee/price structure for the USAC, Poole recommends three general guiding principles:
A fourth principle should be added to Poole's list, based on prevailing views within Congress:
Charges should be based upon long-run economic costs.
Fees That Are Fair. Poole proposes a fee structure based on the technique of marginal cost pricing that utilizes the earlier pioneering analysis of Richard Golaszewski.36 Golaszewski established marginal cost estimates for each of the four major user groups (airlines, commuters, general aviation, and military) for each of the key air traffic control services (air traffic control centers, flight service stations, terminal radar control facilities, and air traffic control towers) and then allocated to each group their estimated share of fixed costs and other overhead.37 Poole modifies these cost estimates by inflating the original 1985 estimates to 1991 levels and by reducing non-commercial general aviation's share of the costs to direct marginal costs actually incurred. Congress should further modify the Golaszewski/Poole proposal by deleting fees charged to the military and instead covering such costs incurred by the USAC on behalf of the military (which would have amounted to $8.3 million in 1990) out of general government revenues.
With this modification, a new fee structure that meets the four principles above and covers all costs of operating the USAC would be approximately like that indicated in the table on the previous page. This table provides the specific fee per aircraft for each service incurred for each of the four main categories of civilian aviation.
Savings for Passengers and Airlines. The benefits of a privatized ATC system, stimulated by the profit incentive and free to pursue modern and innovative solutions to air traffic control problems, would be substantial. One airline estimates that a satellite-based air traffic control system modeled after the military's Global Positioning System would allow for precision approaches to airports and could save the airline industry $525 million per year through delay reduction, direct flight routing, and other improvements. Other analyses put the range of savings from ATC improvements in the range of $300 million to $1.5 billion per year.38 As noted earlier, even greater savings would accrue to the taxpayer. Both DOT and the Senate Budget Committee project annual federal budget reductions of as much as $2 billion per year from corporatizing or privatizing FAA's ATC functions, largely by shifting the funding of its capital requirements from the taxpayer to the credit markets where it more logically belongs.
Management efficiencies and service improvements would follow from the USAC's ability to escape current civil service restrictions that make it difficult to fill key positions in high-cost areas because of pay caps and national pay scales. Under the current system, key towers and control facilities in such critical places as New York City, Chicago, and Los Angeles frequently are understaffed because of an uncompetitive pay scale. Similarly, the end of civil service constraints would allow the hiring of more professional managers with the business skills and experience to implement a comprehensive overhaul of the system.
Most important, freedom from congressional meddling and second-guessing and an end to federal procurement requirements and red tape would allow for swift implementation of a badly needed, but oft-delayed and error-plagued, technological upgrade of the system.
Taking Care of the Work Force. Obviously, a restructuring involving nearly 50,000 employees entails substantial and complicated transition issues, including labor contracts and explicit and implicit employment commitments. To ease the transition and reduce employees' uncertainty regarding their treatment, a formal commitment could be made to entitle the transferred workforce to civil service retirement system benefits already earned. This commitment could be financed out of general government revenues in the same way that earned worker health and retirement benefits were maintained when the post office became an independent government corporation in 1970. Alternatively, interest earnings on - and, if necessary, the surplus in - the Aviation Trust Fund could be used to cover the unfunded liabilities in the civil service retirement obligations for employees transferred to the USAC. For all workers hired after the formation of the USAC, a new pension system would be established that is fully funded and consistent with private-sector norms.
The FAA™s Flight Safety Responsibilities
All existing FAA air transport safety, licensing, and certification functions would be transferred to a new independent transportation safety agency, the Interstate Transportation Safety Office or Administration (ITSO), as discussed earlier. This new entity could be funded from general revenues or from a portion of existing waybill and fuel taxes. At present, the FAA has primary safety rule-making authority, which includes certificating aircraft and developing and enforcing operating rules and procedures. Other safety functions include pilot and mechanic licensing, accident investigation, airport safety, safety analysis, and information.
