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WebMemo #717 on Smart Growth

April 11, 2005

Getting Urban Transit Systems Focused on Cost and Service

By

Despite multi-billion dollar subsidies and frequent fare increases, many of America's urban transit systems face widening operating deficits, and some are near the brink of financial collapse. The problem is that 19th century train technology doesn't measure up to 21st century needs. Local officials financing such money-losing transit systems should cut service and raise prices to put an end to transit's burden on taxpayers. And Congress should put an end to federal subsidies for new transit systems.

 

Urban transit is in bad financial shape. When the nation's capital and its surrounding jurisdictions refused to enact a new sales tax to fund the Washington Metropolitan Area Transit Agency, WMATA turned to Congress with a request for a billion dollar bailout-something it is not likely to get. In the Philadelphia area, the Southeastern Pennsylvania Transportation Authority recently turned to the government of Pennsylvania for an additional $90 million subsidy to cover its expected deficit. Both systems had already raised fares recently-Washington twice in two years.

 

In New York City, the MTA raised fares 33 percent in 2003 but still expects next year's deficit to reach $1.3 billion, an estimate the State's Comptroller says is understated. He expects MTA's deficit to come in nearer $1.7 billion. In California, San Francisco's MUNI plans to raise fares and cut back service, while the Santa Clara County system has cut back service by 21 percent despite benefiting from a dedicated sales tax of one-half percent levied in the service area. And deficits are beginning to emerge at Los Angeles County's MTA despite a dedicated regional sales tax of one percent.

 

While the effect of fare increases on riders has been the focus of the debate over transit's fiscal health, the real burden of transit falls on the federal, state, and local taxpayers who subsidize the widening gap between fares and costs. At the federal level, the highway trust fund provides subsidies of approximately $9 billion per year to local transit systems. Billions more come from state governments, usually from state-levied fuel taxes on motorists, truckers, and private bus companies, while local governments supplement these revenues with a variety of other taxes.

 

Despite decades of generous subsidies, urban transit ridership is less than 2 percent of the overall urban passenger market and less than 5 percent of the commuter market. Because more than 40 percent of U.S. transit ridership takes place within the New York City area, excluding New York reduces transit's national urban market share to just one percent.

 

The Virginia Railway Express, a commuter rail system operating in the Virginia suburbs of Washington, D.C., illustrates the great expense of transit. Operating 31 trains per work day over two lines and serving an estimated 7,800 daily commuters in 8 municipalities, VRE's operating and capital costs for next year are expected to exceed its combined fare revenues and existing subsidies from federal, state, and local governments. VRE raised fares last year and has proposed another fare increase for mid-2005. But despite increased ridership and higher fares, VRE still expects its escalating costs to leave a deficit, and it asked the eight local governments in its service area to increase their combined annual subsidies by a half of a million dollars per year.

 

Many of the local governments rejected the request and are urging VRE to look elsewhere for deficit relief. And well they should: Expressed on a per rider basis, when a passenger at the most distant station on the line buys his or her $7.29 ticket (at the discounted ten-pass rate), taxpayers kick in another $10.50 to finance that ride. And because morning riders return in the evening, each passenger embarking imposes a daily cost of $21.00 on taxpayers. Counting new capital spending plans, VRE's FY 2006 budget will require $35.5 million in taxpayer subsidies on top of the $19.9 million it expects to receive from fares.

 

Put differently, each of VRE's 7,800 passengers will require a taxpayer subsidy of $4,481 per year to keep the system going and growing. At that annual cost, taxpayers could lease or buy on credit a new mid-priced car for every VRE rider, and the government would still have millions of dollars left over for schools or tax relief.

 

As costly as the VRE is to operate, by commuter rail standards it is considered one of the more efficient based upon its fare-box recovery rate. In late 2003, for example, Maryland canceled five bus routes whose fares covered only 5 to 22 percent of operating costs. VRE's 41 percent recovery rate, relative to operating and current costs, rises to 58 percent when based on narrowly defined operating costs. This is about the national average for heavy rail systems. New York City did best with a 67 percent recovery rate, while the worst system could cover only 16 percent of its costs with fares.

 

It follows, then, that VRE's managers are not necessarily the problem. No doubt they are doing as well as they can in applying a 19th century technology to 21st century needs-a costly proposition no matter the details.

 

Another part of VRE's problem is that it is dependent upon one of America's least effective "businesses"-Amtrak-to operate and maintain its daily rail service under a multi-million dollar contract. As other commuter lines have discovered, Amtrak is one of the most expensive operators in the country, and several commuter rail systems-notably in Boston and Los Angeles-have saved millions of dollars by dumping Amtrak for private operators. VRE has been exploring this option for years. One alleged obstacle is that Amtrak's would deny VRE access to Union Station if VRE went with a private operator.

 

While VRE's management should take every opportunity to hold down costs, the economics of rail transportation are such that efficiency alone will not be enough to offset high costs and major deficits. But there is a way out for elected officials whose constituents face the prospect of paying ever-higher subsidies for this marginally important mode of transportation.

 

The first step is for local officials to put an end to any plans to expand service by adding more trains and stations. More trains mean higher losses and larger subsidies. In the example of the VRE, its proposed budget reveals that merely freezing service and canceling its capital wish list would reduce the annual passenger subsidy to $3,558.

 

The second step is to put its operations out to competitive bid to cut operating costs. Though a necessary step, even these savings will not be enough for VRE to reach the break-even point, such are its losses today.

 

The third step is to raise fares to cover the operating deficit that remains. No longer burdened with the goal of increasing ridership, VRE could afford to raise fares to reflect its premium service. In comparison to driving, commuter rail allows users to sleep, read, work, watch a DVD, or just watch the countryside pass by. These are valuable benefits, and a core of commuters would be happy to pay for them. And those who disagree will seek alternatives.

 

As a final step, with declining ridership, VRE could save millions of dollars by canceling some scheduled routes. Between raising fares and reducing costs, VRE could quickly reach the break-even point. At this point, VRE will have achieved financial independence, built a discerning customer base, and freed more than 99 percent of adults in the area who don't ride VRE from the burden of subsidizing those who do.

 

These same steps would work in other communities and cities where costly commuter rail is running in the red and pleading for higher subsidies.

 

Federal policy could be improved to help states and local communities avoid the expensive long-term commitment of commuter and light rail. Of the $8.4 billion that the federal government proposes to spend on transit subsidies in FY 2006, $1.5 billion is dedicated to "new starts," including a new "small starts" program. Seduced by federal money and visions of new trolley cars, impressionable mayors and county supervisors condemn their communities to paying substantial annual subsidies in perpetuity. Ending the new starts program and redirecting the $1.5 billion to expand road capacity will help communities to avoid this temptation and provide citizens with the transportation choices they are more likely to use.

 

And federal law has an impact, as well. The Senate-passed transportation bill (S. 248) would reduce federally mandated transit worker severance pay protection from 6 to 4 years. The legislation also would encourage state and local transportation organizations to hire private sector planners and operators. The House transportation bill (H.R. 3) omits these improvements, meaning that the final bill's provisions will have to be worked out in conference.

 

In the world of local transit, the Virginia Rail Express is considered an efficient system, despite its reliance on subsidies large enough to buy each of its passengers a mid-size car. The truth is that for almost all cities and communities, the economics of rail-based transit just don't make sense. State and local governments should accept this and free their constituents from transit's burdensome subsidies. And the federal government should put an end to policies that make the problem worse.

 

Ronald D. Utt, Ph.D., is Herbert and Joyce Morgan Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

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