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
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.
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
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.
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
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.
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