ITSO would be responsible for continuing the safety-related duties now performed by the FAA and by the other transportation safety-related divisions within DOT and elsewhere. Under the current organizational arrangement, portions of these functions are located in the FAA's Regulation and Organizational Analysis Division, Regulations and Standards Training Division, Airport Safety and Operations Division, Office of Aviation Systems Standards, Civilian Aviation Security, and the Associate Administrator for Regulation and Certification. All of these functions and staff would be transferred to the Aviation Safety Division of the new ITSO. Funding for the aviation division of ITSO could come from the existing freight waybill tax, fuel tax, international departure tax, and interest earnings on the trust fund. DOT's 1994 "Air Traffic Control: Analysis of Illustrative Corporate Financial Scenarios" estimates that the FAA's safety duties cost $700 million in FY 1993.
Better Safety. Although the FAA has an excellent reputation for overseeing one of the safest air transport systems in the world, there is always room for improvement. The proposed restructuring could help facilitate this for several reasons. First, undistracted by its commercial-type ATC functions, an independent flight safety component could devote all of its attention and energy to promoting safety. Second, and related to this, those responsible for maintaining safety no longer would have to make the compromises necessary in an entity with multiple, and at times conflicting, objectives. As the operator of the ATC system, FAA essentially regulates itself and is required to make tradeoffs in trying to promote both safety and the health of the U.S. aviation industry.
Airports and the Airport Improvement Program
Funded from the Aviation Trust Fund through a portion of the passenger ticket tax and other dedicated taxes, the Airport Improvement Program (AIP) provides grants to eligible airports for certain infrastructure projects. The federal government owns no civilian airports, except for Dulles and National, both of which serve Washington, D.C., and are now operated under long-term lease to a regional authority. Of the nation's 17,000 civilian airports, 13,000 are privately owned (mostly small and serving non-commercial general aviation primarily). The other 4,000 are owned by local governments or regional public airport authorities. Within these 4,000 are all of the airports served by the commercial airline industry as well as all of the hubs, both minor and major.
In any given year, the AIP provides just a fraction of the funding for eligible airport improvement projects, with the largest and busiest airports receiving the smallest cash return relative to passenger ticket taxes paid. A 1990 analysis found that major airports at Boston, New York City, Los Angeles, Newark, and San Francisco received in annual entitlement grants less than 12 percent of the amount they contributed to the Aviation Trust Fund in ticket taxes. Meanwhile other airports (including, for example, such smaller airports as Charlotte, Dallas, Love Field, and Memphis) each received more than 30 percent of their contribution.39 (Because the passenger ticket tax also partly funds the FAA's air traffic control and safety responsibilities, AIP grant returns will always be well below 100 percent of ticket tax revenues.)
Costly Mandates. As with urban mass transit and the Highway Trust Fund, the regulations and mandates attached to federal airport grant money may be more costly than the value of the grant because they constrain an airport's ability to tailor its services to the specific needs of its community and diminish its incentive and ability to become financially more self-sufficient. In return for accepting these funds, airports must agree to a number of federal regulations, including how and how much they charge for landing fees, caps on passenger fees, and limits on the utilization of surplus revenues earned on airport operations, as well as numerous other revenue and spending restrictions.
For example, federal law requires that airports charge landing fees based on weight of the aircraft, even though small planes take as much time and runway space to land as large planes. This leads to overuse of scarce airport resources by planes carrying only a few passengers. Peak load pricing for landing fees is also prohibited, thereby removing any direct financial incentive for passengers, aircraft, and airlines to schedule flights at less congested times, and for passengers to be charged accordingly. Likewise, the Federal Anti-Head Tax Act prohibits airports from charging passengers a use fee of more than $1, $2, or $3 per passenger and limits how these revenues may be used. In a number of cases, the FAA has forbidden airports from applying such funds to improvements in surface transit access that could alleviate vehicular congestion and delays. And sections of the Airport and Airway Improvement Act of 1982 prohibit federally funded airports from using any profits generated at the airport for non-airport purposes, thereby discouraging cities and communities from fully developing the economic potential of their airports.40
Because of the many onerous strings attached to federal grants, many airport managers have concluded that they would be better off without this assistance. A 1987 DOT poll of operators of hub airports found that the majority of large, medium, and small hub operators would be willing to give up federal financial assistance, including airport improvement grants, in return for the elimination of the numerous federal restrictions on their operations and the freedom to set their own fees on airport users.41
The airport grant program should be terminated along with the FAA's passenger ticket tax, a portion of which funds AIP grants from the trust fund. At the same time, all the needless federal restrictions and prohibitions on airport fees, revenues, and profits should be struck from the law. Airports should be free to fund their operations and their expansion and improvement programs with financial resources derived from their own choice of fees, rents, taxes, or other measures. With no limits on profits or what can be done with them, airports would have an incentive to develop their facilities more intensively with rent-paying hotels, restaurants, parking facilities, retail stores, offices, and other businesses that would pay a premium to be either at or near an airport.
