Towards financially sustainable mass transit systems

| 14 Comments

Mass transit systems in the United States are collectively losing money hand over fist. Yet many individual routes (including bus routes) earn enough to pay their own operating (and even capital costs). But like bad mortgages contaminating the good, money-losing transit routes are bogging down the system.

We can divide individual systems into three sets of routes:

1. Those routes break-even or profit financially (at a given fare). This is the "core".

2. Those lines which are necessary for the core routes to break-even, and collectively help the set of routes break-even. These are the "feeders".

3. Those lines which lose money, and whose absence would not eliminate profitability on other routes. These money-losers are a welfare program. We might politely call them "equity" routes.

Mass (or public) transit agencies are transportation organizations first, not welfare organizations. They should be considered public utilities rather than departments of government, which provide a useful service for a price to their users.

My thesis is that the local transit systems should identify and propose to retrench to the financially sustainable system, and present local politicians with a choice.

If local politicians want additional "equity" services, they should be presented with a cost of subsidy per line, and then can collectively choose which lines to finance out of general revenue, as this is primarily a welfare rather than an transportation function. In other words, public transit organizations would present the public with a bill for these money-losing services (the subsidy required in order to at least break even on operating them (i.e. the difference between their revenue and their cost), and not be expected to pay for them out of operating revenue.

If the cost of those lines is deemed too expensive (i.e. the politicians are unwilling to pay for them with general revenue tax dollars), they should be canceled. Transit agencies would no longer be losing money, they would now be break-even or slightly profitable. They might even pay a dividend to their owners (the general public).

General revenue (the treasury) would of course now be losing money, we didn't pull money from thin air, but since this is a social welfare/redistribution function, that is perfectly appropriate. This would entirely change public and political perception of transit services. It might also result in fewer bad routes being funded, since it would be crystal clear where the subsidies lay.

The which routes to fund decision should be revisited periodically (e.g. biannually).

Transit fares should be set at a sufficient level to at least break-even on the above system (plus a small positive rate of return).

If these fares are too high, politicians should give poor people money directly. It makes more sense to do that than to subsidize people who are perfectly capable of paying so that some group doesn't face a full cost they cannot pay. If they don't want to give poor people money (e.g. because they don't true poor people with cash, or fear they would use the money for something other than transit (like, say food, or housing, or heat)), they should top-up their transit smartcard (e.g. by adding funds weekly). These funds would come from a separate government agency (let's call it the "Transportation Opportunities Office") which is completely separate from the transit organization. The poor people would use the same smartcard as everyone else, so no public stigma is attached to using the card. Moving towards smartcard systems is efficient all around, saving boarding times and reducing transit run times.

Finally, these public transit utilities should have the freedom to contract with other organizations to provide services, much as London contracts out its routes.

14 Comments

When Paris expanded their transit system in the 1970s they followed a process similar to what you describe. The total cost of supplying a given amount of service was estimated, and the initial proposed fare was set to cover costs (I believe only operating but am not sure). The Parisian and French governments did not want the fares to be as high as proposed, so explicit subsidies were negotiated along the lines of "we don't want retirees paying that much so we will subsidize with $X," etc. Eventually a subsidy agreement was formed. This isn't as direct as giving money to people in need directly, but certainly a better system than we have here in the US.

I'd love to see direct subsidy and fare reform as part of the NY MTA's interest in smart cards, but I don't think that will happen. There are a few active research projects around the country examining social welfare gains/losses from direct transit fare subsidy so maybe there is hope.

Interesting concept, but I see it becoming even more politicized following your concept than it already is.

I agree with everything described.

Welfare should be separated from transit.

If transit routes increase property values, a payment of a portion of transit costs from property taxes can be justified by equity. User fees need not cover all costs because the property owners benefit and could pay assessments.

Express bus services have been highly successful. But, what is the justification for subsidizing these transit users who are mostly in above average income groups.

Separating transit from welfare may demonstrate that fixed route transit is uneconomical for many routes and that dial a ride services are more cost effective in certain areas.

Separating transit services from welfare may also allow privately provided transit services such as the van services that supplement public transit in New York City.

