July 7, 2011 | WebMemo on Transportation
America’s transit systems confront serious financial challenges that will force them to raise fares and reduce service unless they can get better control of their costs. Carrying less than 5 percent of commuters and less than 2 percent of all urban travel and concentrated primarily in large urban areas, these faltering systems will be seeking ever-higher subsidies at a time when hard-pressed state and local governments are laying off teachers and police and the U.S. Congress is contemplating significant cuts in all transportation programs.
If public transportation is to remain viable, it must completely rethink the way it operates. Here are a few suggestions.
Public Transit in the Red
Typical is the Washington, D.C., area’s Metro system, which incurred operating expenses of just over $2 billion against operating revenues of $727 million, leading to a loss of nearly $1.3 billion in 2010, thereby necessitating a subsidy of a similar amount from taxpayers to stay in business. Metro’s escalating losses are due to costs that are growing twice as fast as revenues. New York’s Metropolitan Transit Authority lost more than $4 billion in 2009, New Jersey Transit lost nearly $2 billion, and Chicago’s Regional Transit Authority lost more than $1 billion. Passenger fares for Portland’s oft-touted light-rail system cover barely one-third of operating costs.
Getting Costs Under Control
For decades, transit’s principal problem has been insufficient cost control rather than insufficient revenues. Over the past 25 years, transit’s operating costs have risen approximately $15 billion (on a passenger mile basis). If transit agencies had been able to keep costs within inflation—as most businesses do—transit would have been able to provide 40 percent more service in 2009.
With government unable to provide more subsidies, a much better solution is for transit systems to use competitive contracting to reduce costs and improve the quality of service. Widely used in corporate America, the Department of Defense, and many transit systems here and abroad, competitive contracting defines the process whereby a business or a government entity solicits bids from qualified private-sector service providers to perform a specific service under contract for a defined fee.
For example, Washington’s Metro could put various services out for bid, such as cleaning trains and stations, repair and maintenance of trains, the operation of an entire line, or even the whole system, as has occurred in some places. Indeed, all of the suburban transit systems in the Washington, D.C., area use competitive contracting, although most transit ridership in the region takes place on Metro.
Importantly, the existing workforce and managers would be encouraged to bid on the contract in competition with private companies, encouraging them to use their skills and experience to seek efficiencies that were discouraged when they were protected from competition and acted as monopolists. As numerous studies of the extensive experience compiled by the Defense Department have revealed, savings over previous costs average 25–35 percent, and in many cases, the existing workforce wins the contract by restructuring its operation.
Recent Competitive Contracting Successes in Transit
In recent years, several U.S. transit systems have successfully implemented competitive contracting programs to operate a portion—or all—of their systems. Notable examples include:
While some communities have used competitive contracting to reduce transit costs, many others have not, and union opposition to cost-effective solutions is the key obstacle. To overcome this opposition, Congress should consider linking the ongoing availability of existing federal transit subsidies to the implementation of competitive contracting programs.
Wendell Cox , Principal of the Wendell Cox Consultancy in the St. Louis area, is a Visiting Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation. Ronald D. Utt, Ph.D., is Herbert and Joyce Morgan Senior Research Fellow in the Roe Institute.
Washington Metropolitan Area Transit Authority, Comprehensive Annual Financial Report for the Fiscal Year Ending June 30, 2010, Table 2, p. 14, at http://www.wmata.com/about_metro/docs/CAFR_FY10.pdf (July 6, 2011).
Associated Press, “Private Firm Picked to Run LI Buses,” Wall Street Journal Online, June 11, 2011, at http://online.wsj.com/article/APe05e2ba5558946d2a3b5be1da7f41fb7.html (July 7, 2011).