Airports also could alter their landing fee structure by raising fees at peak times - early morning and late afternoon - and lowering them at off-peak times to encourage airlines to shift flights to less congested periods. Similarly, they could reimpose some form of a ticket tax, or head tax, but at well below current rates. Whatever the choice, the source and amount of the replacement revenues would conform more closely to the specific needs of a particular airport, as well as the passengers and airlines it serves. At the same time, improvement projects at any airport would occur when it chose, not when officials in Washington finally approve and schedule the project.
To accomplish this, the Federal Aviation Act of 1958 and the Airport and Airway Improvement Act must be amended substantially, and the remaining portions of these laws limited largely to legitimate safety issues and bona fide issues of interstate commerce. These legislative changes would better facilitate airport privatization at the discretion of existing airport owners (primarily state and local governments), or regional authorities established on their behalf. Currently, such privatizations are authorized, albeit on a restrictive basis, by Executive Order 12803, issued by President George Bush on April 30, 1992, and implicitly endorsed by the Clinton Administration, which issued Executive Order 12983 on January 6, 1994, to clarify federal law facilitating such privatizations. These orders, and FAA's narrow and limiting interpretation of them, should be reviewed and changed as necessary to reflect the broader privatization options that would be available under the above proposals.
What Congress Should Do
THE COAST GUARD
With an annual budget of approximately $3.7 billion, the Coast Guard (CG) performs a variety of services, including coastal law enforcement and national defense, marine safety, environmental protection, search and rescue, and navigation and waterway management (traffic management, ice breaking, and maintenance of navigational aids).
Given the large changes in its objectives over the past several decades in response to the rapid increase in drug smuggling, the Coast Guard and its law enforcement and defense functions should be transferred to the Department of Justice to permit better coordination with other federal law enforcement agencies and activities. Related Coast Guard functions also should be transferred to Justice. These include the Office of Command, Control and Communications; Office of Engineering, Logistics and Development (ELD); Office of Personnel and Training; Office of Readiness and Reserve; and Military Personnel Command. ELD would be given more of an oversight function, with much of the work now done in house performed by the private sector on a contract basis.
With its focus now primarily on law enforcement, the Coast Guard's search and rescue duties should be limited to extreme emergencies and severe weather. Routine rescues and assistance to recreational and commercial boaters would become the responsibility of the more than 200 existing private rescue services that handled more than 40,000 cases last year. Among other savings, this should allow for a significant reduction in the number of Coast Guard air and sea facilities, including the 185 small boat units now maintained by the Coast Guard, as recommended by the General Accounting Office.42
The Office of Marine Safety, Security and Environmental Protection should be split among existing government departments. Environmental responsibilities should be shifted to the EPA, and oversight for marine safety matters should be transferred to the proposed Interstate Transportation Safety Office. The Coast Guard already is using the private sector for some licensing and inspection, and this should be accelerated. Merchant vessel regulatory issues other than safety or environment should remain within the divisions transferred to Justice.