These changres would have a large effect on the public employee unions and agency jobs and will be resisted strenuously by both groups.

I think we should take European countries as example. All of these systems regardless of their flaws, are easy to use, efficient, clean and get people to pretty much anywhere and do so in a timely manner. London, Paris or Copenhagen are just some of the cities where transportation means a perfectly working system of buses, trains, subways and pedestrian and bicycle pathways.

I don't agree with your approach for a variety of reasons. However, if you expanded your approach beyond transit to all modes of transportation, you may win my support if you augmented your proposal with the part below:

Highway systems in the United States are collectively losing money hand over fist. Yet few roads earn enough money to pay their own maintenance costs, nevermind the externalities they impose on metropolitan areas with their air pollution and time-wasting congestion. But there are some roads that turn a profit, and we should follow their example.

First, we need to divorce roadway funding at least in part from fuel consumption because cars are becoming more fuel-efficient and our roadway system is based on being able to maintain a smaller roadway network on the demand of a less fuel-efficient auto fleet. This is unsustainable.

Next, we need to recognize that the majority of the roads in rural parts of the country, which take more from the economy than they provide, are money-losing wastes. The only way to support them is an impact-equal toll on interstates, which at least serve the purpose of linking economically productive metropolitan areas, and also levy a VMT tax for local roads in these economically lagging areas.

These rural roads are a welfare program. We might politely call them "equity" routes.

DOTs are transportation organizations first, not welfare organizations. They should be considered public utilities rather than departments of government, which provide a useful service for a price to their users.

My thesis is that the DOTs should identify and propose to retrench to the financially sustainable system, and present local politicians with a choice.

If local politicians want additional "equity" services, they should be presented with the cost of maintaining those streets, and can then collectively choose which raods to finance out of general revenue, as this is primarily a welfare rather than an transportation function.

In other words, DOTs would present the public with a bill for these money-losing roads (the subsidy required in order to at least break even on operating them (i.e. the difference between their revenue and their cost), and not be expected to pay for them out of operating revenue.

If the cost of those roads is deemed too expensive (i.e. the politicians are unwilling to pay for them with general revenue tax dollars), those roads should be left to crumble and waste away.

This would entirely change public and political perception of roadways. It might also result in fewer useless roads being funded, since it would be crystal clear where the subsidies lay.

The which routes to fund decision should be revisited periodically (e.g. biannually).

Interstate tolls and VMT taxes should be set at a sufficient level to at least break-even on the above system (plus a small positive rate of return).

Finally, these DOTs should have the freedom to contract with other organizations to provide roads, such as international consortiums that build infrastructure.
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Amend your transit program with this, and I'm on board. Thanks for reading!

You make some very good points.

However, lets look at what is bleeding many transit agencies dry: providing service via an unfunded mandate from the federal government which is paratransit service.

Since the Federal Government mandated that this service be provided, should they be finding a funding mechanism for it? After all it is not truly transit service but a taxi service. I am not saying the service isn't needed but it is killing many transit agencies with rides costing in the range of what $30 a rider?

Beyond that you look at the services out to the suburbs designed around the automobile and so forth.

Maybe it is time to take drastic action and provide only the most efficient service possible.

Thank you for your couragous post. In the industry many may consider your post close to a Jerry McGuire manifesto. Transit should be a net surplus operation. The $55 billion in cost versus the $11 billion in fares emphaisizes your point. Clearly you are correct that many transit operations net gains to communities.

I am still concerned that your approach would lead to only post office level efficiencies with extra costs (like $5 Billion in retirement payments that cannot be made). The capital stock and valuation of the infrastructure could lead to a very unsustainable financing system if depreciation of capital stock is not included in the operation costs.

CityBeautiful2 1 made some outstanding comments, but I would add that when considering private operating costs of auto's the subsidy per dollar of value created for autos is much lower than transit. All the sidewalks, bikelanes, waterlines, sewerlines, powerlines, gas mains that are included in the road cost could be allocated as subsidies to other ventures. Reducing subsidies to any transportation method is a good plan.