Waterway navigation, maintenance, and safety responsibilities of the Office of Navigation Safety and Waterway Services that are purely local or regional in scope - rivers, bays, ports, and harbors - should become the responsibility of contiguous states. Those of an unambiguous national nature would remain with the Coast Guard as reconstituted within the Department of Justice. Many of these functions could be privatized easily. GAO, for example, has recommended the VTS 2000 system now under development as a candidate for privatization. The Port of Los Angeles VTS system already has been privatized.
The Maritime Administration (MARAD)
The Maritime Administration was created in 1950 to ensure that the United States maintained a domestic maritime fleet in case of national emergency. Organized as an agency within the Department of Transportation, it spends nearly $700 million a year implementing a series of Depression-era maritime laws that shield U.S.-flagged vessels from foreign competition.
MARAD's Operating Differential direct subsidy program pays U.S.-flag vessel operators the difference between the costs of shipping cargo on a U.S.-flagged vessel and the costs of shipping on a foreign-flagged vessel. The Ocean Freight Differential program (authorized by the Food Security Act of 1985) subsidizes a portion of the cargo preference costs on agricultural food aid shipments for commodities exported with grants or loans from the Department of Agriculture. Cargo preference laws require that 75 percent of such exports be transported on U.S.-flagged vessels. The Jones Act, authorized by the Merchant Marine Act of 1920, requires that cargo transported between two U.S. cities be carried on U.S.-built and U.S.-flagged vessels. MARAD also maintains the merchant ships retained in the Defense Ready Reserve Fleet.
The Maritime Administration should be closed down, and the Operating Differential Subsidies, Cargo Preference rules, and Jones Act should be repealed. The government-owned merchant ships in the Ready Reserve Fleet should be sold and the Federal Ship Financing and Maritime Guaranteed Loan programs ended.
For over sixty years, the federal government has spent billions on a variety of programs intended to support the U.S. maritime industry. Instead, these programs have undermined the competitiveness of U.S. shipping and shipbuilding. Today, only about four percent of waterborne cargoes imported and exported from the United States are carried on U.S.-flag carriers. According to the GAO, between 1982 and 1992 the number of U.S. privately owned ships decreased by 31.4 percent, from 574 to 394.43
The Maritime Administration pays over $200 million in direct Operating Differential subsidies to 48 oceangoing container ships and 27 bulk cargo vessels. Most of these subsidy contracts are due to expire by the end of 1997. The Clinton Administration's FY 1996 budget requested a reduction to $154 million. However, the Administration also would create a new Maritime Security Program which would give $100 million per year in direct payments to up to fifty U.S. flagged vessels for a period of ten years. This proposal should be rejected.
In 1994, the GAO reported that "the application of cargo preference to food aid programs does not significantly contribute to meeting the intended objectives of helping to maintain U.S.-flag ships as a naval and military auxiliary in time of war or national emergency or for purposes of domestic or foreign commerce." The GAO found that by sheltering U.S. shippers from competition, "cargo preference laws make it possible for U.S. ship owners to maintain inefficient and commercially uncompetitive U.S.-flag ships that do not significantly contribute to the ability of the U.S. merchant marine to carry foreign commerce other than food aid."44
MARAD's Ocean Freight Differential program spends over $60 million a year reimbursing the higher costs paid by the Department of Agriculture to export domestic agricultural products. These cargo preference requirements, as they are known, also increase by some $520 million annually the shipping costs for the Departments of Transportation and Defense, the Agency for International Development, and the Export-Import Bank. The Maritime Administration does not reimburse these agencies for these added costs. Meanwhile, Jones Act restrictions on inter-city cargo transport cost consumers billions of dollars but do not show up on the federal budget. According to a September 1994 study by the International Trade Commission, the Jones Act increases costs to American consumers by at least $3 billion annually, and perhaps by as much as $10 billion.
The Maritime Administration spent $330 million in fiscal 1994 and $205 million in fiscal 1995 maintaining the fleet of government-owned merchant ships known as the Ready Reserve Force. By all accounts, these vessels are in such a state of disrepair that only a few could be made seaworthy in time to carry cargo for the Persian Gulf War. These ships should be sold for whatever the government can get for them.
What Congress Should Do