The wide range of subsidy and voter mandated funding make a transition to your method untenable, but that may even be part of your point.

I question your assertion that “Yet many individual routes (including bus routes) earn enough to pay their own operating (and even capital costs).” There may be some bus routes in the largest cities that would cover their operating costs, but based on my work in smaller cites there are very few routes in cities having a population less than 1 million that would cover costs, especially if the money losing connecting routes were eliminated.

In these metropolitan areas transit is a social-welfare function and is recognized as such.

To suggest that transit could operate with fare high enough to cover costs giving the nature of development and roadway systems in the US would be to repeat the transit death spiral of the 1950s and 60s.

If we apply this to transit, we should apply it to roads.

When a car drives down any given road, it uses fuel, on which the user has paid fuel tax. Therefore, every road generates a certain amount of tax revenue, which is (roughly) proportional to traffic levels. (Congested roads will generate more tax per vehicle!)

We can apply the three categories to roads - those which are profitable in their own right, those which make others profitable, and those which loose money.

Carrying the logic through, those unproftiable roads will probably be rural roads and cul-de-sacs in low density residential neighbourhoods. It may also include collectors and arterials, depending on your local fuel tax levels.

Aren't those "welfare" rather "transporation" services?

Are there positive externalities to public transit (or private transportation for that matter)? Does mass transit simply provide use value to the direct riders?

If so, one operative question is what the political effect of such a proposal would be - more transit or less transit for whom and where? Given the current disposition toward the less advantaged in society, I'm not so sure that the result of this wouldn't be a whole lot fewer routes in poorer places, and thus a net decrease in transfers (direct and indirect) to the poor. So then the economic question becomes which is more of a drain: inefficient service or increased inequality? The moral question is (at least to me), pretty clear.

If mass transit has positive externalities, than the world is obviously a whole lot more complicated.

@Tom and @CityBeautiful21. Yes the same logic should be applied to roads.

However roads are used by more than cars, they are also used by trucks, emergency vehicles, sanitation, school buses, transit buses, pedestrians, bicyclists. Roads existed before cars. Hence the basis for revenue needs to be larger than just taxes on cars (although that should be the dominant part of it, as cars are the most numerous users). Value capture here (and in transit) is appropriate. Property tax is a highly imperfect form of value capture, but better than say the income tax or sales tax, as it is correlated with land development, which depends on accessibility, which is provided by roads (and other land use).

Bother, lost my original comments. Will use bullet points instead:
* Trucks/buses pay fuel tax too. Instead of "cars" read "fuel-tax paying vehicles"
* Pedestrians use sidewalks, not roads! Further, pedestrians and cyclists do not need roads to get around.
* You seem to imply roads have benefits beyond what can becaptured by user fees (and I agree)
* Mass transit does has positive externalities. Consider, if a "loss making" bus route allows people to get to work (and pay taxes, and have money to spend) rather than sit at home on welfare, then it may be cheaper to the taxpayer to pay for that bus!

@ Tom. Pedestrians use both sidewalks (where they exist) and roads (where they do not). Cyclists most certainly use paved surfaces and are vehicles.

I accept transit has some (and at the margins, relatively small) positive externalities. I discuss these in Planning for Place and Plexus. In particular, my using transit makes transit more valuable to you because schedule frequency is increased (the Mohring effect). I am not convinced that such externality justifies subsidy though.

I don't accept that allowing people to get to work cheaply is one of them though. If the work has value, the worker gets paid. The worker has a cost structure including transportation. If the value of the work does not exceed the cost of the worker, he should not be paid, otherwise, we are subsidizing the employer with transit. We could just give the money to the employer to hire someone at a higher cost if that is our objective, they would pay more, and the employee would pay the transit service what it actually cost.

@ Frank - I don't dispute that Fixed route services in rural areas, small towns, even some

David Levinson

Network Reliability in Practice

Evolving Transportation Networks

Place and Plexus

The Transportation Experience

Access to Destinations

Assessing the Benefits and Costs of Intelligent Transportation Systems

Financing Transportation Networks

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This page contains a single entry by David Levinson published on September 15, 2011 8:37 AM.

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